Transaction between the assessee and the director cannot be covered by section 269T

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH ‘E’ NEW DELHI

BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER

AND

SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER

ITA No. 4062/Del/2011

Assessment Year: 2007-08

NJP Hospitality Pvt. Ltd.,

SF 202, 2nd Floor,

V3S Mall, Laxmi Nagar

District Centre, New Delhi.

(PAN: AACCN4544K)

(Appellant)

Vs

Income Tax Officer,

Ward 13(1),

C.R. Building,

New Delhi.

 (Respondent)

Appellant by: None

Respondent by: Shri R.S. Negi, Sr.DR

O R D E R

PER CHANDRA MOHAN GARG, JUDICIAL MEMBER

This appeal has been preferred by the assessee against the order of the CIT(A)-XVI, New Delhi dated 28.04.2011 for AY 2007-08 confirming the levy of penalty by the AO u/s 271E of the  Income Tax Act(hereinafter referred to as the Act).

2. The grounds of appeal read as under:-

“1. The ld. ACIT erred in confirming order of the ld. ITO imposing a penalty of Rs.2,00,000/- under section 271E of the Income Tax Act and thereby dismissing the appeal of the appellant.

2. That the penalty of Rs.2,00,000/- imposed under sec. 271E of the Act is wholly illegal, unjustified and bad in the eyes of law and liable to be deleted.”

3. Briefly stated the facts of the case giving rise to this appeal are that the assessee filed a return declaring loss of Rs.3,95,706/- and his assessment was finalized u/s 143(3) of the Act at an income of Rs.3,84,698. During the assessment, the AO observed that the assessee company has made a repayment of loan of Rs.2 lakh in cash to one of the directors of assessee company Shri Varun Agarwal, in contravention of the provisions of Section 269T of the Act. Consequently, the AO initiated penalty proceedings u/s 271E of the Act. A show cause notice was issued to the assessee by the AO to furnish explanation regarding cash payment of Rs.2 lakh and the assessee furnished its reply and submitted that:

“There is no loan given by the Company to Varun Sarup Agarwal. During the year repayment of unsecured loan to Sh. Varun Agarwal for RS.2 lacs in cash. There is Current A/c in the name of Shri Varun Agarwal who from time to time made payment for and behalf of the assessee company as the assessee did not have its Bank Alc which was opened on February 2007. Payment of RS.2 lacs was part reimbursement of expenses incurred by Shri Varun Agarwal for and on behalf of the Company. It was submitted that the same cannot be treated as loan with the meaning of Section 269SS and 269T. The assessing Officer erred in treating reimbursement of Expenses incurred by the Director of the company for and on behalf of the Company paid in cash as repayment of loan in contravention of the provision of Section 269T of the Income Tax Act 1961."

4. After consideration of submissions and explanation offered by the assessee, the AO noted that the assessee company was having substantial funds in the form of sales of approximately Rs. 10 lakh right from October 2006 to January 2007 and the same could be deposited in its bank account, then repayment/reimbursement could be made by cheque of Shri Varun Sarup Agarwal. The AO further noted that any amount spent by any director on behalf of the assessee company is an unsecured loan in the hands of assessee company and its repayment in cash is a clear violation of the provisions of Section 269T of the Act. The AO held that merely because a transaction is genuine (as contended by the assessee), it cannot be taken out of the ambit of Section 271E. The AO relying on the judgment of ITAT, Visak in the case of ACIT vs Vinman Finance & Leasing Ltd. (ITAT,Visak-TM) 115 ITD 115 held that the assessee company violated Section 269T of the Act and imposed a penalty of Rs. 2 lakh on the assessee u/s 271E of the Act.

5. The aggrieved assessee filed an appeal before the CIT(A) which was dismissed through impugned order. The operative part of impugned order is being reproduced below:-

 “In view of above facts and judicial pronouncements, the AR of the appellant company prayed that no penalty u/s 271E is leviable and the penalty of Rs. 2 lacs levied u/s 271E of the Act deserves to be deleted.

