2008 (2) TMI 114 - HC - Income Tax

Balance due adjusted by book entries for purchase of assets AO treated the outstanding amounts as acceptance of deposit in violation of provisions of Sec. 269SS - assessee proves that there was reasonable cause for such failure penalty is not automatic u/s 271D on mere violation of provisions of sec. 269SS deposited in cash more than specified limit penalty not imposable if reasonable explanation for such deposits have been given as per sec. 273B by assessee revenue appeal dismissed

Summary

Issues involved:
1. Interpretation of Section 269SS of the Income Tax Act, 1961 regarding penalty cancellation.
2. Assessment of whether the conversion of outstanding purchase price to a loan constitutes a violation of Section 269SS.
3. Consideration of reasonable cause under Section 273B for failure to comply with Section 269SS.

Detailed Analysis:
1. The primary issue in this case was the interpretation of Section 269SS of the Income Tax Act, 1961, specifically regarding the cancellation of a penalty. The Income Tax Appellate Tribunal referred a question to the High Court concerning the cancellation of a penalty of Rs. 23 lakhs levied under Section 271D of the Act for a potential violation of Section 269SS. The Tribunal's decision to cancel the penalty was challenged by the Revenue, arguing that the transfer of outstanding purchase price to a loan constituted a violation of the Act.

2. The case involved the assessment of whether the conversion of outstanding purchase price to a loan by transfer entries violated the provisions of Section 269SS. The assessee, a limited company, had outstanding dues which were converted into a loan on a Sarafi Account after partial payment. The Assessing Officer treated this conversion as a deposit in violation of Section 269SS, leading to the levy of a penalty. The Tribunal, however, found that there was no evidence of intentional defiance of the provisions and that the conversion was a technical breach at most, not warranting a penalty.

3. Another crucial aspect of the judgment was the consideration of reasonable cause under Section 273B for the failure to comply with Section 269SS. The Tribunal concluded that there was a reasonable cause for the breach, as the conversion was done in good faith without knowledge of potential penalty implications. The Tribunal's decision was supported by the absence of tax planning or evasion by the assessee, leading to the finding that no penalty was leviable due to the reasonable cause exemption provided under the Act.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee and against the Revenue. The judgment emphasized the importance of considering reasonable cause and the nature of the breach in determining the imposition of penalties under Section 271D of the Income Tax Act. The case highlighted the distinction between technical breaches and deliberate violations, underscoring the need for a balanced approach in penalty assessments related to statutory provisions.