TMI Blog2022 (9) TMI 1460X X X X Extracts X X X X X X X X Extracts X X X X ..... ACCOUNTANT MEMBER: This appeal by the assessee is directed against order of the NFAC/CIT(A), Delhi dated 24.6.2022 for the assessment year 2017-18. The assessee has raised following grounds of appeal:- 1. The order of the Assessing Officer of National Faceless Assessment Centre, Delhi is against the fact and circumstances of the case and equity. 2. On the fact and circumstances of the case, under the provision of the law, and under the judicial precedence, the Assessing Officer of National Faceless Assessment Centre, Delhi erred in levying the penalty u/s 271D of the Income Tax Act, 1961 as the loan is received from the Executive Directors to the Company, who are controlling the financial affairs of the Company, as such the Executive Directors are not any other person for the applicability of Sec. 269SS of the Income Tax Act, 1961. 3. On the fact and circumstances of the case, the Assessing Officer of National Faceless Assessment Centre, Delhi erred in levying the penalty u/s 271D of the Income Tax Act, 1961 wherein the transaction between the Executive Directors and the Company has not been doubted during the course of scrutiny assessment and found to be genuine. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kanaghavi of Rs. 27,00,000/-. Hence, as per Sec. 271D of the Act, the Joint Commissioner of Income Tax, Range-4(1), Bangalore initiated penalty proceedings u/s 271D of the Act for contravention of Sec. 269SS of the Act vide his notice dated 27/12/2019. The penalty proceeding u/s 271D of the Act was subsequently transferred to National Faceless Assessment Centre, Delhi. 2.3 In response to the said notice, the Assessee Company filed his reply vide his submission dated 21/01/2020, explaining that the Director Mr. K V Kanaghavi has advanced loan to the company amounting to Rs. 25,37,770/- cash and Director Mr. Akhil Biraj advanced loan of Rs. 14,43,970/- to the company in cash for urgent exigency of the company wherein the above said Directors were holding management affairs of the company. The said directors are responsible for the day-to-day affairs of the company. 2.4 The Ld. A.R. in support of their submission relied on the Madras High Court in case of CIT Vs Idhayam Publications 285 ITR 281, Madhya Pradesh High Court in case of CIT Vs Indore Plastic Pvt. Ltd. 262 ITR 163, Dillu Cine Enterprises (P) Ltd. Vs Addl.CIT (2002) 80 ITD 484 (Hyd-Trib) and Guwahati High Court in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. The said directors are responsible for the day-to-day affairs of the company. 2.12 The Director Mr. K V Kanaghavi advanced loan up to 31/03/2016 amounting to Rs. 10,42,869/- which is opening balance and advanced Rs. 25,37,770/- during the F.Y 2016-17. Hence, resultant credit balance in the books of the company in favour of Directors K V Kanaghavi is Rs. 35,80,639/-. The Director Mr. Akhil Biraj advanced loan up to 31/03/2016 amounting to Rs. 9,71,359/- which is opening balance and advanced Rs. 14,43,970/- during the F.Y 2016-17. Hence, resultant credit balance in the books of the company in favour of Director Akhil Biraj is Rs. 24,15,329/-. 2.13 The Assessee Company was under the belief that the transaction between the trustee and the trust, director and the company, partner and the firm, the provision of Sec. 269SS of the Act are not applicable as they are not such other persons. 2.14 The Ld. A.R. relied on the following case laws in support of his contention that running account between trustee and trust, partner and partnership firm, director and Company and person with their relatives, section 269SS of the Act is not applicable. 2.15 The jurisdictional I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legislative intent, in view of the board circular no. 387 dated 06/09/1984. The Finance Act, 1984 states the legislative intent and describes a situation where the explanation of taxpayer of loans obtained is from various persons . It also speaks of confirmatory letters from such other persons during the course of the search. This scheme of the section, the context in which the section is introduced and the legislative intent definitely does not mean husband and wife , director and company or `Partner and firm . The legislature was not referring to confirmatory letters produced to explain unaccounted money found during search operations from spouse in case of individual or director in case of company or partner in case of firm . The term any other person in the context of the introduction of this section as appears means persons who are not very intimately or very closely connected to the assessee as in the present case, as in a search and seizure operations under section 132, all these persons are invariably searched together. The legislature_ was intended to curb tax evasion in search situations and referred to confirmatory letters produced in such situatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resent assessee. This being so, the transaction between the assessee and managing trustee cannot be termed as loan so as to apply the provisions of section 269SS of the Act. The transaction between the assessee and managing trustee is in the course of discharge of duty of the managing trustee in the day to day affairs of the assessee trust and