2019 (2) TMI 169 - AT - Income Tax

Penalty u/s. 271D - violation of the provisions u/s. 269SS - whether the trade advances could be called as loan or deposit in terms of provisions of section 269SS? - Held that - The terms loan and deposit are not mutually exclusive, there are a number of common features between the two. It was held in the case of Abdul Hamid Sahib v. Rahmat Bi 1964 (12) TMI 62 - MADRAS HIGH COURT that a loan is repayable the moment it is incurred while it is not so with the deposit. In a deposit, unlike a loan, there is no immediate obligation to repay. Normally a deposit is for a fixed tenure. In the present case, the amounts received by the assessee are as trade advances and there is no evidence that there was any stipulation as to the period or any stipulation for interest. It is therefore matter of grave doubt as to whether the amounts received from the parties can be characterized as loan or deposit. In our view, they are trade advances received for the purpose of supply of goods dealt by the assessee. Such trade advances cannot fall under the purview of section 269SS of the Act so as to attract penalty u/s. 271D of the Act. - Decided in favour of assessee.

Summary

Issues:
1. Penalty under section 271D of the Income-Tax Act, 1961 for violation of provisions u/s 269SS.
2. Classification of cash received as advance for goods or loans.
3. Consideration of audit report and confirmations in penalty proceedings.

Issue 1: Penalty under section 271D of the Income-Tax Act, 1961 for violation of provisions u/s 269SS:
The appeal was against the sustaining of a penalty under section 271D of the Income-Tax Act, 1961 by the CIT(Appeals) relating to the assessment year 2007-08. The penalty was imposed for the violation of provisions under section 269SS of the Act. The AO had levied a penalty of &8377; 8,80,000, which was partially upheld by the CIT(Appeals, confirming a penalty of &8377; 2,50,000. The appellant contested this penalty, arguing that the penalty was not justified based on the facts and circumstances of the case. The appellant raised multiple grounds challenging the CIT(A)'s decision, emphasizing that the penalty was not warranted under the law, equity, and evidence presented.

Issue 2: Classification of cash received as advance for goods or loans:
The main contention revolved around the classification of cash received by the assessee as advance for goods or loans. The assessee argued that the cash received was in the nature of trade advances for the supply of goods to customers. The appellant highlighted that the audit report clearly recognized these advances as trade advances, supporting the claim that they were not cash loans but advances for goods. The appellant further explained that the cash reflected as loans in the balance sheet was a mere nomenclature change and that the intent and purpose of the advance were evident in the audit report. The appellant emphasized that the CIT(Appeals) failed to consider the detailed submissions and documents provided, which demonstrated that the cash received was for trade purposes and not as loans.

Issue 3: Consideration of audit report and confirmations in penalty proceedings:
The appellant stressed the importance of the audit report and confirmations filed by the concerned parties to prove that the cash received was in the nature of trade advances and not loans. The appellant argued that the CIT(Appeals erred in ignoring these confirmations and solely relying on the audit report to conclude that the deposits were in the nature of loans, thus attracting the provisions of section 269SS of the Act. The appellant contended that the CIT(Appeals' decision to sustain the penalty partly was erroneous, as the true nature of the receipts, as evidenced by the confirmations and audit report, did not warrant the penalty under section 271D. The appellant cited a precedent from the Mumbai Bench of the Tribunal to support their argument.

In the final judgment, the ITAT Bangalore allowed the appeal of the assessee, ruling that the trade advances received by the assessee were not to be classified as loans or deposits under section 269SS of the Act. The tribunal emphasized that the amounts received were trade advances for the purpose of supplying goods and did not carry obligations such as repayment or interest typical of loans or deposits. Therefore, the penalty under section 271D was deemed unsustainable, and the appeal was allowed in favor of the assessee.