TMI Blog2018 (10) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... tute a reasonable cause on the facts of the present case. The same reasoning has the strength of the binding jurisdictional High Court judgment in the case of CIT Vs. Triumph International Finance (I) Ltd. [2012 (6) TMI 358 - BOMBAY HIGH COURT]. In this case, the amount was to come back to that assessee towards the sale price of the shares. Therefore, on the ground of reasonable case, as envisaged in the provisions of section 273B of the Act, we are of the opinion that the levy of penalty is not sustainable. - Decided in favour of assessee. - ITA No.137/PUN/2018 - - - Dated:- 25-9-2018 - SHRI D.KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM For The Assessee : Shri Rakesh Mohan For The Revenue : Shri B. Kishore (CIT) ORDER PER D. KARUNAKARA RAO, AM: This appeal filed by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-6, Pune, dated 31.10.2017 for the Assessment Year 2013-14. 2. The proceedings relate to the levy of penalty under section 271E r.w.s. 269T of the Income Tax Act, 1961 (in short the Act ). 3. The grounds raised by the assessee are extracted as follows: 1) The Ld. CIT(A) erred in upho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings and no addition was made in respect of these transactions. On facts, the transactions cannot be categorised as particularly when the fact of allotment of shares itself is not at all disputed. The Id. CIT(A) erred in making findings on the alleged colourable nature of the transaction without considering the substantial evidence placed on record before him which indicated that the transactions were entirely genuine. 6) In any event, the Ld. CIT(A) failed to appreciate that as a matter of law, even assuming (without conceding) that there was any loan which was converted into share capital, that does not at all result in a violation of s. 269T. The question of levying penalty u/s 269T arises only when there is a repayment . The conversion of a loan into share capital does not amount to a repayment. 7) Without prejudice to the above and in any event, the Ld. CIT(A) ought to have appreciated that relevant amounts were received in the previous years relevant to AY 2010-11 and 2011-12, and were already reflected as share application money in those years. Hence, even assuming (without conceding) that in law there is any repayment, the same has not occurred in the per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly, the Assessing Officer levied penalty on 29.09.2015 after following the due process of law. In the said penalty order, the Assessing Officer discussed (a) the details of unsecured loans received by the assessee in the said assessment years; (b) the conversion of the same into share application money (in short SAM ) by way of journal entries in assessee s books of account; and (c) the same is finally converted into preferential shares and allotment to M/s. VSK Technologies Pvt. Ltd. (in short VSK ). Further, the Assessing Officer discussed the details of VSK Company, which is owned by Shri Deepak Bareja and Shri Sunil Suri; the details of loans granted periodically by the said VSK to the assessee; the details of Resolution passed by the company allotting the shares to VSK; the way the Authorized Share Capital was increased from ₹ 5 lakhs to ₹ 60 lakhs over the years; the way the said loans given to the company were utilized for buying the lands through Shri Digambar D Patil and Mrs. Jyotsna Patil, Directors of the assessee company etc., The Assessing Officer also discussed the way the loans given to others amounting to ₹ 4.32 crores by the assessee and the wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty under section 271E of the Act for assessment year 2013-14. The said paras 11 to 13 are extracted as under:- 11. RM has allotted 51,50,000 preference shares of ₹ 100/- each in lieu of deposit received of ₹ 51,50,00,000/- from VSK. The face value of equity shares of RM is valued at ₹ 10/- each. However preference shares are valued at a premium. Such premium is fixed without any basis. RM has not conducted any business from the date of its incorporation which is evident from NIL turnover reported in the financials year after year. Further, RM has consistently reported losses on account of some indirect expenses. RM has claimed Real estate Development as its objective but there are no instances towards the said objective except for the company's claim that advances are given to the Directors for the purpose of procuring land. The progress on the purpose for which advances are received by the directors is not reported and nothing in support of the same is brought on record. RM has regarded loans given to other entities amounting to ₹ 4.32 Cr. as bad and doubtful. Hence RM is inactive except for the isolated transaction of receiving advances from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving the same for share application money by the assessee constitute an Empty formality. This wrong understanding of AO led him to the wrong conclusion. 5. The proceedings before CIT(A) : Aggrieved with the above levy of penalty by the Assessing Officer, the assessee filed an appeal before the CIT(A). During the appellate proceedings, the assessee submitted that (i) loans and advances taken by the assessee from VSK were meant always for share application money from the very beginning of receiving loans. Therefore, as per the assessee, the impugned loans do not constitute the loans or advances for attracting the provisions of section 269T of the Act; (ii) the loans and advances were never repaid by cash to the VSK and therefore, the provisions of section 269T of the Act has no application; (iii) it is the case of receiving share application money from VSK and in return, the shares were allotted by passing the Resolution of the Board of the company and therefore, it is always a case of investment in shares, hence penalty levied should not be sustained; and (iv) notwithstanding the above, even if squiring up of entries relating to the loans or advances, amounts to repayment by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfirmed the penalty as per discussion in paras 6.1.3 to 9 of his order. The above referred decisions referred by the CIT(A) are narrated in the said paras. 