No Penalty for loans acceptance in cash if there exists a reasonable cause

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No Penalty for loans acceptance in cash if there exists a reasonable cause

Section 269SS prohibits an acceptance of loans/ advances or specified sum for an amount of Rs. 20,000/- or more in cash whereas section 269T prohibits repayment of loans, deposits or specified sum in cash. Specified sum includes the amount against the purchase / sale of immovable property.

It may be noted that the violation of section 269SS / 269T could result in hefty penalty under section 271D / Section 271E. The penalty amount could be equivalent to the amount of the loans accepted /repaid.

It may be noted that ITAT Chandigarh  in the case of Baldev Singh Vs Addl. CIT has held that the penalty may not be levied if there exists a reasonable cause. It has observed that Chapter-XXI of the Income Tax Act which deals with penalty impossible/leviable. Penalty under various sections are impossible by the revenue authorities, where they are satisfied that particular default defined under the respective section/s has been committed by the assessee.

The language of section is clear that the penalty can be imposed only if there is violation of one or more of the circumstances mentioned in the section. The levy of penalty for failure to perform statutory obligation prescribed under the Act is a matter of discretion of the authorities to be exercised judicially and on consideration of relevant circumstances and the law laid down by the Apex Court on the issue of levy of penalty. Imposition of penalty in the given set of circumstances is not mandatory but discretionary and in order to exercise its power on levy of penalty under the respective section/s, primary conditions is that the proceedings in respect of the said assessee for the captioned assessment year should be pending before the Assessing Officer to come to the conclusion that the given set of facts and circumstances merits the initiation of penalty proceedings in the case.

In the facts of the present case before us, no proceedings were initiated for the financial year 2004-05 i.e. assessment year 2005-06, which is the year to which the aforesaid transaction of accepting and payment of the cash loan relates. The show cause notice was issued to the assessee by the Assessing Officer, however, in the proceedings relating to assessment year 2007-08 and even penalty proceedings were in initiated under sections 271D and 271E of the Act while completing assessment order relating to assessment year 2007-08. We find no merit in the said initiation of penalty proceedings under sections 271D and 271E of the Act relating to assessment year 2005-06, while completing assessment proceedings relating to assessment year 2007-08.

The assessee in the present case has also raised the plea of reasonable cause, that the person advancing the loan was agriculturist and had no bank account. Accordingly, we delete the penalty levied under sections 271D and 271E of the Act.

Here is a complete order of the case for the benefits of the readers:

Baldev Singh Vs Addl. CIT (ITAT Chandigarh)

IT Appeal Nos. 1125 & 1126/Chd/2011

Order Dated 28/02/2012

Both the appeals by the assessee are against the orders of CIT(A)-II, Ludhiana dated 18.10.2011 relating to assessment year 2005-06 against the penalties levied under section 271D and 271E of the I.T. Act, 1961.

  1. The assessee has raised the following grounds of appeal:

“1. That the worthy CIT(A)-II, Ludhiana has erred in confirming the levy of penalty of Rs. 2 lakhs u/s 271-D/271E of the Income-tax Act, 1961.

