WHEN PENALTY UNDER SECTION 271E SHOULD NOT BE LEVIED FOR

WHEN PENALTY UNDER SECTION 271E SHOULD NOT BE LEVIED FOR CONTRAVENTION OF PROVISIONS OF SECTION 269T OF IT ACT, 1961 RATIO DECIDENDI The provisions of the Income-tax Act are amended so frequently that it is impossible not only for the tax payer, but also the tax experts to know all the provisions of the Act at any given point of time, hence, ignorance of law can be taken as an excuse and penalty should not be levied merely on the ground that the assessee ought to have known the correct provisions of law. IN THE ITAT, VISAKHAPATNAM BENCH (THIRD MEMBER) ACIT v. Vinman Finance & Leasing Ltd. C. O. No. 12/Vizag/2004 In ITA NO. 03/Vizag/2002 February 13, 2008 RELEVANT EXTRACTS ** ** ** ** 3. I have heard the learned Departmental Representative as well as the learned Counsel for the assessee in this regard and carefully perused the record. The assessee, as the name suggests, is a finance and leasing company established during the previous year relevant to the assessment year 1994-95. The company accepted certain deposits in cash and also repaid certain amounts in cash in excess of Rs.20,000/- in contravention of the provisions of Sections 269T and 269SS of the Act. The assessee declared income of Rs.55,740/- for the assessment year 1997-98 and the assessment was completed on 24.3.2000. In the 'Note not to the assessee' the Assessing Officer observed that there were certain deposits which were accepted in cash in contravention of provisions of Section 269SS of the Act. Similarly, repayments were also made in cash contravening the provisions of Section 269T of the Act. This information having been passed on to the Additional Commissioner of Income Tax, Visakhapatnam, penalty proceedings were initiated by the A.C.I.T., Visakhapatnam, and a show cause notice was issued to the assessee on 1.5.2000 fixing the date of hearing on 15.5.2000 calling upon the assessee company to show cause as to why penalty under Section 27 IE of the Act should not be levied for contravention of the provisions of Section 269T of the Act referable to the repayments of deposits aggregating to Rs. 15,10,934/-. In response thereto, the assessee contended that it had started business only in the financial year 1993-94 and accepted as well as repaid deposits in cash from/to persons living in rural areas on account of ignorance of the provisions of the Act. It was submitted that the offence was committed for the first time and most of the depositors are purely agriculturists living in rural areas where no banking facilities are available apart from the fact that the depositors insisted upon cash payment and thus there was a bona fide cause for making payments by cash. It was further contended that the company mainly concentrated on the development of business only in the initial stage and the management was not aware of the consequences of the I.T. Act. The depositors have made the deposits only on the condition that as and when they needed money, the same has to be repaid at the door step and thus cash payments were made on insistence of the depositors. Further, most of the depositors were old aged and sick persons and cannot move from the village to receive the deposits from the assessee company as and when the necessity arises for their medical care. With this intention, the depositor's have made the deposits and withdrawn the same even before the due date of maturity and in such circumstances, repayment was made in cash. Therefore,, it was prevented by a reasonable cause in not making payments by cheque. Hence, the Assessing Officer was requested to exercise his discretionary power to drop the penalty proceedings. 4. The Assessing Officer observed that out of the total repayments of Rs. 15,10,934/-, a sum of Rs. 11,30,934/- can be said to have been paid due to exceptional circumstances. However, with regard to the balance amount of Rs.3,80,000/-, the Assessing Officer was of the view that the depositors resided in urban area where banking facilities are available and therefore there is no reasonable cause for the violation of the provisions of Section 269T of the Act. The repayments, which were taken into consideration for the purpose of levy of penalty, are as follows. S. No. Name of the Depositor Amount Repaid (Rs.) 1. V. Sujatha 1,00,000 2. V. Kanthamma 1,00,000 3. CD Gupta 30,000 4. K. Swamy Setty 1,50,000 The Assessing Officer observed that the very contention of the assessee with regard to non-availability of banking facility would highlight that the assessee was conscious of the provisions of the Act, but did not follow due to circumstances best known to it. Further, all the Directors of the company are well-educated and having taken up a big venture they ought to have been aware of the provisions of the Income Tax Act. He thus concluded that ignorance of law cannot be considered as a reasonable cause in the above circumstances. He accordingly levied penalty of Rs.3,80,000/- on the ground that the depositors are educated and residing in Srikakulam town where the banking facilities are available. 5. On an appeal filed by the assessee, the first aopellate authority observed that the assessee had no intention to violate the orovisions of law and the payments were made in cash due to bona fide circumstances which can be noticed from the fact that the Assessing Officer had not levied penalty with regard to several payments made in cash. He also observed that all the depositors are with village and agricultural background who lack banking facility and thus assessee could not forcibly repay the amount in cheques. Therefore, the payments made by cash are supported by reasonable cause. He accordingly cancelled penalty levied by the Assessing Officer. 