6. Aggrieved with the above order of CIT(A), the assessee is in appeal before the Tribunal with the grounds cited above. BEFORE THE TRIBUNAL 7. Before us, learned Counsel narrated the way the company was originally incorporated, the loans were received from VSK Technologies Pvt. Ltd.(VSK) and also provided date-wise details of loans received. Ld. Counsel submitted that the assessee received ₹ 2.5 crores in assessment year 2010-11 towards the share application money. Further, the assessee received ₹ 49.24 crores in assessment year 2011-12. Thus, the total amount of unsecured loans / deposits / share application money works out to ₹ 51.74 crores. A.Y. Amount received as share application money 2010-11 2.50 crores 2011-12 49.24 crores Total 51.74 crores 7.1 Explaining the appropriation of the said loans, learned Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of the case, learned Counsel argued that the inflow of funds from VSK to the assessee has genesis in the Investment Agreement dated 02.02.2010 and providing the part ownership of the company to VSK by allotting requisite shares has been the original idea of the company. In tune with the same, the assessee allotted 9% RCP shares to VSK to make VSK as a preferential shareholder of the company, which is incorporated for the purpose of development of townships in Pune and Mumbai. As per the assessee, taking loans and advances is never the intention of assessee, and therefore, the loan of ₹ 51.74 crores from VSK was never for loans and advances and it is always for the allotment of ownership of the company to VSK eventually. He also submitted that loans and advances were subsequently converted into share application money pending the request for increase of the Authorized Capital limits with the relevant ROC. Soon after the permission is received, the assessee made book entries converting the loan into share application money (in short SAM ) and then allotted the said 9% RCP shares. These book entries of the said conversion of loan into SAM, which has the consequent effect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the cases and therefore, benefits of reasonable cause should be decided in favour of assessee and delete the penalty levied by the Assessing Officer and confirmed by the CIT(A). 7.4 Further, on the issue of correct assessment year initiation of penalty, elaborating the Assessing Officer s failure to initiate / levy penalty in assessment year 2012-13, where the conversion of loans and advances to share application money was done by passing journal entries, learned Counsel submitted that assessment year 2013-14 is the year of allotment of shares to the assessee and the default, if any, is not relatable to the year under consideration. A.Y. 2012-13 is the year, where the default occurred and there the penalty should have been initiated. The CIT(A) did not deal with this issue in para 8 of his order, was also highlighted by the learned Counsel. It is the case of learned Counsel for the assessee that the amounts received by the assessee from VSK do not constitute loans or advances. Therefore, the allotment of shares to VSK do not constitute any repayment of said loans or advances in order to attract provisions of section 269T of the Act. Further, it is the case of assessee that, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n incorrect appreciation of the Balance Sheet of VSK Technologies Pvt. Ltd. In the Balance Sheet, copy of which has been filed with the written submission by the department for A.Y. 2012-13, in Note No. 14, which has broad heading of Long Term Loans and Advances , the amount under consideration is shown under sub heading of Unsecured Advances to Radhamadhav Realcon Pvt. Ltd. . The department is missing the fact that under the broad heading of Long Term Loans and Advances , the advances given for the purchase of shares are also included. The amount under consideration is in fact advance for purchase of shares and not loan to Radhamadhav Realcon Pvt. Ltd. In this connection, it is pointed out to make things crystal clear that in Note No. 14 for the earlier assessment year, the same amount is reflected as advances for share application. Therefore, the department has proceeded on incorrect presumption about the Balance sheet of VSK Technologies Pvt. Ltd. 1.4 Even otherwise, the department is trying to raise issue of lifting the veil of the company and going into the true nature of the transaction at this stage of imposition of penalty under consideration by the Hon'ble Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the expression sufficient cause . Therefore, the expression reasonable cause in Section 273B for non-imposition of penalty u/s 271E would have to be construed liberally depending upon the facts of each case. 2.3 Therefore a liberal view is sought from the Hon'ble Tribunal in the present facts of the case as well. Further Hon'ble Court have also held as under: Para No. 24 In the present case, the cause shown by the assessee for repayment of the loan/deposit otherwise than by account payee cheque/bank draft was on account of the fact that the assessee was liable to receive amount towards the sale price of the shares sold by the assessee to the person from whom the loan/deposit was received by the assessee. It would have been an empty formality to repay the loan/deposit amount by account payee cheque/draft and receive back almost the same amount towards the sale price of the shares. 