2013 (1) TMI 210 - AT - Income Tax

Penalty u/s 271E - contravention of the provisions of mode of repayment of certain loans or deposits (Section 269T) - Held that - The director of assessee company Mr. Varun Sarup Agarwal issued a cheque on 1.2.2007 on behalf of the assessee company for payment of rent and assessee company opened its account after issuance of this cheque. The amount of Rs. 2 lakh was deposited in the bank account of Mr. Varun Sarup Agarwal with a bona fide intention to prevent dishonoring of the cheque issued to the landlord of the assessee company and the remaining amount was returned back to the assessee company s bank account. In the facts and circumstances of the case, it is doubtful whether the amount received by director with an intention to deposit it to the bank account with a bona fide belief that this would save the prestige of the company can be characterized as a loan or a deposit within the meaning of Section 269T The assessee company was perhaps justified in believing that it is entitled to rely on the position which was in its favour. Thus, it may be stated that the assessee company gave Rs. 2 lakh to its director with a bona fide belief that an urgency to ensure honoring of the cheque issued to the landlord constitutes a reasonable cause u/s 273B where no penalty shall be imposable on the assessee for any failure referred to in the said provisions inter alia Section 269T. Evaluating the impugned transaction as depicted in CIT Versus Idhayam Publications Limited 2006 (1) TMI 97 - MADRAS HIGH COURT in the present case the ledger account of Shri Varun Sarup Agarwal with the assessee company reveals that there was a current account between the assessee company and its director and no interest was being charged for the transactions and the same could not be termed either as a loan or a deposit with the assessee company. Accordingly, the penalty levied was not based on justified and reasonable grounds - in favour of assessee.

Summary

Issues Involved:
1. Legality of penalty under Section 271E of the Income Tax Act.
2. Interpretation of transactions under Section 269T of the Income Tax Act.
3. Reasonable cause and bona fide belief in imposing penalties.

Issue-Wise Detailed Analysis:

1. Legality of Penalty under Section 271E of the Income Tax Act:
The assessee challenged the penalty of Rs. 2,00,000 imposed under Section 271E for repaying a loan in cash, arguing it was unjustified and illegal. The Assessing Officer (AO) initiated penalty proceedings, observing that the assessee repaid Rs. 2 lakh in cash to a director, violating Section 269T. The AO, relying on ITAT Visak's judgment in ACIT vs. Vinman Finance & Leasing Ltd., imposed the penalty despite the assessee's claim that the transaction was a reimbursement of expenses, not a loan. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the penalty, stating that any repayment of expenses by the director constituted a loan, thus violating Section 269T.

2. Interpretation of Transactions under Section 269T of the Income Tax Act:
The primary contention was whether the repayment to the director was a loan under Section 269T. The assessee argued it was a reimbursement of expenses incurred by the director on behalf of the company, not a loan. The CIT(A) disagreed, stating that any amount paid by the director on behalf of the company was a loan, and its cash repayment violated Section 269T. The Tribunal examined similar cases and judicial pronouncements, noting that transactions between connected parties or sister concerns involving cash are subject to differing judicial opinions.

3. Reasonable Cause and Bona Fide Belief in Imposing Penalties:
The Tribunal considered whether the assessee had a reasonable cause or bona fide belief that the cash transaction was not a violation. The assessee's representative argued that the company had no bank account when the director issued a cheque for rent, necessitating the cash deposit to avoid dishonoring the cheque. The Tribunal referred to the Supreme Court's guideline in Hindustan Steel Ltd. Vs State of Orissa, emphasizing that penalties should not be imposed unless the party acted deliberately in defiance of law or in conscious disregard of its obligations. The Tribunal found that the assessee acted in good faith to prevent the cheque from bouncing, constituting a reasonable cause under Section 273B, where no penalty should be imposed if there is a reasonable cause for the failure.

Conclusion:
The Tribunal held that the penalty imposed by the AO and upheld by the CIT(A) was not justified. The cash payment to the director was made under a bona fide belief to prevent dishonoring a cheque, and the transaction was part of a current account with no interest, not a loan or deposit. Therefore, the penalty under Section 271E was set aside, and the appeal of the assessee was allowed. The judgment emphasized the importance of considering the context and bona fide intentions behind transactions when imposing penalties under the Income Tax Act.