2014 (8) TMI 872 - AT - Income Tax

Levy of penalty u/s 271D/E Violation of provisions of section 269SS - Adjustments through journal entries - Business of land development and construction of real estate properties - Limitation of time Time barred penalty order us/ 271(1)(c) - Held that - Since penalty proceedings for default in not having transactions through the bank as required u/s 269SS and 269T are not related to the assessment proceedings but are independent of it, therefore, the completion of appellate proceedings arising out of the assessment proceedings or the other proceedings during which the penalty proceedings u/s 271D and 271E may have been initiated has no relevance for sustaining or not sustaining the penalty proceedings and clause (a) of sub-section (1) of section 275 cannot be attracted to such proceedings - penalty for not deducting tax at source while making payment to employees, or contractor, or for that matter not making payment through cheque or demand draft where it is so required to be made - Following the decision in ITO, Ward 24(1), New Delhi Versus Sh. Dinesh Jain 2014 (6) TMI 140 - ITAT DELHI - it is the AO who applies mind during the assessment proceedings to the issues relating to the violation of section 269SS or 269T of the Act and therefore, the limitation should commence from the date of the Assessment Order. 'journal entries' are outside the scope of the relevant penal provisions - the provisions of clause (a) of section 275(1) of the Act would not apply and in alternative, the provisions of section 275(1)(c) only be attracted in the matters of penalties levied u/s 271D/271E of the Act - the limitation period would be counted from the date of assessment order with the AO s decision to make referral to his Addl. CIT, who is authorized to impose penalty - The orders of the penalty of this kind have to be explained considering the provisions of clause (c) of section 275(1) of the Act - these preliminary acts constitute action for the imposition of penalty - An action for imposition of penalty is always anterior in time to the actual imposition of penalty Decided in favour of Assessee. Applicability of provisions of section 273B - Reasonable Cause Held that - The journal entries are hit by the relevant provisions of section 269SS of the Act - completing the empty formalities of payments and repayments by issuing/receiving cheque to swap/squire up the transactions, is not the intention of the provisions of section 269SS of the Act, when the transactions are otherwise bonafide or genuine - Such reasons of the assessee constitute 'reasonable cause' within the meaning of section 273B of the Act - all the reasons are, prima facie, commercial in nature and they cannot be described as non-business by any means - journal entries should enjoy equal immunity on par with account payee cheques or bank drafts - the provisions of section 269SS and 269T of the Act shall not be attracted where there is no involvement of the 'money' - though the assessee has violated the provisions of Section 269SS / 269T of the Act in respect of journal entries, the assessee has shown reasonable cause and the penalty imposed u/s 271D/E of the Act are not sustainable Decided in favour of Assessee.

Summary

Issues Involved:
1. Levy of penalty under section 271D of the Income Tax Act.
2. Levy of penalty under section 271E of the Income Tax Act.
3. Limitation period for passing penalty orders under section 275(1)(c) of the Income Tax Act.
4. Reasonable cause under section 273B of the Income Tax Act.

Analysis of the Judgment:

1. Levy of Penalty under Section 271D:
The primary issue was whether the assessees violated section 269SS of the Income Tax Act by accepting loans through journal entries instead of account payee cheques/drafts, thus attracting penalties under section 271D. The assessees argued that the transactions were genuine, involved no cash, and were made for commercial exigencies. The ITAT examined the nature of the transactions and found that they were conducted among sister concerns for business purposes, and thus, did not constitute a violation of section 269SS.

2. Levy of Penalty under Section 271E:
Similar to the penalties under section 271D, the issue was whether the assessees violated section 269T by repaying loans through journal entries. The ITAT considered the same arguments and evidence as for section 271D and concluded that the transactions were genuine, bona fide, and conducted for commercial reasons. Therefore, the penalties under section 271E were also not justified.

3. Limitation Period for Passing Penalty Orders:
The assessees contested that the penalty orders were time-barred under section 275(1)(c) of the Act. The ITAT analyzed the relevant dates and found that the penalty orders were indeed passed beyond the statutory limitation period. The Tribunal referred to various judgments, including those of the Rajasthan and Delhi High Courts, which supported the assessees' contention that the limitation period should be counted from the date of the assessment order or the first show-cause notice issued by the AO, not from the date of the notice by the Additional CIT.

4. Reasonable Cause under Section 273B:
The ITAT considered whether the assessees had a "reasonable cause" for the transactions conducted through journal entries. The Tribunal referred to the judgment of the Bombay High Court in the case of Triumph International (I) Ltd, which held that journal entries for extinguishing mutual liabilities among group concerns could constitute a reasonable cause. The ITAT found that the transactions were conducted for legitimate business purposes, such as raising funds, assigning receivables, squaring up transactions, and operational efficiencies. Therefore, the penalties under sections 271D and 271E were not sustainable.

Conclusion:
The ITAT allowed all the appeals of the assessees, holding that the penalties under sections 271D and 271E were not justified due to the genuine and bona fide nature of the transactions and the existence of a reasonable cause. The penalty orders were also found to be time-barred under section 275(1)(c) of the Act.