2.2 I have considered the facts of the case and the submissions of the AR of the appellant. It is an admitted fact that Rs.2,00,000/- paid by the appellant to its director in cash in February,2007 represented return of the amount paid by the director on behalf of the appellant company towards its expenses. Clearly, any amount paid by one person on behalf of another person would be a loan from the former to the latter because a loan or deposit has been defined in explanation to section 269T to mean any loan or deposit of money which is repayable after notice or repayable after a period and the expenses incurred by the director on behalf of the appellant company were repayable/had to be reimbursed by the appellant. When the appellant company returned this amount to its director, the return would constitute return of loan given by the director to the appellant company. The expenses incurred by the director on behalf of the appellant cannot be termed as transactions in the current account of the appellant with the director, as contended. It is also observed that the appellant company was incorporated in September,2006 and it took five months to open its bank account in February,2007. Not only this, it has been submitted that the bank account was opened on February,2007 with HDFC Bank while cash was deposited in the bank account of Shri Yarun Agarwal, Director on 9^th February,2007 to enable cheque towards rent payable by the appellant company to be cleared on l0th February,2007. It is not clear as to why, once the account of the company was opened on 7^th Feburary,2007, cash was not deposited in this account and cheque for rent issued from the account of the company, instead of giving cash to the director who then made payment on behalf of the appellant company.

Therefore, it would not be correct to say that the payment of cash of Rs.2,00,000/- by the appellant company to its director was necessitated by any urgent requirement. The case laws relied upon by the AR of the appellant are not applicable to the facts of the appellant's case. For instance in the cases of Canara Housing Development Company vs. Addl. CIT, CIT vs. Idhayam Publications Ltd., CIT vs. Shri Ambica Flour Mills Corporation & CIT vs. Sriniwas Joshi (supra), the issue was whether current account transactions with sister concerns/urgent payments to sister concerns would fall within the meaning of loans or advances for the purpose of section 269SS/269T. As already discussed above, in the case of the appellant the expenses incurred by the director on behalf of the appellant company were loan by the director to the appellant and not current account transactions. Neither was there any urgency to return the amount in cash to the director. In the case of Narayan Ram Chhaba vs. ITO (supra), the assessee was an griculturist who took cash loans from his wife and HUF and in the case of CIT vs Kasi Corporation & Anr.(supra), the assessee was in the business of accepting deposits from the public and in some of the cases repaid them in cash on account of closure of banking hours, payments to lady members who did not have bank accounts, etc. The appellant is not an agriculturist and has not made the repayment of loan in cash for any such urgent reasons and so the facts of the appellant's case are totally different. As per the other judicial pronouncements relied upon the appellant, penalty u/s 2710/271 E is not attracted when there is reasonable cause for giving or returning loans in cash or the appellant holds a bona-fide belief that such payments

can be made. In the case of the appellant it cannot be aid that there was any reasonable cause for return of the loan in cash, since as discussed earlier, the bank account of the appellant had already opened by the time the return of loan was made. The Addl. CIT has discussed in the penalty order that merely because a transaction is genuine (as contended by an assessee) it cannot be taken out of the ambit of Section 271 E as held in ACIT vs. Vinman Finance & Leasing Ltd. (IT AT, Visak - JM) 115 ITD 115. I am, therefore, of the view that there was no reasonable cause for the appellant to return the loan of Rs.2,OO,OOO/- taken by it from its director in cash and accordingly the penalty ofRs.2,OO,OOO/- levied by the Addl. CIT u/s 271E is upheld. Grounds Nos. 1 to 3 of the appeal are dismissed.”

Hence, this second appeal by the assessee before this Tribunal.

6. We have heard rival submissions of both the parties in the light of material on record before us and carefully considered the same.

7. The assessee’s representative submitted that the company did not have a bank account till 7.2.2007 and on 1.2.2007 the director of the company Shri Varun Sarup Agarwal issued cheque of Rs.1,50,000 for payment of rent to M/s Gahoi Buildwell on behalf of assessee company from his bank account with ICICI Bank but there was not sufficient balance in the account, therefore, the appellant company withdrew cash of Rs.2 lakh out of cash in hand and deposited in the bank account of Shri Varun Sarup Agarwal on 9.2.2007. After that, the cheque of Rs.1,50,000 dated 1.2.2007 issued for payment of rent to M/s Gahoi Buildwell Ltd. was cleared on 1.2.2007 and then the remaining amount of Rs.50,000 was transferred to company’s bank account on 10.2.2007. He further submitted that the payment of rent was made by Shri Varun Sarup Agarwal (director of the assessee company) by issuing a cheque from his bank account and if cash amount could not be deposited, the cheque could be dishonored. Therefore, in these circumstances, cash payment of Rs. 2 lakh was made to Shri Varun Sarup Agarwal enabling him to ensure clearance of cheque pertaining to payment of rent to the landlord M/s M/s Gahoi Buildwell Ltd.

