2023 (9) TMI 1610 - AT - Income Tax

Penalty u/s 271E - contravention of provisions of section 269T - repayment of unsecured loan of an amount in cash to Shri Vipan Kumar which is beyond the limits specified - whether the repayment of loans and deposits can be made only through any of the mode of transfer through the banking channel in terms of cheque, draft, ECS, etc or through cash or there could be a third mode of repayment whereby the assessee repays the amount in kind by selling the goods manufactured by him and adjusting the same against the amount received initially? HELD THAT - The restrictions imposed u/s 269SS in terms of initial receipt of loans and deposits are in situations where the acceptance of loans and deposits is in cash beyond the prescribed threshold and restrictions imposed u/s 269T in terms of repayment of loans and deposits applies where the repayment is in cash beyond the prescribed threshold. As decided in case of CIT vs Rugmini Ram Ragav Spinners (P) Ltd 2007 (7) TMI 237 - MADRAS HIGH COURT has similarly held that the rationale behind provisions of section 269SS and 269T is to prevent tax evasion i.e, laundering of concealed income by the parties in the guise of cash loans or deposits in or outside the accounts. Therefore, we donot agree with the findings of the ACIT that even where the assessee s submissions are considered, the repayment of loan by supplying goods would still fall in the ambit of contravention as so specified in section 269T. The reporting of the transaction in the tax audit report by the tax auditor has to be examined taking into consideration the explanation so furnished by the assessee to determine whether there is any violation of section 269T or not in the instant case. In the instant case, the assessee has produced relevant documentation in support of his sale transactions which are reported in the financial statement and duly offered to tax and has also reported the same as part of its regular VAT filings with the VAT authorities. What further documentation is required from the assessee has not been specified nor has the existence of these documents been denied. There is no adverse findings recorded by the AO in accepting the sale transactions as part of the return of income and therefore, where the Additional CIT is disputing the same transaction while deciding the penalty matter, the same carries an additional burden which has not been discharged in the instant case. There was nothing which stops the Additional CIT in calling Shri Vipan Kumar and recording his statement in order to verify the authencity of the explanation so submitted by the assessee. There was nothing which stops the Additional CIT in calling for the books of accounts which includes the cash book, sale register and other ledgers and examining the claim of the assessee that there was no cash payment and sales were made to Shri Vipan Kumar. Nothing has been done in the instant case and merely basis the apprehension, the explanation of the assessee has been rejected. Thus no violation of section 269T in the instant case and levy of penalty u/s 271E is accordingly set-aside. Assessee appeal allowed.

Issues Involved:

1. Imposition of penalty under Section 271E for contravention of provisions of Section 269T.
2. Classification of transactions as unsecured loans versus business transactions.
3. Applicability of Section 269T to the transactions in question.
4. Interpretation of tax audit report findings.

Detailed Analysis:

1. Imposition of Penalty under Section 271E for Contravention of Provisions of Section 269T:

The primary issue in this case is whether the assessee contravened Section 269T, which prohibits the repayment of loans or deposits exceeding a specified limit through modes other than account payee cheque or bank draft. The Additional Commissioner of Income Tax (CIT) imposed a penalty under Section 271E on the grounds that the assessee repaid an unsecured loan of Rs. 6,38,000 in cash, violating Section 269T. The assessee contended that the amount in question was not a loan repayment but an adjustment of advance payment against sales of knitted cloth.

2. Classification of Transactions as Unsecured Loans versus Business Transactions:

The assessee argued that the transaction was not a repayment of a loan or deposit but a business transaction involving the sale of goods. The assessee provided evidence, including ledger accounts, sale bills, VAT returns, and a sale register, to support the claim that the amount received was an advance against sales. The Additional CIT, however, classified the transaction as an unsecured loan, citing the tax audit report and balance sheet entries.

3. Applicability of Section 269T to the Transactions in Question:

The tribunal examined whether Section 269T applies to the transactions in question. It was argued that Section 269T is confined to loans and deposits and does not extend to business transactions involving advances for sales. The assessee relied on CBDT Circular No. 387, which clarifies that the prohibition in Section 269SS is limited to loans and deposits and does not cover purchase/sale transactions. The tribunal agreed with this interpretation, noting that the transaction was a business transaction and not a loan repayment, thus falling outside the purview of Section 269T.

4. Interpretation of Tax Audit Report Findings:

The tax audit report played a crucial role in the proceedings. The Additional CIT based the penalty on the audit report's findings, which indicated that the repayment was not made through the prescribed banking channels. The assessee argued that the audit report's indication of "no" in response to whether the repayment was made through banking channels was misinterpreted. The tribunal found that the transaction was reported as part of regular business activities and not as a loan repayment, thus supporting the assessee's position.

Conclusion:

The tribunal concluded that the transaction was a business transaction involving the sale of goods, not a repayment of an unsecured loan. It held that Section 269T did not apply to the transaction, as it was not a loan or deposit repayment. Consequently, the penalty under Section 271E was unjustified and was set aside. The tribunal emphasized the importance of corroborative evidence to support claims of contravention and found that the Additional CIT failed to substantiate the claim of a loan repayment. The order was pronounced in favor of the assessee, setting aside the penalty.

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