2014 (2) TMI 1173 - AT - Income Tax

Penalty u/s 271E - cash payment of 33, 26, 960 to the firms M/s. Chetan Grass Trading Company and M/s. ABC Grass Company were not reflected in the capital account of the assessee and as per the audit report submitted by the assessee cash payments were treated as repayment of loans - CIT(A) deleted penalty levy - Held that - In the present case it is an admitted fact that the assessee is a partner in the firms M/s. Chetan Grass Trading Company and M/s. ABC Grass Company from whom he received a sum of 2, 00, 000 and 31, 26, 960 respectively. These transactions were treated by the Assessing Officer as repayment of loan in cash. Thus there is no independent legal entity of the firm apart from the rights and liability of the partners constituting it and if any amount is given or taken from the firm by the partners that cannot be treated as giving or taking of a loan. In the instant case the assessee being a partner gave the money to the partnership-firm when it was in need of business exigencies later on the amount was received it back if the said amount had been routed through the capital account there could have been no disallowance by the Department because a partner can deposit cash in his capital account and also he has a right to receive it in cash. Therefore the penalty levied by AO under section 271E was not justified - Decided in favour of assesse.

Summary

Issues:
- Deletion of penalty under section 271E of the Income-tax Act, 1961.

Analysis:
1. Facts and Penalty Initiation:
- The Department appealed against the deletion of a penalty of Rs. 33,26,960 under section 271E of the Income-tax Act by the Commissioner of Income-tax (Appeals).
- The penalty was imposed due to cash repayments of loans by the assessee to two firms, which the Assessing Officer deemed a violation of section 269T of the Act.

2. Assessee's Submissions:
- The assessee argued that transactions with partnership-firms were not subject to sections 269SS and 269T as partners and firms are considered one entity for tax purposes.
- The nature of transactions was explained as capital introduction/withdrawal, not loans, supported by the partnership-firm's treatment of funds.

3. Assessing Officer's Rejection:
- The Assessing Officer rejected the explanation, stating that cash payments were not reflected in the capital account and were treated as loan repayments.
- The Officer found no compelling reasons for cash transactions and applied section 269T, leading to the penalty imposition.

4. Commissioner's Decision:
- The Commissioner held that partners and firms lack separate legal identities, and transactions were not loan-related but for business purposes.
- Citing various legal precedents, the Commissioner concluded that the penalty was unwarranted due to genuine business transactions.

5. Tribunal's Ruling:
- The Tribunal agreed with the Commissioner, emphasizing the absence of distinct legal entities between partners and firms.
- Referring to legal judgments, the Tribunal upheld the deletion of the penalty, noting the bona fide nature of transactions and lack of loan dealings.

6. Judicial Precedents:
- The Tribunal referenced cases like CIT v. V. Sivakumar and CIT v. Lokhpat Film Exchange to support the decision.
- These cases highlighted the partners' right to use firm funds and the non-applicability of penalty provisions in certain partner-firm transactions.

7. Conclusion:
- Ultimately, the Tribunal dismissed the Department's appeal, affirming the deletion of the penalty under section 271E.
- The decision aligned with legal principles regarding partner-firm transactions and the absence of loan transactions in the assessed case.