8. The asessee’s representative relying on the judgment of Hon’ble Supreme Court in the case of Hindustan Steel Ltd. Vs State of Orissa reported as (1972) 83 ITR 26(SC) submitted that the penalty will not be imposed merely because it is lawful to do so because an order of imposing

penalty for failure to carry out statutory obligation is the result of a quasicriminal proceeding and penalty should not be imposed unless the party under obligation acted deliberately in defiance of law or was guilty of conduct or acted dishonestly, or acted in conscious disregard of its obligation. Relying on the submissions made before the CIT(A), the AR contended that the authorities below decided the issue in a mechanical manner without considering the fact that the cash payment was made by the assessee company to its director who used his personal resources to save the goodwill of the assessee company. The authorities below also ignored the fact that the assessee company and its director Shri Varun Sarup Agarwal acted in good conscience, honestly and without any intention to violate the statutory provisions of the Act.

9. The ld. DR supported the impugned order, inter alia the order of the AO passed u/s 271E of the Act and submitted that the assessee company made payment of Rs.2 lakh on 9th February, 2007 as repayment/reimbursement of rent and other expenses incurred by the director Shri Varun Sarup Agarwal on behalf of the assessee company. As the assessee company opened its bank account on 7.2.2007, there is no reasonable cause to make cash payment of Rs. 2 lakh to its director on 9.2.2007. Therefore, the assessee company clearly violated the provisions of Section 269 of the Act. Accordingly, penalty levied u/s 271E of the Act was proper and justified in the facts and circumstances of the case.

10. On perusal of paper book and citations relied by the authorities below, we observe that in the case of Hindustan Steel Ltd. Vs State of Orissa reported as 83 ITR 26, the Hon’ble Apex Court provided a guideline to the courts and quasi-judicial authorities which is being reproduced as under:-

“An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, he authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.”

11. In the case in hand, it is not in dispute that Shri Varun Sarup garwal is a director of assessee company who made payment of rent through cheque from his bank account with ICICI Bank. His bank statement from 1.10.2006 to 1.3.2007 available on paper book page nos. 23 and 24 reveals that cash of Rs. 2 lakh was deposited on 9.2.2007 and a cheque of Rs.1,50,000 was cleared to Gahoi Buildwell Ltd. on 10.2.2007 and remaining amount of Rs.50,000 was returned back to the assessee company through cheque no. 217337 which was credited to the assessee’s account on 17.2.2007.

12. In view of above, we observe that it was necessary to withdraw cash from sales proceeds and to deposit it in the bank account of Shri Varun Sarup Agarwal as the transfer of money by cheque could take time and if cheque was issued to Shri Varun Sarup Agarwal in this regard, definitely some time may be consumed for banking transaction for routing money from the assessee’s bank account to Shri Varun Sarup Agarwal’s bank account and this would have resulted in dishonoring of cheque issued by Shri Varun Sarup Agarwal on behalf of the assessee company for payment of rent.

13. We have observed that the Assessing Officer relied on the judgment of ITAT, Visac, Third Member Bench in the case of Vinman Finance (supra) wherein it was held that:-

“10. However, cancellation of penalty on technical grounds is not justified. In my considered opinion, penalty proceedings under section 271E of the Act need not be initiated during the course of assessment proceedings as could be seen from the plain language of the provisions of section 275(1)( c) of the Act. Similar view taken in the case of Dr. D. Siva Sankara Rao (supra). Similarly, by taking analogy from the observations of the Apex Court in the case of Similarly, by taking analogy from the observations of the apex Court in the case of Attar Singh Gurmukh Singh vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667 (SC), the provisions of ss. 269SS and 269T of the Act having been intended to regulate business transactions and to prevent the use of unaccounted monies or to reduce chances of use of black money for business transactions, even genuine transactions cannot be taken out of the sweep of the provisions of the Act if the payments are not routed through the specified channels unless and until exceptional circumstances are proved. While considering the provisions of s. 40A(3), the Court observed as under:

"...The terms of s. 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the AO the circumstances under which the payment in the manner prescribed in s. 40A(3) was not practicable or would have caused genuine difficulty to the payee."

(Emphasis, italicized in print, supplied)

In the light of the principle laid down by the apex Court supra, merely because the transaction is genuine, it cannot be taken out of the sweep of s. 269T/271E of the Act.”