when the assessee needed some funds to meet the day to day operation of the construction of the college building, it was facilitated by the managing trustee and assessee is having running account with the managing trustee and the transaction between these two parties cannot be termed as loan transaction so as to levy penalty u/s. 269SS of the Act. More so, the transaction undertaken by the assessee with managing trustee is incidental to attainment of main object of assessee society and in this context, if the assessee has not paid money to the contractors who have undertaken construction of the building, the managing trustee himself is liable for all the consequences of non-payment even bouncing of cheques for insufficient funds and in that view the money advanced by the managing trustee to the assessee to meet the urgent business exigency am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances, the penalty levied u/s 271D of the Income-tax Act,1961 ['the Act' for short] was deleted as the transaction was between Trustee and the Trust. 4. The Ld. D.R. relied on the order of the Ld. CIT(A) and submitted that there is no bar in the provisions of section 271D of the Act to levy penalty u/s 271D of the Act in the case of loan taken by assessee company from its Directors namely Akhil Anand Biarj Kallappa V. Khanagavi. 5. We have heard the rival submissions and perused the materials available on record. In this case, assessee company has taken loan from Akhil Anand Biraj at Rs.14,62,478/- and Kallappa V. Khnaghavi at Rs.27 lakhs. The A.O. levied penalty u/s 271D of the Act for receiving the said amount in violation of section 269SS of the Act. The assessee pleaded before the lower authorities that the Directors Kallappa V. Kanaghavi and the Director Mr. Akhil Anand Biraj are Executive Directors of the company and are responsible for the day to day management of the company, they have advanced loan to the company in cash to meet the urgent requirements of the company, which, as such, it does not attract section 269SS of the Act, so as to levy of pen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1D. If there is a default, if any, it was only of technical or venial nature. 20. Further it was submitted that Sh. K Muniraju being the managing trustee of the trust is looking after the trust and day to day affairs of assessee. When there was shortage of cash in the assessee s account, the assessee was forced to take cash loan from Sh. K Muniraju due to the situation beyond the control of the assessee. 21. At this point, it is appropriate to refer to few judgments on the subject. 22. In the case of Chandra Cement Ltd. vs. Dy. CIT , 99 TTJ 212 (Agra) the brief facts were that the appellant-company was setting up mini cement plant at village Paniyala, Tehsil Kotputli, Distt. Jaipur. Shri R.P. Goyal was and has been its promoter-director as well as C.M.D. For establishment of the plant, the appellant approached financial institutions who sanctioned the loan in January, 1992. Pending the disbursement of loan, Mr. Goyal brought his own money from time-to-time for the project work during the two years under consideration. During the course of assessment proceedings, it was noticed by the AO that the balance sheet of the company indicated unsecured loan from Mr. Goyal at Rs. 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought on pp. 13 to 30 of the paper book for financial year 1991-92. First two receipts of Rs. 10,000 and Rs. 1,270 are for expenditure for the incorporation of the company. The next one on 31st July, 1991, is for the purchase of land where Rs. 4,05,960 is paid and credited to Shri Rajendra Goyal. A number of expenditure are for purchase of machinery, automobile, construction material and so on. These payments cannot be made from office because till then there was no office or the factory. It is obvious that the payments are made by Shri Rajendra Goyal and he rendered the account. Likewise in the next year 1992-93 where the amounts are credited through journal entry to the amount of Shri Rajendra Goyal and debited to various heads. The details are summarized at pp. 31 and 32 of the paper book. These are for building, plant and machinery, other assets as also revenue expenditure during construction period. Thus, the fact remains that money was brought for its immediate disposal. It is true that the company has a separate status and entity than its shareholders and directors. It is also true that director's act as agents of the company and are answerable to their principa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditions. Mr. R.P. Goyal, the director and the agent of the company suo motu spent his own money for his principal, i.e., the company, who by way of incorporation of the transaction in its books, undertook the obligation to repay. Let us also consider as to what would constitute primary evidence of the amount advanced by Mr. Goyal in cash in the present facts. There is no loan agreement and no deposit receipts are issued. In our opinion, if any dispute ever arises about the amount spent by Mr. Goyal on company's construction, the appropriate method for measurement of amounts advanced by Mr. Goyal would be the valuation of construction work, because, firstly, there is a direct nexus between the advance and expenditure, and secondly, hardly