2003 (7) TMI 66 - HC - Income Tax

Penalty imposed on the respondent under section 271D - The element of mens rea is not brone out from the nature and the manner in which the transaction was carried out - we do not find any justification or reasonable cause to remand the matter for adjudication afresh by the Commissioner of Income-tax for consideration of reasonableness with-in the meaning of section 273B of the Act. In the facts and circumstances of the case we hold that the Tribunal was justified and correct in law in upholding the judgment of the Commissioner of Income-tax in deleting the penalty of Rs. 4, 50, 000 imposed on the assessee under section 271D - The appeal stands dismissed.

Summary

The core legal questions considered in the judgment are:

1. Whether the Tribunal was justified and correct in law in upholding the order of the Commissioner of Income-tax (Appeals) deleting the penalty of Rs. 4,50,000 imposed under section 271D of the Income-tax Act.

2. Whether the Commissioner of Income-tax (Appeals) and the Tribunal erred in deleting the penalty imposed under section 271D of the Income-tax Act.

The issues revolve around the applicability and constitutional validity of section 269SS of the Income-tax Act, 1961, which mandates that loans above a certain amount must be taken by account payee cheque or bank draft, and the consequent penalty under section 271D for failure to comply.

Issue-wise Detailed Analysis

Issue 1: Validity and applicability of section 269SS and imposition of penalty under section 271D

Relevant legal framework and precedents: Section 269SS prohibits acceptance of loans or deposits exceeding Rs. 20,000 otherwise than by an account payee cheque or bank draft. Section 271D prescribes a penalty equal to the amount of loan taken in contravention of section 269SS. Section 273B provides discretion to waive penalty if there is reasonable cause for non-compliance.

Earlier, the Madras High Court in Kumari A.B. Shanti v. Assistant Director of Inspection had declared section 269SS ultra vires the Constitution, leading the Commissioner of Income-tax (Appeals) and the Tribunal to rely on this precedent to delete the penalty.

However, subsequent decisions by Division Benches of the Madras and Gujarat High Courts upheld the constitutional validity of section 269SS. Ultimately, the Supreme Court reversed the Madras High Court's judgment in Assistant Director of Inspection (Investigation) v. Kumari A.B. Shanti [2002], affirming the validity of section 269SS.

Court's interpretation and reasoning: The Supreme Court explained that section 269SS was introduced to prevent taxpayers from giving false explanations for unaccounted money by mandating loans above a threshold to be taken through traceable banking channels. This curbs manipulation of accounts and false entries.

The Court noted that the legislature intended to punish tax evasion but not genuine transactions. Section 273B confers discretion to waive penalty if reasonable cause is shown for non-compliance.

Key evidence and findings: In the present case, the assessee had taken loans from a private money lender evidenced by promissory notes. The loan transactions were recorded in the books of both parties. No authority found the transactions to be sham or intended to evade tax.

The Assessing Officer imposed penalty on the ground that the loan was not taken through account payee cheque or draft and doubted the genuineness of the transaction, suggesting the assessee could have borrowed from a nationalized bank.

Application of law to facts: The Tribunal and Commissioner of Income-tax (Appeals) deleted the penalty relying on the earlier Madras High Court decision, but the High Court noted that this precedent was overruled by the Supreme Court. Despite this, the facts showed genuine transactions, and the assessee had reasonable cause for not taking the loan through banking channels, given the immediate need and nature of the lender (private money lender).

Treatment of competing arguments: The Revenue argued that the penalty was mandatory under section 271D for violation of section 269SS and that the Madras High Court decision relied upon was overruled. They also contended that neither the Commissioner nor the Tribunal gave reasons for exercising discretion not to impose penalty under section 273B.

The Court acknowledged the Revenue's position on constitutional validity but emphasized the discretion under section 273B to waive penalty if reasonable cause exists. It held that immediate need and genuine transaction with a private lender constituted reasonable cause.

Conclusions: The Court held that the Tribunal was justified in deleting the penalty, though for different reasons than those originally given. The transaction was genuine, there was no mens rea to evade tax, and the assessee had reasonable cause for non-compliance with section 269SS. Therefore, penalty under section 271D was not warranted.

Issue 2: Whether remand was necessary for fresh adjudication on reasonableness under section 273B

Relevant legal framework: Section 273B allows waiver of penalty if reasonable cause is shown. The assessing authority has discretion to impose or waive penalty.

Court's interpretation and reasoning: The Court noted that the facts clearly showed a genuine loan transaction and immediate need for funds from a private lender. There was no evidence of mala fide intention or tax evasion.

Key findings: Since the facts were clear and no further evidence was necessary, the Court found no justification to remand the matter for fresh consideration of reasonable cause.

Conclusions: The Court declined to remand, holding that the discretion under section 273B was properly exercised in favor of the assessee given the circumstances.

Significant Holdings

"The object of introducing section 269SS is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money, or if he has given some false entries in his accounts, he shall not escape by giving false explanation for the same."

"The main object of section 269SS was to curb this menace. As regards the tax legislations, it is a policy matter, and it is for Parliament to decide in which manner the legislation should be made."

"Under section 273B if the court finds that there was a reasonable and sufficient cause for not imposing the penalty on the assessee in the given facts and circumstances of the case the penalty shall not be levied."

"When there is an immediate need of money the person cannot get such money from the nationalised bank to satisfy the immediate requirement. To satisfy the immediate requirement of money the person normally approaches the money-lender or his friend or relative who could lend money to him to satisfy his immediate requirement."

"The element of mens rea is not borne out from the nature and the manner in which the transaction was carried out."

The Court affirmed that the penalty under section 271D is not automatic and must be imposed considering the genuineness of the transaction and reasonable cause under section 273B. The constitutional validity of section 269SS stands upheld by the Supreme Court, overruling earlier contrary High Court decisions.

The final determination was that the penalty of Rs. 4,50,000 imposed under section 271D was rightly deleted by the Commissioner of Income-tax (Appeals) and upheld by the Tribunal, and the appeal by the Revenue was dismissed.