Conversion of loans into equity is not violation of section 269T
Income tax case:
Arkit Vincom (P) Ltd. v. ACIT
Decision: In assessee’s favour.
Penalty under section 271E–Loan squared off by assessee by way of conversion of the loan into equity–Imposition of
Assessee-company was engaged in business of trading in iron and steel. AO imposed penalty under section 271E on the allegation that the assessee had paid the amount of loan otherwise than by an account payee cheque or draft which was in contravention of section 269T. Assessee assailed imposition of penalty contending that the loan received from the lender-company was squared off by way of allotment of equity shares issue at premium in the assessee company. Therefore, the loan was converted into equity by way of book entry without any physical outflow of funds from the side of the assessee and there was no violation of section 269T.
The loan received by the assessee was squared off by way of conversion of loan into equity by the assessee through book entries without any physical outflow of funds. It is usual business practice and is part of routine corporate debt restructuring exercise carried out by various banks and financial institutions. Therefore, the said transaction could not be considered to be in violation of section 269T, so as to impose penalty under section 271E.