2014 (12) TMI 522 - AT - Income Tax

Imposition of penalty u/s 271D - Cash received from one of the Directors of the company Addition u/s 68 made by AO for violation of section 269SS - Held that - Most of the High Courts are of the view that where loans and advances are accepted by the Director of company and which is not found to be in-genuine and assessee s return of income having been under scrutiny assessment u/s 143(3) and no addition having been made on account of such loan and there is no finding that transactions were malafide aimed at disclosing concealed money, imposition of penalty u/s 271D merely on technical mistake cannot be sustained - the money was accepted by the company from Director and it was explained that money was accepted through current account and was necessitated for ensuring meeting of funds requirement of company which arose suddenly - The transactions of receipt of cash was duly confirmed by the Director and the it was in the nature of current account - The Director used to pay the money in the current account and withdraw money from the current account as and when the need arises - It was also explained that such transactions were attributable to various exigencies and vicissitudes of the business - there are decisions of High Court wherein it was held that where assessee is unable to prove the exigency, the penalty is imposable. In Commissioner of Income-Tax, West Bengal Versus Vegetable Products Limited 1973 (1) TMI 1 - SUPREME Court it was held that if in a case of taxing provision two reasonable constructions are possible, construction which favours the assessee must be adopted - cash book of the assessee company was produced before him wherein he found acceptance of cash from the Director - even after verifying the cash book there is no any adverse observation by the AO to the effect that on the date of accepting cash the company was not in any urgent need of funds - without any adverse observation and also the AO s action of acceptance of genuineness of loan u/s 68 and in not making any addition in the hands of the assessee company, puts the case at par with the OMEC ENGINEERS Versus COMMISSIONER OF INCOME-TAX 2007 (9) TMI 27 - HIGH COURT , JHARKHAND wherein it was held that there being no finding of AO, CIT(A) or Tribunal that the transactions in violation of S.269SS were not genuine, assessee s return having been accepted u/s 143(3) after scrutiny, there being also no finding that transactions were mala fide aimed at disclosing concealed money, imposition of penalty u/s 271D merely for technical mistake could not be sustained Decided in favour of assessee.

Summary

Issues Involved:
1. Imposition of penalty under Section 271D of the Income Tax Act.
2. Violation of Section 269SS of the Income Tax Act.
3. Nature of transactions between the Director and the Company.
4. Interpretation of judicial precedents regarding Section 269SS and 271D.
5. Genuineness and necessity of cash transactions.

Detailed Analysis:

1. Imposition of Penalty under Section 271D of the Income Tax Act:
The appeal was filed by the assessee against the order of CIT(A) dated 28-8-2010, concerning the imposition of penalty u/s.271D amounting to Rs. 19,90,000/- for the assessment year 2005-06. The Assessing Officer (AO) initiated penalty proceedings under Section 271D(2) after discovering that the assessee company received cash from one of its Directors, Shri Ramesh Shah, which was considered a prima facie violation of Section 269SS of the Act.

2. Violation of Section 269SS of the Income Tax Act:
Section 269SS prohibits acceptance of loans or deposits in cash exceeding Rs. 20,000/-. The AO observed that the transactions were confirmed by the Director, and since the amount could not be taken as assessable income under Section 68, it was accepted as an explained loan, leading to the initiation of penalty proceedings under Section 271D.

3. Nature of Transactions Between the Director and the Company:
The assessee contended that the transactions were through a current account and were necessitated by the sudden fund requirements of the company. The Director would pay and withdraw money from the current account as needed, attributing the transactions to business exigencies and vicissitudes. The AO noted the transactions were confirmed by the Director and were recorded in the cash book.

4. Interpretation of Judicial Precedents Regarding Section 269SS and 271D:
The assessee relied on several judicial precedents:
- CIT Vs. Idhyam Publications Ltd. (Madras High Court): Held that cash transactions with a Director having a running current account with the company are not considered loans or deposits under Rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules, 1975.
- CIT Vs. Preeti Fuels & Flames (P) Ltd. (Chhattisgarh High Court): Exempted amounts received from a Director from being considered as deposits.
- Dillu Cine Enterprises (P) Ltd. Vs. ADCIT (Hyderabad ITAT): Short-term funding by a Director for business exigencies does not attract Sections 269SS and 271D.
- OMEC Engineers Vs. CIT (Jharkhand High Court): Penalty under Section 271D should not be imposed for technical mistakes if the transactions are genuine and there is no mala fide intent.
- CIT Vs. Speedways Rubber (P) Ltd. (Punjab & Haryana High Court): Held that technical defaults in accepting cash do not justify penalty if the transactions are bona fide.
- CIT Vs. Shree Ambica Flour Mills Corporation (Gujarat High Court): Transactions between sister concerns are not covered by Sections 269SS or 269T, and penalties should not be imposed for venial breaches.

5. Genuineness and Necessity of Cash Transactions:
The assessee argued that the transactions were genuine and necessary for meeting sudden fund requirements. The AO did not find any adverse observations regarding the necessity of funds on the dates of accepting cash and accepted the genuineness of the loan under Section 68 without making any additions.

Conclusion:
After considering various judicial precedents and the specific circumstances of the case, it was concluded that the transactions were genuine and necessary for business exigencies. The imposition of penalty under Section 271D was deemed unjustified, as the transactions were bona fide and there was no mala fide intent. The appeal of the assessee was allowed, and the penalty was set aside.

Order:
The appeal of the assessee is allowed. The order was pronounced in the open court on 10/10/2014.