2007 (9) TMI 27 - HC - Income Tax

Penalty -Alleged that assessee had received more than permissible amount u/s 269SS in cash and accordingly penalty imposed - Held that there is genuine reason for accepting the cash and accordingly penalty set aside

Issues Involved:
1. Whether there was reasonable cause for the assessee to receive loans and deposits in cash instead of by account payee cheque or bank draft as required under section 269SS of the Income-tax Act, 1961.
2. Whether the penalty levied under section 271D for receiving the loans and deposits in cash was proper and justified.

Detailed Analysis:

Issue 1: Reasonable Cause for Receiving Loans and Deposits in Cash
The assessee, a firm engaged in contract business, received cash loans and deposits amounting to Rs. 5 lakhs from 11 persons between February 14, 1993, and November 10, 1993. The assessee claimed that the cash was urgently needed for labor payments and that there was no deliberate intent to defy the law. The return filed by the assessee was accepted under section 143(3) of the Income-tax Act, and no loss of revenue was found. The Tribunal, however, held that there was no reasonable cause for receiving the deposits in cash, disapproving the assessee's justification.

Issue 2: Justification of Penalty under Section 271D
The Deputy Commissioner of Income-tax imposed a penalty of Rs. 7 lakhs under section 271D, equal to the amount of deposits accepted in violation of section 269SS. The appellate authority and the Tribunal affirmed the penalty, stating that the assessee failed to show reasonable cause as required under section 273B. The Tribunal referred the question of law to the High Court for opinion.

Legal Provisions and Interpretation:
- Section 269SS: Prohibits acceptance of loans or deposits of Rs. 20,000 or more in cash, mandating the use of account payee cheques or drafts.
- Section 271D: Imposes a penalty equal to the amount of the loan or deposit accepted in violation of section 269SS.
- Section 273B: Provides that no penalty shall be imposed if the assessee proves that there was reasonable cause for the failure.

Court's Analysis:
The High Court examined the purpose and object of sections 269SS, 271D, and 273B, noting that these provisions were designed to prevent tax evasion and the laundering of unaccounted money. The court referenced the Memorandum Explaining the Provisions in the Finance Bill, 1984, which highlighted the intent to curb the practice of explaining unaccounted cash as loans or deposits.

The court also considered the principle that penalty provisions should be strictly construed and that penalties are quasi-criminal in nature. Penalties should not be imposed unless the failure to comply with statutory obligations was deliberate, contumacious, or dishonest. The court cited the Supreme Court's decision in Hindustan Steel Ltd. v. State of Orissa, which held that penalties should not be imposed for technical or venial breaches or when the breach resulted from a bona fide belief.

Conclusion:
The High Court found no evidence that the transactions were not genuine or that they were intended to conceal undisclosed income. The return was accepted after scrutiny, and no revenue loss was identified. The court concluded that imposing a penalty for a technical breach that did not result in revenue loss would be harsh and unsustainable in law.

Final Judgment:
The reference was answered in favor of the assessee and against the Revenue. The court held that the imposition of penalty under section 271D could not be sustained in law.

D.G.R. Patnaik J. concurred with the judgment.

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