2016 (9) TMI 117 - HC - Income Tax

Penalty u/s.271 (D) - deemed income u/s 68 versus loan or deposits u/s 269SS - Held that - If any sum is found credited in the books of account and the assessee fails to offer satisfactory explanation regarding the nature and source so offered by him or fails to tender satisfactory explanation, the said amount can be treated as deemed income of the assessee, in our view once it has been held as deemed income of the assessee or an addition u/s.68, has been made the character of the said amount/addition will not remain as a loan or deposit and section 269-SS will not be applicable. Although addition u/s.68 or provisions of sec.269-SS are independent provisions but if the alleged income is held to be deemed income of the assessee, the penalty u/s.271-D could not be invoked. - Decided in favour of assessee.

Summary

Issues Involved:
1. Interpretation of penalty under section 271-D of the Income Tax Act, 1961 for violation of section 269-SS.
2. Application of provisions of section 68 regarding unexplained deposits.
3. Determination of whether penalty under section 271-D is sustainable in cases where deemed income has been added under section 68.

Analysis:

Issue 1: Interpretation of penalty under section 271-D for violation of section 269-SS
The case involved a penalty appeal under section 260A against the order passed by the Income Tax Appellate Tribunal related to the assessment year 1991-92. The central question was whether the penalty of ?20,000 under section 271-D was justified for a cash amount received in violation of section 269-SS. The Tribunal upheld the penalty, considering the violation of both sections as separate causes of action. However, the High Court held that once an amount is treated as deemed income under section 68, the character of the amount does not remain a loan or deposit, rendering section 269-SS inapplicable. The Court concluded that the penalty under section 271-D could not be invoked in such cases.

Issue 2: Application of provisions of section 68 regarding unexplained deposits
The AO had made an addition of ?20,000 under section 68 as unexplained deposit based on incriminating documents. The CIT (A) deleted the penalty, stating that once an amount is deemed income under section 68, it cannot be treated as a loan or deposit for section 269-SS purposes. The Court agreed with this interpretation, emphasizing that the failure to explain the creditworthiness or genuineness of the deposit led to the addition under section 68, which altered the character of the amount.

Issue 3: Determination of penalty sustainability under section 271-D post section 68 addition
The Revenue contended that the violation of section 269-SS due to a cash receipt from the appellant's wife justified the penalty under section 271-D. However, the Court held that once an amount is treated as deemed income under section 68, section 269-SS penalties are not applicable. The Court emphasized the distinct nature of sections 68 and 269-SS, stating that the penalty under section 271-D cannot be sustained in cases where the alleged income is deemed income of the assessee.

In conclusion, the High Court ruled in favor of the assessee, holding that the penalty under section 271-D was not sustainable in the given circumstances where the amount had been treated as deemed income under section 68.