any activity other than construction was there during this period. This is for this reason that advances made by Mr. R.P. Goyal in the present case are inseparable from construction activity. Making of advance and spending for construction work cannot be considered to be independent from each other. The person at whose instance amounts were advanced or the construction was carried out was the same individual. Therefore, in the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -do- 17-12-1990 In cash Rs. 30,000 -do- 8-12-1990 In cash Rs. 1,72,000 Total Rs. 2,17,000 27. According to the AO, this was in contravention of the provisions of s. 269SS of the IT Act and after giving the assessee an opportunity of being heard, he came to a conclusion that the assessee was liable to be penalized under s. 27ID of the Act. Accordingly, he imposed a penalty of Rs. 2,17,000. When the matter was taken to the CIT(A), he confirmed the penalty. On the above facts and circumstances that the Hon'ble Tribunal deleted the penalty by holding as under:- 2. We have heard the assessee's counsel and Departmental Representative According to the assessee's counsel under s. 269SS, no person shall, after the 30th day of June, 1984, take or accept from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of such loan or deposit or the aggregate amount of such loan and deposit on the date of taking or accepting such loan or deposit exceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of search or was even explained by the taxpayers as representing loans taken or deposits made by various persons. This particular section was brought in with a view to counter such tactics of the assessee in question. The clarification has been given in the Department Circular No. 387, dt. 6th July, 1984, which is a clarification of binding nature on the Departmental authorities. There is no dispute in this case that it is not a case where any search and seizure had taken place and it is also not a case of explaining deposits or loans taken through cash in past. The Hon'ble Supreme Court in the case of R.M. Chidambaram Pillai (supra) held that a firm is not a legal person even though it has some attributes of personality. In IT law a firm is a unit of assessment, by special provisions, but is not a full person. Thus, in that case, it was held that the payment of salary to a partner represents a special share of profits. Salary paid to a partner retains the same character of the income of the firm. The Hon'ble Supreme Court, therefore, relying on the commentary of Lindley on partnership held that the firm as such has no legal recognition. The law, ignoring the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of Madhukant M. Mehta (supra) had also held that a firm has no distinct legal entity apart from the partners except that in IT Act a firm is a unit of assessment and has certain attributes simulative of a personality. The Hon'ble Supreme Court in the case of CIT vs. Ramniklal Kothari (1969) 74 ITR 57 (SC)held, ...,., although for purpose of Income-tax a firm has certain attributes simulative of personality, we have to take it that a partnership is not a person but plurality of a person . In the classic decision of the Hon'ble Supreme Court in Malabar Fisheries Co.'s case (supra) it has been held, there is no transfer of assets involved even in the sense of any extinguishments of the firm's rights in the partnership assets when distribution takes place upon dissolution . The Hon'ble Tribunal- Ahmedabad Bench C in the case of Vir Sales Corpn. (supra), have held that transactions inter se between the sister-concern made with a view to meet the business necessity and made under the bona fide belief and with reasonable cause and no penalty is imposable under such circumstances. In this case, the Department has nowhere challenged that the loans advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation given by the assessee and levied a penalty of Rs. 12,63,500 under s. 271D of the Act holding that the assessee had contravened the provisions of s. 269SS. The CIT(A) confirmed the penalty. On these facts, the Tribunal as per para 6(e) to para 7 of its order, has held as under:- On the question of legislative intent, the CBDT has explained the object of introduction of s. 269SS by the Finance Act, 1984, in its Circular No. 387, dt. 6th July, 1984, (1984) 43 CTR (St) 3 : (1985) 152ITR (St) 1 thus: 'Unaccounted cash found in the course of searches carried out by the IT Department is often explained by taxpayers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits, and taxpayers are also able to get confirmatory letters from such persons in support of their explanation. With a view to circumventing this device, which enables taxpayers to explain away unaccounted cash or unaccounted deposits, the bill seeks to make a new provision in the IT Act debarring persons from taking or accepting, after 30th June, 1984, from any other person any loan or depos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uine. Both the assessee and the director were on the records of the IT Department and both declared these transactions to the Department. The [Chapter XX-B and s. 269SS begins with the heading Requirement as to-mode of acceptance, payment or repayment in certain cases to counteract evasion of tax . The term certain used