2011 (5) TMI 684 - AT - Income Tax

Penalty u/s.271D of the Act - five promissory notes of Rs.5 lakh each were found during the course of search operation at the residence of Shri KKS - loan given to Shri Viren Shan and Rakesh Doshi of Rs.25 lakh for which promissory notes were obtained - promissory notes were in the name of individuals and not in the name of Growth Avenues Ltd - penalty u/s 271D can be levied against a person who takes or accepts any loan or deposit in contravention of the provisions of Section 269SS - no such violation on the part of assessee company the penalty cannot be levied against it - appeal of assessee are allowed

Summary

Issues Involved:
1. Penalty under Section 271E for repaying loan in cash.
2. Penalty under Section 271D for accepting loan in cash.

Issue-wise Detailed Analysis:

1. Penalty under Section 271E for repaying loan in cash:

The first issue pertains to the penalty of Rs. 25,00,000/- levied under Section 271E for repaying a loan in cash, which was upheld by the CIT(A). The facts emerged from a search operation under Section 132 at the residence of Shri KKS, revealing that the assessee had repaid a loan of Rs. 25 lakh to Shri KKS in cash. The assessee contended that Shri KKS was a sub-broker with regular dealings, and the promissory notes were issued as a security deposit. The actual payment received was only Rs. 6 lakh through an account payee cheque, and the balance amount was pending.

The Assessing Officer (AO) did not accept the explanation, citing that promissory notes of Rs. 5 lakh each, totaling Rs. 25 lakh, were found, and Shri KKS confirmed in his statement under Section 132(4) that he had given Rs. 25 lakh to the assessee, which was repaid in cash. The AO emphasized that the promissory notes were not for safety but for the loan given, thus violating Section 269T, which mandates repayment through account payee cheque or draft if the amount exceeds Rs. 20,000/-. Consequently, the AO levied a penalty under Section 271E.

Upon appeal, the CIT(A) upheld the penalty, noting the clear evidence of cash transactions and the promissory notes issued by the directors of the assessee company. The cross-examination of Shri KKS reaffirmed the loan and its repayment in cash. The CIT(A) dismissed the assessee's reliance on the decisions in CIT v. Standard Brands Ltd. and DCIT v. G.S. Entertainment, as the facts differed, and the amount was not treated as undisclosed income.

However, the Tribunal found that the promissory notes were issued in the name of individuals, not the assessee company, and the loan was repaid by the directors, not the company. Therefore, the penalty under Section 271E could not be levied on the assessee company, leading to its deletion.

2. Penalty under Section 271D for accepting loan in cash:

The second issue involves the penalty of Rs. 25,00,000/- levied under Section 271D for accepting a loan in cash, which was also upheld by the CIT(A). Similar to the first issue, the search operation revealed that the assessee accepted a loan of Rs. 25 lakh from Shri KKS in cash. The assessee argued that the promissory notes were for a security deposit related to regular business dealings, and the actual payment received was Rs. 6 lakh through an account payee cheque.

The AO rejected the explanation, relying on the promissory notes and the statement of Shri KKS, which indicated a loan of Rs. 25 lakh given and repaid in cash. The AO emphasized the violation of Section 269SS, which prohibits accepting loans or deposits in cash if the amount exceeds Rs. 20,000/-. Consequently, the AO levied a penalty under Section 271D.

The CIT(A) upheld the penalty, noting the clear evidence of cash transactions and the promissory notes issued by the directors of the assessee company. The cross-examination of Shri KKS reaffirmed the loan and its repayment in cash. The CIT(A) dismissed the assessee's reliance on the decisions in CIT v. Standard Brands Ltd. and DCIT v. G.S. Entertainment, as the facts differed, and the amount was not treated as undisclosed income.

However, the Tribunal found that the promissory notes were issued in the name of individuals, not the assessee company, and the loan was repaid by the directors, not the company. Therefore, the penalty under Section 271D could not be levied on the assessee company, leading to its deletion.

Conclusion:

In both appeals, the Tribunal concluded that the penalties under Sections 271E and 271D could not be levied on the assessee company as the transactions were conducted by the directors in their individual capacities. Consequently, both penalties were deleted, and the appeals were allowed.