2.4 In the present facts of the case, the situation is exactly identical. The loans were accepted in the past and were lying in the books of account of the appellant as share application money. It was decided to issue shares against the share application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , a copy of which was handed over in the course of proceedings. It has been identified that if the following circumstances exist then benefit of reasonable cause cannot be granted. These are as under: 1. It is established that JV entries are made to achieve a purpose outside the normal business operations. 2. There is involvement of money. 3. Genuineness of JVs doubted in assessment proceedings. 3.2 Consequently if these do not hold good then JV shall tantamount to a reasonable cause. In the present facts, none of these causes exist so as to deny the appellant the benefit of reasonable cause. The penalty therefore should be cancelled. 3.3 There is no transaction of cash. There is no stipulation at all that the moneys involved are unaccounted money either of appellant or of VSK Technologies Pvt. Ltd. The journal entries have not been doubted in the assessment proceedings. The transaction of transfer of share application money to share account by passing journal entries has been done as a prudent commercial transaction. This mode is a recognized mode of transaction in commercial as well as accounting world. The genuineness of these JV transactions has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of CIT Vs. Triumph International Finance (I) Ltd. (supra). Emphasizing that the amount received by the company constitutes loans and advances only, he submitted that the repayment by way of journal entries in the books of account constitute contravention to the provisions of section 269T of the Act and therefore, penalty under section 271E of the Act is rightly levied. Referring to the reasonable cause related issues and facts, learned DR submitted that the facts of the jurisdictional High Court in the case of CIT Vs. Triumph International Finance (I) Ltd. (supra) are distinguishable and therefore, penalty cannot be deleted on the ground of reasonable cause and also in view of the decision of the jurisdictional High Court in the case of CIT Vs. Triumph International Finance (I) Ltd. (supra). 9. Decision of the Tribunal : We have heard both the parties and perused the orders of the Revenue, written submissions, paper book filed before us. We find there are couple of major issues for adjudication. They are (1) whether the transactions in question between the VSK to assessee and to VSK constitutes the loan transaction- payments/loan repayments thereby attracting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion (1) of] [section 271, section 271A, [section 271AA] section 271B [section 271BA], [section 271BB,] section 271C [section 271CA,] section 271D, section 271E, [section 271F, [section 271FA,] [section 271FAB,] [section 271FB,] [section 271G.]] [section 271GA,] [section 271 GB] [section 271H,] [section 271-I,] [section 271J,] clause (c) or clause (d) of sub-section (1) or sub-section (2) of 272A, sub-section (1) of section 272AA] or [section 272B or] [sub-section (1) [or sub-section 1A) of section 272BB or] [sub-section (1) of section 272BBB or] clause (b) of sub-section (1) or clause (b) or clause (c) of sub-section (2) of section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure]. 9.2 From the above, it is the spirit of the above provisions relating to repayment of loan/advance and the same needs to be done by the specified modes only, i.e. account payee cheque/demand draft and not by other modes. Legal provisions and the other judgmental law do not allow transaction of repayment of loan is done by way of cash or by wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re dismissed. Accordingly, relevant grounds are dismissed. 11. Year of initiation of Penalty proceedings : Regarding the questions relating to years of initiating the penalty proceedings, the case of the assessee is that assessee converted the said loan into share application money in books in the preceding assessment year and therefore, the year of initiation of penalty should have been done by the AO in that year and not in the year under consideration. 11.1 Per Contra, the case of the Revenue is that the said book entries in the books of the assessee are not in tune with that of the VSK. Therefore, argument of Ld. Counsel constitutes a self-serving one. 11.2 On going through the relevant extracts relating to book entries of both assessee and VSK, we find the orders of AO/CIT(A) are fair and reasonable. We proceed to extract the relevant lines from the order of CIT(A). The same reads as under : 6.1.3 The appellant also claimed that the share application money is not a loan or deposits. The appellant claimed that the loan connotes a transaction in which the borrower approached the lender for certain sum for a fixed period on the terms and conditions agreed betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.2.1 As on 31-2-2010, the appellant company had an authorized share capital of ₹ 5 lakhs only and this authorized share capital was already subscribed by the promoters and thus the paid up capital was equivalent to authorized share capital. So the amounts of ₹ 2.5 crores could not have been towards share application money, as there was no authorized share capital to receive the same. So therefore, this amount has to be treated as a loan/deposit. It is shown under share application money in the figures mentioned for F.Y. 09-10 of the balance sheet filed for F.Y. 10- 11 as it contains the figures of the earlier years. It is not clear as to how these figures are reflected in the balance sheet filed for F.Y. 09-10, as the appellant did not file the balance sheet for F.Y. 09-10 filed with ROC. Even otherwise, mere representation of an amount as share application money would not be the true criteria to determine its correct nature. 6.2.2 The appellant company received an amount of ₹ 49 crores and ₹ 24 lakhs during the F.Y. 10-11. On verification of the ledger extract, it is seen that the appellant company had received an amount of ₹ 33.71 crores (2.