2008 (11) TMI 307 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of penalty levied under sections 271D and 271E of the Income Tax Act.
2. Validity of initiation of penalty proceedings during block assessment.
3. Reasonable cause for accepting and repaying deposits in cash.
4. Genuineness of deposits and compliance with section 269SS and 269T of the Act.

Issue-wise Detailed Analysis:

1. Deletion of Penalty Levied under Sections 271D and 271E of the Income Tax Act:
The Revenue appealed against the CIT(A)'s order deleting penalties under sections 271D and 271E for violations of sections 269SS and 269T, which mandate that loans or deposits of Rs. 20,000 or more must be accepted or repaid only through account payee cheques or drafts. The Additional CIT had levied penalties of Rs. 46,53,600 under section 271D and Rs. 1,57,000 under section 271E after noticing the violations during block assessment proceedings.

2. Validity of Initiation of Penalty Proceedings during Block Assessment:
The assessee argued that penalty proceedings under sections 271D and 271E could not be initiated during block assessment, which is a special and separate proceeding under Chapter XIV-B of the Act. However, this contention was rejected based on the Special Bench decision in Dewan Chand Amrit Lal vs. Dy. CIT, which held that since the Act does not prescribe a limitation for initiating penalty proceedings under sections 271D and 271E, they can be initiated after a search as well.

3. Reasonable Cause for Accepting and Repaying Deposits in Cash:
The assessee provided several explanations for accepting and repaying deposits in cash, such as:
- The finance business was highly competitive, and the company used doorstep deposit collection as a promotional strategy.
- Deposits were collected from rural areas and agriculturists who lacked banking facilities.
- Agents accepted smaller deposits to provide flexibility for partial withdrawals.
- Deposits were sometimes collected on bank holidays or after banking hours.

The CIT(A) found these explanations reasonable and noted that most cash deposits were from individuals without bank accounts or from areas without banking facilities. The Tribunal emphasized that the term "reasonable cause" should be liberally construed in favor of the assessee and understood from a common man's perspective.

4. Genuineness of Deposits and Compliance with Section 269SS and 269T of the Act:
The genuineness of the deposits was not doubted by the Department. The Tribunal observed that the assessee's explanations were not properly considered by the Additional CIT, who failed to appreciate the business compulsion and prudence involved. The Tribunal also noted that the company had accepted deposits in cash since its inception and suggested that a reasonable period for such acceptance could be three years from the start of the business, considering the need to establish goodwill and reputation.

Conclusion:
The Tribunal ordered the deletion of penalties for deposits accepted or repaid during the first three years of the company's business and remanded the issue to the Additional CIT for implementation. The appeals of the Revenue were partly allowed, with the Tribunal emphasizing the need for a liberal and practical approach in interpreting "reasonable cause" and considering business exigencies.