2025 (5) TMI 1174 - AT - Income Tax

Penalty u/s. 271D - violation of the provisions of sec.269SS - accepting loans or deposits in cash from members - Scope of the term bona fide belief - HELD THAT - If the element of honesty is present the requirement of good faith is satisfied. But this requires to be judged taking into consideration the factual situation prevailing in a particular situation. In the present case on a careful perusal of the orders of the lower authorities it would reveal that no factual foundation is laid as to how the appellant-society had entertained a bonafide belief that the provisions of sec.269SS of the Act have no application to it. In the absence of this factual foundation no relief can be granted based on the bald submissions. Thus we do not find any merit in the contention that it is under the bonafide belief that provisions of sec.269SS of the Act have no application. Transactions of acceptance of loans or deposits in cash as genuine and bonafide - The argument made on behalf of the appellant-society that there was a reasonable cause for accepting loans or deposits in cash from members and therefore no penalty can be levied u/s. 271D of the Act also cannot be accepted for the reason that the appellant had failed to show the reasons which compelled the appellant-society to accept the loans and deposits in cash. Thus this contention also cannot be accepted for the failure of the appellant to prove its reasonable cause. Therefore we do not find any reason to interfere with the orders of the authorities below. Accordingly the appeal filed by the assessee is dismissed by confirming the penalty u/s. 271D of the Act. Appeal filed by the assessee stands dismissed.

Summary

The core legal questions considered in this judgment are:

1. Whether the appellant co-operative society, being a primary agricultural credit society without a Reserve Bank of India (RBI) banking licence, is exempt from the applicability of section 269SS of the Income-tax Act, 1961 ("the Act") regarding acceptance of deposits or loans in cash.

2. Whether the penalty under section 271D of the Act for accepting deposits or loans in cash can be levied on the appellant for violation of section 269SS.

3. Whether the appellant's claim of bonafide belief that the provisions of section 269SS do not apply to it can be accepted as reasonable cause to avoid penalty under section 271D.

4. Whether the genuineness and bonafide nature of the cash transactions constitute reasonable cause to exempt the appellant from penalty under section 271D.

Issue 1: Applicability of Section 269SS to the Appellant Co-operative Society

The relevant legal framework includes section 269SS of the Act, which prohibits acceptance of loans or deposits exceeding Rs. 20,000 otherwise than by account payee cheque, bank draft, or electronic clearing system. The section contains provisos exempting certain entities, including banking companies, co-operative banks, government companies, and other notified institutions. The appellant is a primary agricultural credit society registered under the Kerala Co-operative Societies Act, 1956, but it does not hold an RBI banking licence.

Precedents considered include the Supreme Court judgment in Kerala State Co-operative Agricultural & Rural Development Bank Ltd. v. Assessing Officer (2023), which held that a co-operative society without an RBI licence cannot be treated as a co-operative bank for exemption purposes under section 269SS.

The Court interpreted the statutory provisions and precedents to conclude that the appellant does not fall within the exempted categories under the first proviso to section 269SS. Furthermore, the insertion of the third proviso to section 269SS, which raises the threshold limit for primary agricultural co-operative credit societies, underscores Parliament's intention that such societies remain subject to the provisions of section 269SS.

The appellant's contention that it is engaged in banking business and thus exempt was rejected due to the absence of an RBI licence. The Court emphasized that the appellant's status as a primary agricultural credit society without RBI authorisation precludes exemption.

Issue 2: Levy of Penalty under Section 271D for Violation of Section 269SS

Section 271D mandates penalty for contravention of section 269SS. Section 273B provides that no penalty shall be imposed if the assessee shows reasonable cause for the violation.

The facts admitted include that the appellant accepted deposits and repaid loans in cash, violating section 269SS. The AO imposed a penalty of Rs. 33,67,71,039 under section 271D, upheld by the CIT(A) and the National Faceless Appeal Centre (NFAC).

The Court found that the appellant's failure to hold an RBI licence and the absence of exemption under section 269SS justified the penalty. The Court rejected the appellant's argument that the transactions were bonafide and genuine, stating that genuineness alone does not constitute reasonable cause under section 273B.

The Court relied on the Kerala High Court decision in NSS Karayogam v. CIT (2020), which held that mere genuineness of transactions does not amount to reasonable cause to avoid penalty under section 271D.

Issue 3: Claim of Bonafide Belief as Reasonable Cause

The appellant contended that it acted under a bonafide belief that section 269SS did not apply to it, relying on the principle of good faith.

The Court examined the definition of "bonafide belief" under section 3(22) of the General Clauses Act, 1897, which requires honest intention. However, the Court noted that the appellant failed to provide any factual foundation or evidence demonstrating how it entertained such a belief.

Without factual basis, the Court held that the bonafide belief claim was a bald assertion insufficient to constitute reasonable cause under section 273B.

Issue 4: Genuineness and Bonafide Nature of Transactions as Reasonable Cause

The appellant argued that the genuine and bonafide nature of the cash transactions precluded penalty.

The Court referred to the Kerala High Court ruling in NSS Karayogam (supra), which clarified that reasonable cause under section 273B requires showing a compelling reason for accepting cash deposits, not merely the absence of tax evasion or the genuineness of transactions.

The Court concluded that the appellant failed to establish any compelling or reasonable cause for accepting deposits in cash, and therefore, the penalty under section 271D was rightly imposed.

Significant Holdings and Core Principles

"The appellant co-operative society, not holding a licence from the Reserve Bank of India to carry on banking business, cannot be treated as a co-operative bank exempted from the provisions of section 269SS of the Income-tax Act."

"The provisions of section 269SS apply to primary agricultural co-operative credit societies, as made clear by the third proviso to the section, and acceptance of deposits or loans in cash beyond the prescribed limit attracts penalty under section 271D."

"A mere bonafide belief or the genuineness of the transactions does not constitute reasonable cause under section 273B to avoid penalty for violation of section 269SS."

"Reasonable cause requires demonstration of a compelling or acceptable reason which necessitated acceptance of deposits or loans in cash, and mere absence of intention to evade tax or the bona fide nature of transactions is insufficient."

"In the absence of factual foundation to establish bonafide belief or reasonable cause, penalty under section 271D is justified and must be upheld."

The Court, after considering the statutory provisions, authoritative precedents, and facts, confirmed the penalty imposed under section 271D for violation of section 269SS, dismissing the appellant's appeal.