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount received has to be treated as loan/deposit. Thus, the facts suggest that the entries in the books of the assessee and the VSK are not in sync in this regard. Therefore, we find the reason given by the CIT(A) has merits. Therefore, we dismiss relevant arguments of Ld. Counsel for the assessee. Accordingly, relevant ground No.7 is dismissed. 12. Having held that the fund taken by the assessee constitutes the loans and the penalty proceedings are initiated property in the year under consideration, now we proceed to adjudicate the transaction on repayment by way of book entries qua the allotment of 9% Redeemable Cumulative Preference Shares. 13. Repayment linked transactions Nature : Book of accounts of the assessee demonstrates undisputedly the fact of conversion of the existing loan to the share application money by way of the book entries only. These entries resulted in squiring up of the said loans and therefore, in this case, the loans got repaid neither by way of account payee cheque nor by demand draft as specified in the Act. On these facts, the case of the assessee is that VSK never gave loans to the assessee and they are part of the investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has been repaid by debiting the account through journal entries, it must be held that the assessee has contravened the provisions of Section 269T of the Act. From the above, it is a decided issue that the squiring up of loans by way of book entries constitutes violation. Hon ble High Court dismissed all the similar arguments of Ld. AR before stating that the section 269T of the Act does not distinguish the between the bonafide or nonbonafide transactions. Therefore, we proceed to dismiss the arguments of Ld. Counsel. Accordingly, the relevant ground No.6 is dismissed. 15. Reasonable Cause (RC) : Ground No.8 relates to the reasonable cause. The provisions of section 273B of the Act are relevant. The provisions of section 273B of the Act mandate for not levy of penalty if there exist a reasonable cause for the assessee for the failure to make the repayment of loans in the modes other than the specified ones. Relevant extract from the said section reads as under : 273B. Notwithstanding anything contained in the provisions of....................................... Section 271E......................., no penalty shall be imposable on the persons or the assessee, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reasonable cause, i.e. lack of funds-cum-empty formality. We have perused the orders of the Revenue along with the paper book and the written submissions made by the Ld. Counsels before us. We shall now take up the reasonable cause of the assessee and the merits of it. Meaning of Reasonable Cause : The expression reasonable cause is undefined in the Act. However, the same was subject matter of discussion in many orders of the Tribunal and the same exists in the public domain. Accordingly, what constitutes a reasonable cause cannot be laid down with a precision. It all depends on the factual background of each case. The reasonable cause, as applied to human action, is that which would constrain a person of average intelligence and ordinary prudence. The word reasonable cause is interpreted by the Tribunal in the case of Mrs.Manju Kataruka Vs. ITO 74 TTJ (Kol.) 873. Relevant lines are extracted here as under : 12. What would constitute reasonable cause cannot be laid down with precision. It would depend upon the factual background. Reasonable cause, as applied to human action, is that which would constrain a person of average intelligence and ordinary prudence. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loans received by the assessee from VSK were substantially utilised for acquisition of the lands which are needed for creation of townships which is the original intention of the assessee. Barring ₹ 4.38 crores given to the other concerns, otherwise, rest of the total loans of ₹ 51.74 crores were undoubtedly utilised for the business purposes. Thus, it is not the case of the Revenue that the said funds were utilised for non business purposes. Normally, the lack of funds by itself may not be reasonable cause. However, the reasons for not having fund for repayment by specified mode may constitute a reasonable cause depending on the reasons. In the present case on hand, in our view the use of funds for business purposes of the assessee, will constitute a reasonable cause. Other Modes of Raising Funds : Now we shall examine how the assessee would have met the requirement of the statute, i.e. repayment through account payee cheque or demand draft when (a) the assessee is divested of the funds and (b) there is need for allotment of shares to VSK. As a first option, assessee should have sold the said acquired lands and raise the funds to repay to VSK by account payee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that no penalty under Section 271E shall be imposed for contravention of Section 269T if reasonable cause for such contravention is shown. .. 24. In the present case, the cause shown by the assessee for repayment of the loan / deposit otherwise than by account-payee cheque / bank draft was on account of the fact that the assessee was liable to receive amount towards the sale price of the shares sold by the assessee to the person from whom loan / deposit was received by the assessee. It would have been an empty formality to repay the loan / deposit amount by account-payee cheque / draft and receive back almost the same amount towards the sale price of the shares . Neither the genuineness of the receipt of loan / deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business has been doubted in the regular assessment. There is nothing on record to suggest that the amounts advanced by Investment Trust of India to the assessee represented the unaccounted money of the Investment Trust of India or the assessee. The fact that the assessee company belongs to the Ketan Parekh Group which is involv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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