2025 (1) TMI 382 - AT - Income Tax

Penalty by invoking the provision of sec 271E - default of sec 269T while making repayment of loans by journal entries /book entries to the partners - transactions by way journal entry - HELD THAT - Where the repayment has been made by the partnership firm to its partners, such transactions are not covered within the fold of s. 269SS/269T of the Act for the reason that under general laws, partnership firm is no different from partners constituting it and a firm is only a compendious name for partners who carry on business etc. It is the case of the assessee that the repayment has been made by journal entry and a small part paid through banking channel. Thus, the facts available on record would show that no actual payment has been made in cash but has been merely effected by journal entry in the books of the assessee. As in the case of CIT vs Noida Toll Bridge Co. Ltd. 2003 (1) TMI 46 - DELHI HIGH COURT had taken judicial view that such repayment of loan by way of journal entry falls outside the ambit of s. 269T. In any case, such transactions are entitled to immunity available u/s 273B of the Act which stipulates that penalty u/s 271E is not to be imposed on a person for any failure, if he proves that there was reasonable cause for such failure in accepting/repaying the loan/deposits in modes other than the ones prescribed. The journal entries in the instant case appear to have been made with the partner of the firm under the bonafide belief that such transactions would not be hit by the provision of s. 269T in light of various judicial decisions on the issue including the judgement of the Jurisdictional High Court. There is no finding in the orders of the lower authorities that such transactions by way journal entry were undertaken to evade any tax in any manner. Appeal of the assessee is allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the repayment of loans by journal entries to partners of a partnership firm constitutes a violation of Section 269T of the Income Tax Act, 1961, which prohibits repayment of loans or deposits otherwise than by account payee cheque or draft.
Whether the imposition of penalty under Section 271E of the Income Tax Act for such transactions is justified.
Whether the transactions in question qualify for immunity under Section 273B of the Income Tax Act, which provides relief from penalties if reasonable cause is demonstrated.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Violation of Section 269T

Relevant Legal Framework and Precedents: Section 269T prohibits repayment of loans or deposits otherwise than by account payee cheque or draft. Section 271E imposes penalties for contravention of Section 269T. Section 273B provides immunity from penalties if reasonable cause is shown. Relevant precedents include judgments by the Delhi High Court and the Co-ordinate Bench of the Tribunal.
Court's Interpretation and Reasoning: The court interpreted that transactions between a partnership firm and its partners are not distinct from transactions with oneself, as per the Partnership Act. The court reasoned that journal entries do not constitute cash transactions and thus do not violate Section 269T.
Key Evidence and Findings: The court noted that the repayments were made by journal entries and a small portion through banking channels. There was no evidence of cash transactions or intent to evade taxes.
Application of Law to Facts: The court applied the legal principles established in precedents, finding that the partnership firm and partners are not separate entities under the law, and journal entries do not constitute cash repayments.
Treatment of Competing Arguments: The court considered the Assessing Officer's argument that journal entries equate to cash transactions but found it unsupported by legal precedents and the facts of the case.
Conclusions: The court concluded that the transactions did not violate Section 269T, and therefore, the penalty under Section 271E was not warranted.

Issue 2: Immunity under Section 273B

Relevant Legal Framework and Precedents: Section 273B provides that no penalty shall be imposed if the assessee proves reasonable cause for the failure to comply with provisions like Section 269T.
Court's Interpretation and Reasoning: The court interpreted that the reasonable cause was demonstrated by the assessee's bona fide belief, supported by legal precedents, that journal entries do not violate Section 269T.
Key Evidence and Findings: The court found no evidence of tax evasion or malintent in the transactions conducted through journal entries.
Application of Law to Facts: The court applied Section 273B, determining that the assessee had a reasonable cause for using journal entries based on existing judicial interpretations.
Treatment of Competing Arguments: The court addressed the arguments of the lower authorities regarding the absence of reasonable cause but found them lacking in light of the facts and legal precedents.
Conclusions: The court concluded that the transactions were entitled to immunity under Section 273B, and the penalty under Section 271E should not be imposed.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "Under these circumstances, where the repayment has been made by the partnership firm to its partners, such transactions are not covered within the fold of s. 269SS/269T of the Act for the reason that under general laws, partnership firm is no different from partners constituting it and a firm is only a compendious name for partners who carry on business etc."
Core Principles Established: Transactions between a partnership firm and its partners, conducted through journal entries, do not constitute a violation of Section 269T. Penalties under Section 271E are not mandatory if reasonable cause is shown under Section 273B.
Final Determinations on Each Issue: The court set aside the penalty imposed under Section 271E, directing the Assessing Officer to cancel it, as the transactions did not violate Section 269T and were protected under Section 273B.

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