2012 (9) TMI 525 - HC - Income Tax

Penalty u/s 271D - whether transactions effected through journal entries would amount to acceptance of any loan or deposit otherwise than by account payee cheque or account payee bank draft within the meaning of Section 269SS to attract levy of penalty under Section 271D of the Income Tax Act 1961 - Held that - Receiving loans / deposits through journal entries would be in violation of Section 269SS but the transactions in question were undertaken not with a view to receive loans / deposits in contravention of Section 269SS but with a view to extinguish the mutual liability of paying / receiving the amounts by the assessee and its sister concern to the customers. In the absence of any material on record to suggest that the transactions in question were not reasonable or bonafide no reason to interfere with the order of the Tribunal in deleting the penalty of 22.99 crores. Deletion of penalty of 2.10 crores a specific finding of fact recorded by the Tribunal is that the loan was received by the assessee by way of a cheque. The above finding is based on the documents produced before the Tribunal. Nothing is brought on record even in this appeal to suggest that the loan was received otherwise than account payee cheque. Accordingly deletion of the penalty of 2.10 crores cannot be faulted - appeal decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 269SS and Section 271D of the Income Tax Act, 1961 regarding transactions through journal entries.
2. Validity of penalty imposed for receiving loans/deposits through journal entries.
3. Admissibility of additional evidence in penalty proceedings.
4. Assessment of transactions between common customers, the assessee, and another company through journal entries.

Issue 1: Interpretation of Section 269SS and Section 271D
The case involved a dispute regarding transactions amounting to a significant sum effected through journal entries in the books of the assessee. The primary question was whether these transactions violated Section 269SS of the Income Tax Act, which pertains to acceptance of loans or deposits. The Tribunal had to determine if these journal entries constituted acceptance of loans or deposits otherwise than by account payee cheque or bank draft, attracting penalty under Section 271D.

Issue 2: Validity of Penalty Imposed
The penalty of Rs. 2.10 crores was imposed under Section 271D for allegedly receiving a loan/deposit of the same amount in contravention of Section 269SS. The Commissioner of Income Tax (Appeals) upheld the penalty, linking it to the transfer of debtor balances. However, the Tribunal later deleted both penalties, stating that the transactions did not violate Section 269SS. The Revenue challenged this decision, arguing that the journal entries constituted receiving a loan or deposit, especially given the history of the assessee's group.

Issue 3: Admissibility of Additional Evidence
A key contention was the admissibility of additional evidence filed by the assessee before the Tribunal without giving an opportunity to the officer who levied the penalty. The Tribunal considered this additional evidence in deleting the penalties, leading to a challenge by the Revenue. The Revenue argued that the penalty should not have been deleted without allowing the officer to verify the documents furnished before the Tribunal.

Issue 4: Assessment of Transactions
The transactions involved mutual liabilities between the assessee, a public limited company, and another company related to common customers in the stock market. Instead of direct payments, the companies agreed to settle accounts through journal entries to discharge their respective credit/debit liabilities. The Tribunal found that these transactions were not aimed at violating Section 269SS but were intended to clear mutual liabilities without any evidence of mala fide intentions. The High Court upheld the Tribunal's decision, emphasizing the reasonable and bona fide nature of the transactions.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee and against the Revenue. The Court found that the transactions through journal entries were not in violation of Section 269SS as they were undertaken to settle mutual liabilities in a reasonable and bona fide manner, thereby deleting the penalties imposed under Section 271D.