1993 (8) TMI 312 - AT - Income Tax

Summary

Issues Involved:
1. Legality of penalties under ss. 271D and 271E for transactions prior to 1st April 1989.
2. Classification of transactions in current accounts as "loans" or "deposits" under ss. 269SS and 269T.
3. Existence of "reasonable cause" under s. 273B to exempt penalties.
4. Application of the judgment declaring s. 269SS ultra vires.
5. Mechanical imposition of penalties without proper verification.

Summary:

1. Legality of penalties under ss. 271D and 271E for transactions prior to 1st April 1989:
The Tribunal held that the penal provisions of ss. 271D and 271E, which came into force from 1st April 1989, cannot be applied retrospectively to transactions that occurred before this date. The Direct Taxes Laws (Amendment) Act, 1987, which introduced these sections, received presidential assent on 24th January 1988 and was made effective from 1st April 1989. The Tribunal noted that the law applicable at the time of the wrongful act should determine the penalty, citing the Supreme Court's decisions in CIT vs. Onkar Saran & Sons and Brij Mohan vs. CIT.

2. Classification of transactions in current accounts as "loans" or "deposits" under ss. 269SS and 269T:
The Tribunal did not provide a definitive ruling on whether transactions in current accounts between sister concerns constitute "loans" or "deposits" under ss. 269SS and 269T, as both parties agreed that a decision on this point was not necessary for resolving the appeals. However, for the sake of argument, they assumed such transactions could be classified as "loans" or "deposits."

3. Existence of "reasonable cause" under s. 273B to exempt penalties:
The Tribunal found that the transactions were genuine and made to meet urgent business needs. The assessee's ignorance of the law and bona fide belief that such transactions did not violate any provisions constituted "reasonable cause" under s. 273B. The Tribunal emphasized that the discretion to impose penalties should be exercised justly and fairly, particularly in cases of technical or venial breaches without any mala fide intention.

4. Application of the judgment declaring s. 269SS ultra vires:
The Tribunal followed the judgment of the Hon'ble Madras High Court in Kum. A.B. Shanti vs. ADI, which declared s. 269SS ultra vires. The Tribunal noted that it is bound to follow such a decision in the absence of any contrary ruling from another High Court, citing CIT vs. Smt. Godavaridevi Saraf and CIT vs. Smt. Nirmalabai K. Darekar.

5. Mechanical imposition of penalties without proper verification:
The Tribunal criticized the Department for levying penalties in a mechanical and arbitrary manner without verifying whether the transactions actually constituted acceptance or repayment of deposits. The Tribunal pointed out that many transactions were merely adjustments of existing debit balances and should not have been treated as violations of ss. 269SS and 269T. The Tribunal found the penalties to be unjustified and highlighted the need for careful consideration of the facts before imposing penalties.

Conclusion:
The Tribunal allowed the appeals, canceling the penalties levied under ss. 271D and 271E. The decision was based on the retrospective application of the penal provisions, the existence of reasonable cause, the binding precedent declaring s. 269SS ultra vires, and the improper imposition of penalties without proper verification.