2014 (1) TMI 1683 - AT - Income Tax

Penalty under s. 271D - whether the assessee has contravened the provisions of s. 269SS - whether the money has been received in current account - Held that - If transaction was bona fide and default was of technical nature, then the penalty should not be justified. In the case before us. there is no default because the share application money or deposit in the current account cannot be included in the definition of deposit but in any case even if it is assumed otherwise then the defect is only of technical nature and there was a bona fide belief on the part of the assessee that this is not in contravention of provisions of the Act, therefore, it is of technical nature and does not call for levy of penalty. In any case, a reasonable cause was also explained that assessee company was constructing a hotel for which bank loans were not sanctioned and, therefore, directors had to contribute the money towards construction of the hotel. The payment was generally required for labour payments and other cash items, therefore, it is a reasonable cause for accepting the cash from directors and relatives and even on this basis also penalty is not leviable. We set aside the order of learned CIT(A) and delete the penalties levied under s. 271D in all the years - Decided in favour of assessee.

Issues Involved:
1. Confirmation of penalty under Section 271D of the Income Tax Act.
2. Whether the penalty notice issued and subsequent penalty order passed under Section 271D were barred by limitation.
3. Imposition of penalty for accepting share application money in cash.
4. Whether the provisions of Section 271D are attracted in respect of share application money received from directors.
5. Consideration of reasonable cause for accepting cash.

Issue-wise Detailed Analysis:

1. Confirmation of Penalty under Section 271D:
The primary issue in these appeals was the confirmation of penalties under Section 271D of the Income Tax Act for accepting share application money in cash. The assessee argued that the share application money was received from directors and not from outsiders, distinguishing it from the case of Bhalotia Engineering Works (P) Ltd. vs. CIT. The Joint Commissioner of Income Tax (Jt. CIT) imposed penalties on the basis that the transactions violated Section 269SS, which prohibits accepting loans or deposits in cash exceeding Rs. 20,000. The Jt. CIT observed that the share application money was not allotted as shares even after five years and was later returned, indicating it was in the nature of a deposit. The CIT(A) upheld the penalties, noting that the amounts were credited to the directors' current accounts and not directly to the share application money account.

2. Limitation of Penalty Notice and Order:
The assessee initially raised the issue that the penalty notice issued and the subsequent penalty order passed under Section 271D were barred by limitation. However, this ground was not pressed during the proceedings and was dismissed as not pressed.

3. Imposition of Penalty for Accepting Share Application Money in Cash:
The Jt. CIT and CIT(A) both found that the assessee had accepted share application money in cash from directors, which was credited to their current accounts and later transferred to the share application money account. This practice was inconsistent with established accounting principles and indicated an attempt to disguise unsecured loans as share application money. The Jt. CIT noted that the share application money, along with paid-up capital, exceeded the authorized capital, which was not permissible under the Companies Act.

4. Applicability of Section 271D to Share Application Money from Directors:
The assessee argued that share application money received from directors should not be considered as loans or deposits under Section 269SS. The Tribunal referred to various High Court decisions, including CIT vs. Idhayam Publications Ltd. and CIT vs. Rugmini Ram Ragav Spinners (P) Ltd., which held that share application money does not constitute loans or deposits. The Tribunal also noted that the Hon'ble Delhi High Court in CIT vs. I.P. India (P) Ltd. differed from the view of the Hon'ble Jharkhand High Court in Bhalotia Engineering Works (P) Ltd., stating that share application money cannot be treated as a receipt of loan or deposit.

5. Reasonable Cause for Accepting Cash:
The assessee contended that there was a reasonable cause for accepting cash from directors due to the urgent need for funds for hotel construction, as bank loans were not sanctioned. The Tribunal considered this explanation and referred to several High Court decisions, including CIT vs. Sunil Kumar Goel and CIT vs. Maheshwari Nirman Udyog, which held that reasonable cause can exempt the imposition of penalties under Section 271D. The Tribunal concluded that the transactions were bona fide and the default was technical and venial in nature, thus constituting a reasonable cause.

Conclusion:
The Tribunal set aside the order of the CIT(A) and deleted the penalties levied under Section 271D for all the years in question. The appeals of the assessee were partly allowed, considering the reasonable cause for accepting cash and the bona fide nature of the transactions.

← Previous Next →