2015 (10) TMI 2238 - AT - Income Tax

Penalty u/s. 271D - Held that - only those loans and deposits are covered by section 269SS where funds/money are transferred. We, therefore, are of the opinion that where the loans are recorded by merely passing adjustment entries or journal entries are outside the scope of section 269SS of the Act. Therefore, in our considered opinion, the ld. CIT(A) was not justified in confirming the penalty against the assessee on this count. - Decided in favour of assessee.

Summary

Issues:
Challenge against penalty imposed under section 271D of the Income-tax Act, 1961 for the assessment year 2007-08.

Detailed Analysis:
The appeal was against the penalty of Rs. 30,00,000 imposed by the Assessing Officer under section 271D of the Income-tax Act, 1961. The penalty was initiated due to the acceptance of a loan exceeding Rs. 20,000 by the assessee company through a journal entry, which was deemed a violation of Section 269SS. The Assessing Officer imposed the penalty as the loan acceptance did not involve an account payee cheque or draft, as mandated by the law. The CIT(A) upheld the penalty citing that the loan acceptance did not fall under the exceptions listed in the CBDT Circular No. 387. The appellant contended that the loan was part of a share capital pooling arrangement among directors and involved no physical transfer of funds, hence not violating Section 269SS.

The crucial argument put forth by the appellant was that the loan acceptance through a journal entry did not breach Section 269SS as it did not involve a transfer of funds. The appellant demonstrated that the loan was part of a share capital pooling arrangement among directors, and the journal entry was a mere accounting adjustment. The appellant relied on various decisions to support their case, emphasizing that the loan acceptance did not involve a monetary transaction as defined in Explanation (iii) of Section 269SS. The appellant also highlighted that subsequent to the journal entry, the loan accounts were adjusted against share capital, further reinforcing the non-monetary nature of the transaction.

The Tribunal analyzed the provisions of Section 269SS and its Explanations to determine the applicability of the penalty under Section 271D. It was concluded that the loan acceptance through a journal entry, without a physical transfer of funds, did not violate Section 269SS. The Tribunal emphasized that the section pertains to loans or deposits of money, and in this case, the journal entry did not involve a monetary transaction. The Tribunal also noted that the CBDT Circular did not provide clarity on the type of loans covered under Section 269SS. Referring to previous decisions and the recent ITAT judgment, the Tribunal ruled in favor of the appellant, canceling the penalty imposed under Section 271D.

In conclusion, the Tribunal allowed the appeal filed by the assessee, emphasizing that the journal entry for loan acceptance did not breach Section 269SS, and therefore, the penalty under Section 271D was unjustified. The decision was based on the nature of the transaction, absence of fund transfer, and consistent judicial precedents supporting the appellant's position.