therein, when read along with the legislative intent of curbing tax evasion, clearly means that all loans are not attracted. This section attracts only certain loans that are brought in by the taxpayer to explain away his unexplained cash or unaccounted deposit. This section is definitely not intended to penalize genuine transactions, where no tax evasion is involved. It is well-settled that the headings prefixed to sections or set of sections in some modern statutes are regarded as preambles to those sections. This view was approved by Farewell L.J. in Fletcher vs. Birkenhead Corporation (1907) 1 KB. Enterprises case (supra), we hold that the transactions between the assessee and Mr. P.K. Swamy do not fall within the mischief sought to be remedied by the section as there is no case against the assessee that these transactions had anything to do with evasion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resent case. We do not agree to finding of the learned CIT(A) on p. 4 para 3 of her order that provisions of s. 2(21) are applicable when considering this term any other person . The context in which the Chapter and section was introduced by the legislature and the legislative intent are very clear in this regard and we agree with the argument of the learned counsel for the assessee. Thus, we hold that the active director of the assessee-company is clearly not covered by the expression any other person occurring in s. 269SS of the Act. 30. The Hon'ble Madhya Pradesh High Court has in the case of Patiram Jain (225 ITR 409) held that :- It has also been accepted by the respondents that the transactions made between the two sister-concerns were under exceptional circumstances to accommodate the emergency needs of the sister-concern for a very short and temporary period. As such, it did not amount to a loan or deposit as defined under s. 269SS of the IT Act. Therefore, the proceedings initiated under. ss. 276DD and 276E of the IT Act were against the provisions of law. 31. The Cochin Bench of the Tribunal in Muthoot M. George Bankers case (47 TTJ 434) held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ually exclusive there are a number of common features between the two. It was held by the Madras High Court in Abdul Hamid Sahib vs. Rahmat Bi AIR 1965 Mad 427, that a loan is repayable the moment it is incurred while it is not so with the deposit. In a deposit, unlike a loan, there is no immediate obligation to repay. Normally a deposit is for a fixed tenure. The amounts taken by the assessee in the present case from VE are temporary advances and there is no evidence that there was any stipulation as to the period or any stipulation for interest. It is, therefore, a matter of grave doubt as to whether the amount received from VE can be characterised as loans or deposits. In our view, they can be more appropriately referred to as temporary advances. Such temporary advances are outside the purview of s. 269SS. Thus, in our considered opinion, and in view of the various judicial pronouncements on this matter, we hold that the transaction of this case on hand cannot be considered as loan so as to attract s. 269SS and s. 27ID of the Act. We are also of the considered opinion that the transaction can be attributable to various exigencies and vicissitudes of business and thus c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d seizure case where unaccounted money had been found. The other argument was that amount was deposited in cash by the directors or members of the assessee-company and the same were declared under the VDIS scheme in the personal capacity as they did not have any bank account. In view of these facts, the Tribunal cancelled the penalty after relying on the various decisions listed in the order itself. 34. In the present case, similarly, the assessee's plea that in view of the intention of the legislature while enacting the provisions of s. 269SS and 269T as well as 271D and 271E, which, as explained in Circular No. 387, dt. 6th July, 1984, was to curb the transaction of black money, is also liable to be accepted because in the present case, the Revenue has accepted the transaction as genuine and has not found the deposit being out of unaccounted cash or the deposit having been made with an effort to explain or introduce cash in the garb of loan/deposit. In view of all these facts, we, after following the decision of Tribunal in the case of Farrukhabad Investment India Ltd. (80 TTJ 82, Del) accept the assessee's plea that there was no violation of the provisions of s. 269SS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the depositees. It is in accordance with the terms of section 131 of the Negotiable Instruments Act. The customer introduction had to be been taken to avoid any kind of fraud. The assessee like present is not obliged to question the source of deposit made by its customers. Also, the customer can keep the deposit for a period which is according to their convenience . The amount has to be repaid by the assessee to its customer immediately on demand. These features distinguish the case of the assessee from other ordinary assessees. Therefore, the provisions of section 271D/271E to be viewed in the background of these aspects. Further, the assessee is subject to periodical inspects and audits by various statutory authorities and