14. In the case of Vinman Finance (supra), the facts were that the assessee was a financial leasing company. During the relevant assessment year, it accepted certain deposits in cash and also repaid certain amounts in cash in excess of Rs.20,000. The Assessing Officer opined that out of total repayments, a part of amount could be said to have been paid in cash due to exceptional circumstances with but regard to the balance amount, the Assessing Officer viewed that the depositors resided in urban areas where banking facilities were available and therefore there was no reasonable cause for violation of the provisions of Section 269T of the Act. Accordingly, the Assessing Officer levied penalty u/s 271E of the Act.

15. In this case, on appeal, the Commissioner of Income Tax(A) observed that all the depositors were with village and agricultural background, who lacked banking facility and, thus, assessee, could not forcibly repay the amount by cheques Accordingly, the Commissioner of Income Tax(A) taking the view that payments made by cash were supported by reasonable cause, cancelled the penalty levied by the Assessing Officer. On revenue’s appeal before ITAT, Vizac in view of difference of opinion between the Judicial Member and the Accountant Member, the matter was referred to the Third Member, who decided the issued in favour of the assessee with the following observations:-

"Under the circumstances, I agree with the conclusions of the learned Judicial Member that in view of the claim of ignorance of provisions of law coupled with the bona fide reasons for making payment in cash, no case was made out for levy of penalty since the explanation constitutes a reasonable cause within the meaning of s. 273B of the Act. In other words, the penalty imposed under s. 271E is not justified and the crossobjections filed by the assessee deserve to be allowed.”

16. The facts and circumstances of this case are not identical with the present case as the appeal in hand is related to the cash transaction of a company with its director.

17. The assessee’s representative relied on the judgment of ITAT Bangalore Bench in the case of Canara Housing Development Co. vs ACIT (2010) 127 TTJ (Bang) 446 wherein it was held as under:

“13. Much of the arguments advanced before were on the question whether transactions between sister concerns in cash are hit by s. 269T. The section does not expressly confer any exemption for transactions between connected parties or sister concerns. A perusal of the decided cases on this point shows that there is a cleavage of judicial opinion. The assessee has relied on the order of the Cochin Bench of the Tribunal in the case of Muthoot M. George Brothers (supra) in which it was held that cash transactions between sister concerns are not affected by the section. However, the Mumbai Bench of the Tribunal in the case of Karnataka Ginning &\ Pressing Factory vs Jt.d Commissioner of Income Tax(2001) 72 TTJ (Mumbai) 307: (2001) 77 ITD 478 (Mumbai) to which one of us was party (the Vice President), has held that there is no exemption from s. 269T even if the parties are connected with each other or they are sister concerns. In the case of Supreme Investments vs Jt.CIT in ITA NO.76/Bang/2006 dt. 3^rd Aug. 2007, for the asstt.yr. 2001-02, the Bangalore Bench did not record a definite conclusion that transactions between sister concerns are not hit by s. 269T, though the penalty was cancelled on other grounds. For the limited purpose of imposing penalty under s. 271E, it is perhaps enough to see whether the assessee could have bona fide belief that transactions with sister concerns involving cash were not hit by s. 269T. Since there is a difference of opinion on this point between two orders of the Tribunal, the assessee was perhaps justified in believing that it is stated that the assessee’s bona fide belief constitutes reasonable cause for the violation of s. 269T r/w s. 273B. Similarly, if the assessee had bona fide belief that cash transactions in a current account are not hit by s. 269T, which belief is vindicated by the judgment of the Madras High Court, cited supra, even that can be considered as reasonable cause under s. 273B and on that ground also the penalty is liable to be cancelled. The judgment of the Hon’ble Karnataka High Court in H.S. Ananthasubbaraya (supra) also supports the plea of the assessee. In this connection, we may refer to the judgment of the Allahabad High Court in Chaubey Overseas Corpn. vs Commissioner of Income Tax (2008) 218 CTR (All) 494: (2008) 303 ITR 9(All), in which it was held that even a trade deposit was included within the purview of the definition of the deposit in s. 269T. This decision was cited by the ld. Commissioner of Income Tax-DR. In the present case, however, we have already referred to the term in the MoU dt. 5th Oct. 2004 that the arrangement entered into between the assessee and Assessing Officer shall not be construed as resulting in any business arrangement between them. Thus, the monies cannot be said to represent any business or trade deposits so that they can be included in the definition of “loans or deposits” in the section. Thus, this judgment is of no assistance to the Department on the facts of the present case.

