2011 (6) TMI 1033 - AT - Income Tax

Summary

Issues Involved:
1. Validity of penalty levied under section 271E of the Income Tax Act.
2. Interpretation and application of sections 269T and 273B of the Income Tax Act.
3. Examination of the genuineness and nature of transactions.
4. Consideration of reasonable cause for non-compliance with the statutory provisions.

Issue-wise Detailed Analysis:

1. Validity of Penalty Levied Under Section 271E of the Income Tax Act:
The appeal by the revenue challenges the cancellation of penalty levied under section 271E of the Income Tax Act. The AO observed that the assessee repaid amounts to ex-partners and relatives of the partners by means other than account payee cheques/drafts, amounting to Rs.30,92,700/-. The Addl. CIT imposed a penalty of Rs.30,92,700/- for violating section 269T of the Act. The CIT(A) canceled the penalty, concluding that the repayments were genuine and not intended to evade tax.

2. Interpretation and Application of Sections 269T and 273B of the Income Tax Act:
Section 269T prohibits repayment of loans or deposits exceeding Rs.20,000/- by means other than account payee cheques/drafts. Section 271E prescribes a penalty for such violations. However, Section 273B provides that no penalty shall be imposed if the assessee proves that there was a reasonable cause for the failure. The CIT(A) held that the repayments were not loans or deposits but were returns of capital contributions made by ex-partners, thus not attracting section 269T. The CIT(A) also considered the legislative intent behind sections 269SS and 269T, which aim to curb tax evasion through unaccounted cash.

3. Examination of the Genuineness and Nature of Transactions:
The CIT(A) and the Tribunal noted that the transactions were genuine, recorded in the books of both parties, and there was no evidence of sham or bogus transactions. The capital contributions by ex-partners were returned upon their retirement, and no interest was paid on these amounts. The Tribunal emphasized that the character of the introduction of capital remains the same at the time of repayment and does not transform into a loan or deposit.

4. Consideration of Reasonable Cause for Non-compliance with the Statutory Provisions:
The Tribunal considered various judicial precedents and Board Circulars that highlight the importance of reasonable cause in determining the imposition of penalties. The Tribunal found that the assessee had a bona fide belief, supported by legal counsel, that the provisions of section 269T were not applicable. The Tribunal also noted that the transactions involved closely related persons, and the source of payments was not in doubt. The Tribunal concluded that the default was technical and did not result in any loss of revenue, thus justifying the cancellation of the penalty.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to cancel the penalty, finding that the assessee had a reasonable cause for the non-compliance and that the transactions were genuine and bona fide. The appeal by the revenue was dismissed, and the order pronounced in open court on 17-06-2011 affirmed the cancellation of the penalty.