  1. That the confirmation of penalty by the Worthy CIT(A)-II, Ludhiana is against the facts and circumstances of the case.
  2. That the CIT(A) has failed to consider the exceptional circumstances as narrated before him as per clause (g) of rule-6DD and for which he has failed to consider the necessary evidence as furnished before him
  3. Notwithstanding the above ground of appeals, it is submitted that no penalty is otherwise levy able since the amount has already been surrender as income and tax already paid on the same and the CIT(A) has failed to consider that aspect.
  4. That the appellant craves leave to add or amend any ground of appeal before the appeal is finally heard or disposed off.”
  5. The issue raised in the present appeals is against the levy of penalty u/s 271-D and 271-E of the Income-tax Act, 1961. Both the appeals of the assessee were heard together and are being disposed off by this consolidated order for the sake of convenience.
  6. Brief facts of the case are that survey u/s 133A of the Act was conducted at the business premises of the assessee on 10.12.2007. During the course of survey, copies of certain documents were impounded and original documents were returned to the assessee. Page 228 of the aforesaid documents revealed that the assessee had received payment of Rs. 2.00 lakhs on 3.1.2005 from Shri Babu Singh. The said amount of Rs. 2.00 lakhs was repaid in cash of Rs. 75,000/- on 24.1.2005, Rs. 25,000/- on 3.2.2005, Rs.50,000/- on 3.3.2005, Rs. 5,000/- on 9.3.2005 and Rs. 45,000/- on 15.3.2005 to Shri Babu Singh. Further interest of Rs. 4500/- was paid in cash on 12.3.2005. Show-cause notice was issued to the assessee by the AO for imposing penalty u/s 271-D and 271-E of the Act. The plea of the assessee before the AO was that the proceedings should be dropped in view of certain case laws which were rejected by the AO in the absence of any reasonable cause. The plea of the assessee that Shri Babu Singh was Agriculturist having no bank account and hence cash transaction, was also rejected by the AO. In the absence of any urgency, the AO held the assessee to have violated the provisions of section 269 SS in accepting cash loans above Rs. 20,000/- and further provisions laid down in Section 269T of the Act in repaying the loan in cash by an amount exceeding Rs. 20,000/-. The assessee was held liable for levy of penalty of Rs. 2.00 lakhs each u/s 271-D and 271-E of the Act. The plea of the assessee that it had surrendered a sum of Rs. 30.00 lakhs pursuant to the survey and the amount was covered in the said surrender, was rejected by the AO as the surrender was for assessment year 2007-08 and the loan was taken and repaid in financial year 2004-05.
  7. The CIT(A) upheld the orders of AO in levying penalty u/s 271-D and 271E of the Act. The assessee is in appeal against the said orders of the CIT(A).
  8. The ld. AR for the assessee stated that during the course of survey on 10.1.2007, the assessee surrendered Rs. 30.00 lakhs on account of the documents found during the course of survey and Rs. 14.00 lakhs excess stock found during the survey. The next plea of the assessee was that in relation to Assessment Year 2005-06 no proceedings were initiated u/s 147 of the Act and consequently the AO could not have initiated the penalty proceedings during the proceedings being completed for Assessment Year 2007-08. Our attention was drawn to the assessment order passed relating to Assessment Year 2007-08. The ld. AR for the assessee further stressed that in the absence of any re-assessment proceedings being initiated for Assessment Year 2005-06, the penalty u/s 271-D and 271-E of the Act relating to Assessment Year 2005-06 was not warranted, in view of the ratio laid down by the Hon’ble Punjab & Haryana High Court in CIT v. Manohar Lal Thakral, ITA No. 812 of 2010, date of decision 14.1.2011. The second plea of the ld. AR for the assessee was that the transaction in question was genuine as the loan was taken and was repaid in cash and the said loan was for agricultural purposes. The ld. AR for the assessee further stressed that because of reasonable cause, no penalty u/s 271-D and 271-E could be levied, in view of the ratio laid by the Hon’ble Gauhati High Court in the case of CIT v. Bhagwati Prasad Bajoria (HUF), 263 ITR 487 (Gau).

7.The ld. DR for the revenue pointed out that the ratio laid down by Hon’ble Punjab & Haryana High Court is not applicable as the facts were distinguishable. It was pointed out by the ld. DR for the revenue that during the course of survey, certain documents were found which necessitated the levy of penalty u/s 271-D and 271-E of the Act. Our attention was drawn to the language of said section in which it was pointed out that where in the course of any proceedings and the proceedings in the present case are the assessment proceedings relating to Assessment Year 2007-08. Further it was pointed out by the ld. DR for the revenue that the explanation of the assessee in respect of purpose of cash loan taken is varying.