14. So far as AE is concerned, Satish Pai who is a partner in the assessee firm is also a partner in AE. In the assessee’s reply dt. 23rd May 2008 to the ACIT, it was explained that the amount of Rs. 12 lakh was drawn by Satish Pai in cash for making investment in a property in the name of AE and thus it was nothing but drawings by a partner. The ledger account of AE in the assessee’s books is at p. 85 of the paper book. The assessee’s claim has not been specifically refuted in the orders of the Departmental authorities. In fact, it appears to us that the cash repayment relating to AE has not been specifically considered at all in their orders. Since the assessee’s claim that it represents drawings by a partner. The ledger account of AE in the assessee’s books is at p. 85 of the paper book. The assessee’s claim has not been specifically refuted in the orders of the Departmental authorities. In fact, it appears to us that the cash repayment relating to AE has not been specifically considered at all in their orders. Since the assessee’s claim that it represents drawings by a partner for making investment in a property in the name of AE has not been found incorrect, there is no justification for levy of any penalty for violation of s. 269T.”

In view of above, we hold that the director of assessee company Mr. Varun Sarup Agarwal issued a cheque on 1.2.2007 on behalf of the assessee company for payment of rent and assessee company opened its account after issuance of this cheque. The amount of Rs. 2 lakh was deposited in the bank account of Mr. Varun Sarup Agarwal with a bona fide intention to prevent dishonoring of the cheque issued to the landlord of the assessee company and the remaining amount was returned back to the assessee company’s bank account. In the facts and circumstances of the case, it is doubtful whether the amount received by director with an intention to deposit it to the bank account with a bona fide belief that this would save the prestige of the company can be characterized as a loan or a deposit within the meaning of Section 269T of the Act. Although Section 269T of the Act does not expressly confer any exemption from transaction between connected parties or sister concern but a perusal of the decided cases on this point shows that there is a cleavage of judicial opinion. For the limited purpose of imposing penalty u/s 271E of the Act, it is perhaps enough to see whether the assessee could have bona fide belief that the transaction with connected parties or sister concerns involving cash of more than Rs.20,000 would not hit by Section 269T of the Act. The assessee company was perhaps justified in believing that it is entitled to rely on the position which was in its favour.

Thus, it may be stated that the assessee company gave Rs. 2 lakh to its director with a bona fide belief that an urgency to ensure honoring of the cheque issued to the landlord constitutes a reasonable cause u/s 273B of the Act where no penalty shall be imposable on the assessee for any failure referred to in the said provisions inter alia Section 269T of the Act.

18. In the case of Commissioner of Income Tax vs Idhayam Publications Ltd. (2006) 285 ITR 221 (Madras), their lordships dismissing the appeal of the revenue held that the transaction between the assessee and the director was not a loan or deposit and it was only a current account in nature and no interest was being charged for the transactions made under the account, the Hon’ble High Court confirmed the order of the Tribunal which deleted the penalty.

19. In view of above case, if we evaluate the impugned transaction in this case, then from the ledger account of Shri Varun Sarup Agarwal with the assessee company available at page 17 of the paper book, it reveals that there was a current account between the assessee company and its director and no interest was being charged for the transactions and the same could

not be termed either as a loan or a deposit with the assessee company.

20. Accordingly, we finally hold that the penalty levied by the Assessing Officer and confirmed by the Commissioner of Income Tax(A) was not based on justified and reasonable grounds. The Assessing Officer misinterpreted the ratio of the judgment of the ITAT, Visac in the case of Vinman Finance (supra) and in the peculiar facts and circumstances of the case wherein the impugned cash payment was made to the director was under bona fide belief that it was a transaction under a current account between the company and its director which was bearing no interest on the transactions. Therefore, the penalty levied u/s 269T r/w Section 271E of the Act cannot be sustained and impugned order in this regard deserves to be set aside and we set aside the same. 21. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 19.9.2012.

                                                          Sd/-                              Sd/-

                                (J.SUDHAKAR REDDY) (CHANDRAMOHAN GARG)

                               ACCOUNTANT MEMBER      JUDICIAL MEMBER

DT. 19th SEPTEMBER, 2012

‘GS’

Copy forwarded to:-

1. Appellant

2. Respondent

3. Commissioner of Income Tax(A)

4. CIT.

5. DR

By Order

Asstt. Registrar