2025 (1) TMI 867 - AT - Income Tax

Penalty u/sec.271E - violating the provisions of sec.269T - Reasonable cause u/s 273B - assessee made repayment of loans/deposits through the mode other than account payee cheques/drafts - transactions in respect of which penalty has been levied can be bifurcated in two parts i.e. transaction with related party and transactions with Customer Sales Agents CSAs - HELD THAT - For transaction with CSAs since the dues are to be recovered from the CSAs on account of sales made to them, the assessee has adjusted the amount of recovery against the security deposits obtained from the said parties through journal entries. Although it has been held that receipts/deposits/loans received through journal entries is in breach of sec.269SS, however, the adjustment of such security deposits against outstandings receivable, in our opinion, will constitute a reasonable cause so as not to attract levy of penalty u/sec.269T. We find in the case of Ajitnath Hi-Tech Builders (P.) Ltd. 2018 (2) TMI 603 - BOMBAY HIGH COURT while holding that receipt/deposit/loans received through journal entries is in breach of sec.269SS, however, has upheld the decision of the Tribunal cancelling the penalty levied on account of reasonable cause In the present case there is a reasonable cause on the part of the assessee for such violation. We, therefore, set aside the order of the Ld. CIT(A) and direct the AO to delete the penalty levied u/sec.271E - Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The primary legal issue considered in this judgment is whether the penalty imposed under Section 271E of the Income Tax Act, 1961 for the repayment of loans/deposits through modes other than account payee cheques/drafts, in violation of Section 269T, is justified. The core questions include:

Whether the transactions conducted through journal entries constitute a breach of Section 269T.
Whether there exists a 'reasonable cause' under Section 273B to exempt the assessee from the penalty.
How previous legal precedents and interpretations apply to the current case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Breach of Section 269T

Relevant Legal Framework and Precedents: Section 269T of the Income Tax Act prohibits the repayment of loans/deposits through modes other than account payee cheques/drafts if the amount exceeds a specified limit. Section 271E prescribes penalties for such violations. The Tribunal referenced previous decisions, including the Hon'ble Supreme Court's ruling in CIT vs. Adinath Builders (P.) Ltd., which acknowledged that journal entries could breach Section 269T but also considered 'reasonable cause' under Section 273B.

Court's Interpretation and Reasoning: The Tribunal interpreted that while the repayment through journal entries technically breaches Section 269T, the nature and purpose of the transactions must be considered. The court emphasized the importance of 'reasonable cause' as a mitigating factor under Section 273B.

Key Evidence and Findings: The assessee argued that the transactions were mere journal entries involving adjustments of security deposits against outstanding dues, conducted in the ordinary course of business. The Tribunal found merit in the argument that these were not cash transactions and were conducted through recognized banking channels initially.

Application of Law to Facts: The Tribunal applied the principle of 'reasonable cause' under Section 273B, finding that the adjustments made through journal entries were part of routine business operations and did not involve any unaccounted money.

Treatment of Competing Arguments: The Revenue argued for the enforcement of penalties due to the breach of Section 269T. However, the Tribunal favored the assessee's position, emphasizing the absence of any fraudulent intent or tax evasion.

Conclusions: The Tribunal concluded that the penalty under Section 271E was not warranted due to the existence of a 'reasonable cause' for the journal entries, which were made to adjust legitimate business transactions.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal held, "Although it has been held that receipts/deposits/loans received through journal entries is in breach of sec.269SS, however, the adjustment of such security deposits against outstandings receivable, in our opinion, will constitute a 'reasonable cause' so as not to attract levy of penalty u/sec.269T of the Act."

Core Principles Established: The judgment reinforced the principle that journal entries, when used as a legitimate business practice without involving cash transactions, may not attract penalties if there is a 'reasonable cause' for their use. It highlighted the importance of evaluating the intent and context of transactions under Sections 269T and 273B.

Final Determinations on Each Issue: The Tribunal set aside the penalty imposed under Section 271E, directing the Assessing Officer to delete the penalty, thus allowing the appeal filed by the assessee.

In summary, the Tribunal's judgment underscores the necessity of considering the purpose and nature of financial transactions when determining penalties for breaches of tax provisions, particularly when such transactions are conducted through journal entries in the regular course of business. The decision aligns with established precedents, emphasizing 'reasonable cause' as a significant factor in mitigating penalties under the Income Tax Act.

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