2022 (9) TMI 1460 - AT - Income Tax

Penalty u/s 271D - contravention of Sec. 269SS - loan is received from the Executive Directors to the Company who are controlling the financial affairs of the Company - Was there there was reasonable cause u/s 273B? - HELD THAT - As in this present case the transaction between assessee company and its Executive Directors is on account to meet the urgent financial requirements of the company. Accordingly it cannot be considered and there exist reasonable causes for accepting the money in cash from the Executive Directors of the company who are responsible for day-to-day affairs of the company. In our opinion in this case levy of penalty u/s 271D of the is unwarranted. Accordingly we inclined to delete the penalty levied by the AO confirmed by Ld. CIT(A). Appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Legality of levying penalty under Section 271D of the Income Tax Act, 1961.
2. Applicability of Section 269SS of the Income Tax Act, 1961 to transactions between a company and its directors.
3. Reasonable cause under Section 273B of the Income Tax Act, 1961 for not levying penalty.
4. Jurisprudence and precedents related to Section 271D and Section 269SS.

Detailed Analysis:

Issue 1: Legality of Levying Penalty under Section 271D
The primary issue revolves around whether the Assessing Officer (AO) of the National Faceless Assessment Centre, Delhi, was justified in levying a penalty of Rs. 41,62,470/- under Section 271D of the Income Tax Act, 1961. The AO noted that the assessee company received cash loans from its directors, which was considered a contravention of Section 269SS. The penalty was levied despite the assessee's argument that the transactions were genuine and necessitated by urgent financial needs.

Issue 2: Applicability of Section 269SS to Transactions Between Company and Directors
The assessee argued that Section 269SS, which prohibits cash transactions exceeding Rs. 20,000, should not apply to transactions between a company and its directors. The directors, being responsible for the company's day-to-day affairs, are not considered "any other person" under Section 269SS. The assessee relied on multiple judicial precedents, including the Madras High Court in CIT Vs Idhayam Publications and the Madhya Pradesh High Court in CIT Vs Indore Plastic Pvt. Ltd., which supported the view that such transactions do not attract Section 269SS.

Issue 3: Reasonable Cause under Section 273B
The assessee contended that even if Section 269SS was applicable, there was a "reasonable cause" under Section 273B for not levying the penalty. The directors provided loans in cash due to urgent financial exigencies, and the transactions were genuine and necessary for the company's operations. The assessee cited various judgments, including those from the Bangalore ITAT, which held that penalties under Section 271D should not be levied if there was a reasonable cause.

Issue 4: Jurisprudence and Precedents
The Tribunal referred to several judicial precedents to substantiate its decision. These included:
- Chandra Cement Ltd. vs. Dy. CIT: The Tribunal observed that transactions between a company and its promoter-director, undertaken to meet urgent financial needs, should not attract Section 269SS.
- Mohan Kaikare vs. Dy. CIT: The Tribunal held that cash transactions undertaken due to urgent business needs, even if technically in violation of Section 269SS, should not attract penalties if they are genuine.
- Dillu Cine Enterprises (P) Ltd. vs. Addl. CIT: The Tribunal ruled that transactions between a company and its directors, who are intimately connected with the company, do not fall within the mischief of Section 269SS.

Conclusion:
The Tribunal concluded that the transactions between the assessee company and its executive directors were genuine, undertaken to meet urgent financial needs, and did not attract the provisions of Section 269SS. Consequently, the penalty levied under Section 271D was deemed unwarranted and was deleted. The Tribunal emphasized that penalties should not be levied for genuine transactions undertaken due to urgent business needs, especially when there is a reasonable cause under Section 273B. The appeal filed by the assessee was allowed, and the penalty was deleted.