in case of any default assessee is liable for having penalty besides cancellation of its licence. This is not the case with other assessees. Further, the assessee has to maintain confidentiality in respect of the information collected by it from its customers, such information is not to be divulged to outsiders. There is no such obligation with other assessee. In spite of this, the assessee has furnished the information as available with it. Now if the addr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of provisions of sections 269SS/269T from a bona fide belief. Ex facie it is a venial breach. The law takes no notice of trivialities. Cash payments and receipts made because of business exigencies. The mere violation of a statutory obligation is not liable for any penalty more so, undisputedly the penal action is quasi criminal nature. The income of the assessee is exempt under section 80P of the Act and more so, there is no establishment of deliberate and intentional violation of the provisions by the assessee, that too, in order to hide any income or to evade any payment of tax. Usually penalty will not be imposed unless the party concerned has acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation and that penalty will also not be imposed merely because it is lawful to do so. The imposition of penalty for failure to perform statutory obligation is only a discretionary power of the authority exercising judicial functions on consideration of all the relevant circumstances. If the assessee acted on genuine belief that penal provisions have no application to deposits and it applied only to other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuality will apply. The fact of the present case, are akin to the above position and all the ingredients necessary for holding the application of the concept of mutuality are satisfied because there is complete identity between the contributors and participators and the requirement of the law is that contributors of the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund that or that each member should participate in the surplus or get back from the surplus precisely what he has paid. What is required is that the members as a clause must be able to participate in the surplus. It is immaterial whether the surplus is paid back to the members in cash or is put to reserve with the society for his development and for providing better amenities to the member. In view of the transaction took place between the assessee and its member, the strict provisions of the section 269SS/269T cannot be applied. 17.1 Further, the Legislature was intending to curb the tax evasion in a search situation and referred to confirmatory letters produced in such situations to counter cash found . A statute is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there are reasonable cause or the said failure clearly indicates these provisions give a discretion to the authority to impose the penalty or not to impose the penalty. Such a discretion has to be exercised in a just and fair manner having regard to the entire facts and materials existing on record. Ordinarily, a plea as to be ignorance of law cannot support the breach of a statutory provision but the fact of such an technical break due to ignorance of the relevant provisions of law or on account of bona fide belief, coupled with the fact that transactions in question are genuine and bona fide transaction were undertaken during the regular course of its business will not result in levy of penalty under sections 271D and 271E. 19. In view of the above discussion, we inclined to delete the penalty levied under sections 271D and 271E of the Income-tax Act for the assessment years 2006-07 and 2007-08. 36. In the present case, the assessee is a registered society u/s. 12AA of the Act and its income is exempt u/s. 11 of the Act. The assessee in the stage of establishment of educational institution has undertaken the construction activity of building for the purpose of achieving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee society and in this context, if the assessee has not paid money to the contractors who have undertaken construction of the building, the managing trustee himself is liable for all the consequences of non-payment even bouncing of cheques for insufficient funds and in that view the money advanced by the managing trustee to the assessee to meet the urgent business exigency amounts to reasonable cause within the purview of section 273B of the Act and on this count also, the penalty cannot be levied. Further, the concept of mutuality is primarily based on the principle that one cannot profit from himself. Thus, when the managing trustee provided funds to the society to meet urgent business exigency, it cannot be said that it was a loan transaction so as to attract penalty u/s. 269SS of the Act. Further, as held by the Hyderabad ITAT in the case of Citizen Co-operative Society Ltd. (supra), the term various persons and such other persons which relates to such situation as the section itself was introduced to meet such situation only. Thus, the managing trustee of the society is not covered by the expression any other persons occurring in section 269SS or 269T of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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