6. On an appeal filed at the instance of the Revenue, learned Accountant Member noticed that the depositors were not from village background and a finance company is duty bound to abide by the provisions of law, whereas the learned Judicial Member observed that they were all from rural background where there is no banking facility and upon their insistence cash payments were made. Genuineness of the transaction coupled with ignorance of relevant provisions of law was held to constitute a reasonable cause. 8. On the other hand, learned Departmental Representative submitted that only genuine transactions would fall for consideration under Section 269SS/269T of the Act, as otherwise, they can be considered under Section 68 of the Act itself and thus merely on account of the fact that the transactions were genuine, it cannot be taken out of the sweep of Section 271E of the Act and such interpretation would make the provisions of Section 271D and 271E of the Act as otiose. He further submitted that penalty proceedings need not be initiated during the course of assessment proceedings and in this regard placed reliance upon the order of the IT AT., SMC Bench, Visakhapatnam, in the case of Dr. D. Siva Sankara Rao - HUF v. I.T.O. (TA No.7/Vizag/2000, dt.16.3 2007). He thus supported the order passed by the learned Accountant Member. 9. Upon giving careful consideration to the facts and circumstances of the case, I am of the view that the learned Judicial Member w3S justified in cancelling the penalty on the ground of reasonableness of explanation tendered by the assessee. 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 Attar Singh Gurmukh Singh v. I.T.O. -.[1991] 191 ITR 667 (SC), the provisions of Section 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 Section 40A(3), the Court observed as under: "...The terms of section 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 Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee." (emphasis 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 Section 269T/271Eof the Act 11. However, the fact remains that the depositors have stated before the Assessing Officer that they insisted upon cash payment due to certain compelling circumstances and they have also explained as to the reasons for giving a separate address for the purpose of making a deposit though three out of the four were actually residing in a village where there were no barking facilities. The statement of the parties and the explanation of the assessee with regard to the compelling circumstances for making payment in cash was not found to be false. In other words, there is no evidence on the record of the Assessing Officer to disprove the claim of the assessee that the parties were not having banking facilities. The learned Counsel has also submitted that out of the four persons two persons have made the deposits in cash, but the Assessing Officer did not choose to levy any penalty under Section 271D of the Act. It is also necessary to notice that in this very case for assessment year 1997-98, penalty levied by the Assessing Officer under Section 271D of the Act was considered by the I.T.A.T., Visakhapatnam Bench, wherein penalty levied by the Assessing Officer was cancelled on the ground that most of the depositors are from villages and not so educated to utilize banking facilities. 12. Even the plea of the assessee with regard to ignorance of provisions of law was rejected by the Assessing Officer on the limited ground that the Directors of the Company are well-educated and they ought to be aware of the provisions of the Act. Further, the plea of non-availability of the banking facility was in itself taken as the pointer to hold that the assessee was conscious of the provisions of the Act, ignoring the fact that though the assessee pleaded ignorance of the provisions of the Act, in response to the penalty proceedings he was advised to take the benefit of the factual matrix with regard to non-availability of the banking facility as a reasonable cause. It is evident from the order passed by the Assessing Officer as well as the order passed by the Accountant Member that the plea of non-availability of banking facility as well as ignorance of the provisions of the Act were brushed aside without any evidence to prove to the contrary. 13. The provisions of the Income Tax Act are amended so frequently that it is impossible not only for the tax payer, but also the tax experts to know all the provisions of the Act at any given point of time, which is aptly summarized in the following cases to hold that ignorance of law can be taken as an excuse and penalty should not be levied merely on the ground that the assessee ought to have known the correct provisions of law. 14. Here is a case where the assessed income is Rs.59,210/- only, It is difficult to presume that assessee had received deposits and repaid them in cash, totaling to Rs.25 lakhs (approximately), with the knowledge and threat of exposing itself to levy of penalty equivalent to the amount transacted, which works out to more than 40 times of the assessed income. 15. 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 bonafide 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 Section 273B of the Act. In other words, the penalty imposed under Section 271E is not justified and the cross-objections filed by the assessee deserve to be allowed.

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