  1. The ld. AR for the assessee in rejoinder stressed that the decision of Hon’ble Punjab & Haryana High Court is squarely applicable.
  2. We have heard rival contentions and perused the record. Survey u/s 133A of the Act was conducted at the premises of the assessee on 10/01/2007. During the course of survey, certain discrepancies were found on the physical verification of stock, cash in hand and certain documents. Excess stock of Rs.14 Lacs was found on the day of survey. The assessee offered sum of Rs.30 lacs as additional income to cover all discrepancies found in the books of account as well as other documents. The assessee declared the additional income over and above the income of the year in the return of income filed relating to assessment year 2007-08. During the course of assessment proceedings relating to assessment year 2007-08, when confronted with the documents found evidencing the receipt and repayment of cash loan transaction with on Sh. Babu Singh of Rs. 2 lacs each, the stand of the assessee was that only excess stock of Rs. 14.37 lacs was found and out of surrender of Rs. 30 lacs, balance surrender of Rs. 15.65 lacs covered the above said loan transaction and the penalty proceedings u/s 271D and 271E of the Act should be dropped. The Assessing Officer however passing the order of assessment relating to the assessment year observed as under:

“A perusal of photocopy of documents duly certified (page No. 228) by the proprietor kept by the AO revealed that he has received a cash payment of Rs. 2 lacs i.e. exceeding Rs. 20.000/- on 03.01.05 from Sh. Babu Singh, Resident of Vill. Chadodhi and has repaid also the same on 24.01.05, 03.02.05, 03.03.05 & 12.03.05 etc. Thus he has violated both the sections 269SS/269T and accordingly show cause notice dated 23.11.09 was issued and served to the assessee on 26.11.09.”

  1. Following the said observation, penalty proceedings were initiated under sections 271D and 271E of the Act in the assessment order passed under section 143(3) of the Act relating to assessment year 2007-08. Penalties under sections 271D and 271E of the Act were levied vide separate orders passed relating to assessment year 2005-06.
  2. Penalty u/s 271D of the Act is leviable, where the assessee has violated the provisions of section 269SS of the Act, which provides that no person shall accept loan or deposit exceeding Rs. 20000/- otherwise than by crossed cheque or demand draft. Penalty u/s 271D of the Act is leviable equal to the amount of such cash loan accepted.
  3. Further penalty u/s 271E of the Act is leviable for violation of provisions of section 269T of the Act, which inter alia provide that no loan or deposit shall be repaid, except by way of crossed cheque or demand draft, where such loan or deposit exceeds Rs. 20000/-. Penalty u/s 271E of the Act is leviable equivalent to the amount of cash loan or deposit repaid.
  4. The issue arising in the present appeals is whether where no proceedings were initiated or pending in respect of the captioned assessment year i.e. assessment year 2005-06, penalty proceedings u/s 271D or 271E of the Act could be initiated, while completing the assessment proceedings relating to assessment year 2007-08. Admittedly the documents evidencing the loan transaction were found during the course of survey proceedings on the business premises of the assessee on 10/01/2007. The assessee had offered additional income of Rs. 30 lacs, which was included in his return of income. During the course of assessment proceedings relating to assessment year 2007-08, the assessee was confronted with the documents relatable to financial year 2004-05 and asked to show cause as to why penalty proceedings u/s 271D & 271E of the Act should not be initiated. No proceedings were initiated or were pending in relation to assessment year 2005-06, except for the show cause notice given to assessee during the assessment proceeding relating to assessment year 2007-08, for the alleged violation of provisions of section 269SS and 269T of the Act.
  5. Both the assessment and penalty proceedings are distinct and separate, but the penalty impossible in given set of facts has relevance to the proceedings carried on while completing the assessment in the case of the assessee for the relevant assessment year. Where the information was received by the Assessing Officer pursuant to the survey at the premises of the assessee and admittedly the said information was acted upon by the Assessing Officer by confronting the same to the assessee, the knowledge of the Assessing Officer in such circumstances could not be doubted. The Assessing Officer acted upon the said information by issuing show cause notice to the assessee during the assessment proceedings relating to assessment year 2007-08, though the information related to assessment year 2005-06. No proceedings by way of re-assessment or other wise were taken up for assessment year 2005-06 in the present case. The penalty proceedings for violation of provisions of sections 269SS and 269T were initiated vide assessment order passed under section 143(3) of the Act relating to assessment year 2007-08, though the transaction in question was relatable to assessment year 2005-06.
  6. Chapter-XXI of the Income Tax Act deals with penalty impossible/leviable. Penalty under various sections are impossible by the revenue authorities, where they are satisfied that particular default defined under the respective section/s has been committed by the assessee. The language of section is clear that the penalty can be imposed only if there is violation of one or more of the circumstances mentioned in the section. The levy of penalty for failure to perform statutory obligation prescribed under the Act is a matter of discretion of the authorities to be exercised judicially and on consideration of relevant circumstances and the law laid down by the Apex Court on the issue of levy of penalty. Imposition of penalty in the given set of circumstances is not mandatory but discretionary and in order to exercise its power on levy of penalty under the respective section/s, primary conditions is that the proceedings in respect of the said assessee for the captioned assessment year should be pending before the Assessing Officer to come to the conclusion that the given set of facts and circumstances merits the initiation of penalty proceedings in the case. In the facts of the present case before us, no proceedings were initiated for the financial year 2004-05 i.e. assessment year 2005-06, which is the year to which the aforesaid transaction of accepting and payment of the cash loan relates. The show cause notice was issued to the assessee by the Assessing Officer, however, in the proceedings relating to assessment year 2007-08 and even penalty proceedings were in initiated under sections 271D and 271E of the Act while completing assessment order relating to assessment year 2007-08. We find no merit in the said initiation of penalty proceedings under sections 271D and 271E of the Act relating to assessment year 2005-06, while completing assessment proceedings relating to assessment year 2007-08.
  7. We find that similar issue of levy of penalty under section 271E of the Act where no proceedings were pending before the Assessing Officer, came up before the Hon’ble Punjab & Haryana High Court in CIT Vs Manohar Lal Thakral, ITA No.812 of 2010, date of decision 14.1.2011. The question of law raised before the Hon’ble High Court inter alia was as under:

“(i) Whether on the facts and in the circumstances of the case and in law, the Ld. IT AT was right in deleting the penalty imposed u/s 271E of the I.T. Act, 1961 on the ground that the deletion of penalty proceedings itself was illegal as no proceedings were pending before the AO, despite the fact that imposition of penalty u/s 271E is not subject to pendency of any type of proceedings.

(ii) Whether on the facts and in the circumstances of the case and in law, the Ld. ITAT was right in accepting the contention of the assessee that the penalty notice was issued when there were no proceedings pending before the AO qua the assessee and the action of penalty may be permissible only after assessment without taking into consideration the decision of Ld. ITAT, Vishakapatnam Bench in the case of Assistant Commissioner of Income-Tax, Circle 4(1) Vs. Vinman Finance and Leasing Limited, reported in 115 ITD 115 (120 TTJ 426) wherein it has been held that penalty proceedings u/s 271E need not be initiated during the course of assessment proceedings?”

  1. The Hon’ble High Court upheld the findings recorded by the Tribunal, which read as under:

“Having heard the parties and having perused the material on record, we find the grievance of the assessee to be correct. In this case, the return of the assessee was processed u/s 143(1)(a) of the Income-tax Act, on 31.12.2003. Notice u/s 274 read with 271E of the Act was issued to the assessee on 12.06.2007. It being a case of processing the return of income, there is no finding in the AO’s order with regard to the applicability or otherwise of section 269T of the IT Act to the assessee’s case. It was within the purview of the AO to bring the assessee’s case to scrutiny and to make regular assessment u/s 143(3) of the Act. It was also within the power of AO at the appropriate stage to initiate proceedings u/s 147 of the Act against the assessee. No such action was taken. Rather, the penalty was imposed on the basis of the finding in the case of assessee’s wife.”

  1. The deletion of penalty in the aforesaid case was further held to be non-leviable because of the plea of the reasonable cause raised by the assessee. The assessee in the present case has also raised the plea of reasonable cause, that the person advancing the loan was agriculturist and had no bank account. In the entirety of the facts and circumstances before us and following the ratio laid down by the Hon’ble Punjab & Haryana High Court in CIT Vs Manohar Lal Thakral (supra) we hold that there is not merit in initiation of penalty proceedings under sections 271D and 271E of the Act in the present set of facts. Accordingly, we delete the penalty levied under sections 271D and 271E of the Act. Grounds of appeal raised by the assessee in both the appeals are allowed.
  2. In the result, both the appeals of the assessee are allowed.

Order Pronounced in the Open Court on this 28th day of February, 2012.

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