2025 (4) TMI 1570 - HC - Income Tax

Penalty u/s 271E - repayment of loan to the extent of more than twenty thousand rupees by the assessee is in violation of provisions contained in Section 269T - appellant has not proved reasonable cause for its failure within the meaning of Section 273B - HELD THAT - A combined reading of the provisions contained in Section 271E which provides penalty for failure to comply with the provisions of Section 269T and Section 273B of the Act makes it abundantly clear that if the assessee shows reasonable cause for the failure to comply with any provision referred thereto the penalty for its violation of Section 269T of the Act shall not be imposable on the assessee. The word reasonable cause has not been defined in the Act of 1961. Therefore in the context of the penalty provisions the words reasonable cause would mean a cause which is beyond the control of the assessee. Reasonable cause obviously means a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances without negligence or inaction or want of bona fides. In our considered opinion bona fide belief coupled with the genuineness of the transactions would constitute a reasonable cause. Furthermore the transaction which was bona fide and not aimed to avoid any tax liability would constitute a reasonable cause within the meaaning of Section 273B for not invoking Section 271E. in our considered opinion the cause shown by the assessee that on the insistence of M/s. Tata Finance Corporation to pay the amount of loan in cash vide its letter dated 5-11-2012 would constitute a reasonable cause within the meaning of Section 273B of the Act and also in light of the decision of Kum. A.B. Shanthi s case 2002 (5) TMI 4 - SUPREME COURT reasonable cause has been shown by the assessee for non-compliance with the provisions contained in Section 269T of the Act and the transaction is genuine and bona fide which is not disputed by all the three authorities however all the three authorities ignored the provision contained in Section 273B of the Act and proceeded to levy penalty under Section 271E of the Act rendering the provision contained in Section 273B of the Act otiose as the provision contained in 271E of the Act for imposition of penalty for non-compliance of Section 269T of the Act is subject to Section 273B of the Act. The order imposing penalty passed by the AO affirmed by the first appellate authority by order dated 25-10-2022 and further affirmed by the second appellate authority by order dated 6-9-2023 are liable to be and are hereby set-aside/quashed and it is held that since the appellant has shown the reasonable cause within the meaning of Section 273B the appellant is not liable to pay penalty u/s 271E for non-compliance of Section 269T. Substantial question of law is answered against the Revenue and in favour of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

- Whether the three authorities (Assessing Officer, Commissioner of Income Tax (Appeals), and ITAT) were concurrently justified in holding that the appellant failed to prove reasonable cause for non-compliance with Section 269T of the Income Tax Act, 1961, thereby justifying imposition of penalty under Section 271E.

- Whether the penalty imposed under Section 271E for repayment of loan in cash, in violation of Section 269T, was sustainable in the absence of consideration of the provisions of Section 273B of the Act, which provides exemption from penalty if reasonable cause is shown.

- Whether the transaction of repayment of loan in cash was genuine and bona fide, and if so, whether this fact negates the imposition of penalty.

- Whether the authorities erred in mechanically imposing penalty without judicially exercising discretion and considering all relevant facts, including the letter from the financer insisting on cash payment.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Interpretation and applicability of Sections 269T, 271E, and 273B of the Income Tax Act

The Court examined the legal framework governing the mode of repayment of loans and deposits under Section 269T, which mandates repayment only by account payee cheque, bank draft, or electronic mode if the amount exceeds Rs. 20,000. The language of Section 269T is prohibitive, making compliance mandatory.

Section 271E prescribes a penalty equal to the amount of loan or deposit repaid in violation of Section 269T, making it a penal provision that must be strictly construed. The Court relied on authoritative precedent emphasizing that penalty provisions are quasi-criminal and should not be imposed unless there is deliberate or dishonest conduct or conscious disregard of statutory obligations.

Section 273B provides an exception to the imposition of penalty under Section 271E if the assessee proves reasonable cause for failure to comply with Section 269T. The Court emphasized that the penalty under Section 271E is subject to Section 273B, which confers discretionary power to the authorities to refrain from imposing penalty when reasonable cause exists.

The Court referred to the Supreme Court decision in Assistant Director of Inspection v. Kum. A.B. Shanthi, which upheld the constitutional validity of similar provisions and clarified that reasonable cause may mitigate penalty liability.

Issue 2: Definition and scope of "reasonable cause" under Section 273B

The Court analyzed the concept of "reasonable cause" as not defined in the Act but interpreted through judicial pronouncements. It cited the Delhi High Court's definition in Azadi Bachao Andolan, describing reasonable cause as a cause that would constrain a person of average intelligence and ordinary prudence, acting without negligence or bad faith.

The Court held that bona fide belief and genuineness of the transaction constitute reasonable cause. It further observed that a bona fide transaction not intended to evade tax liability falls within the ambit of reasonable cause under Section 273B.

Issue 3: Evaluation of facts and evidence regarding the genuineness of the transaction and reasonable cause

On facts, the Court noted that the assessment under Sections 143(3) and 147 was completed accepting the genuineness of the transaction and the return of income. None of the three authorities disputed the bona fide nature of the loan repayment transaction.

The Assessing Officer accepted that the repayment was reflected in the books of account and that the loan repayment was made in cash as per the financer's insistence via a letter dated 5-11-2012. This letter was submitted by the assessee and acknowledged during assessment proceedings.

Despite these facts, the authorities imposed penalty under Section 271E without considering Section 273B, treating non-compliance with Section 269T as automatically attracting penalty. The Court found this approach erroneous and mechanical, as it ignored the statutory discretion and the exception carved out under Section 273B.

The Court also noted that the imposition of penalty for a technical breach that did not result in loss of revenue was unsustainable.

Issue 4: Treatment of competing arguments regarding penalty imposition

The Revenue argued that the authorities' finding of non-compliance with Section 269T was correct and supported by record, justifying penalty under Section 271E. The Court rejected this argument on the ground that the authorities failed to consider the reasonable cause exception under Section 273B.

The assessee's counsel argued that the transaction was accepted as genuine, reflected in books, and that the financer's insistence on cash repayment constituted reasonable cause. The Court agreed, holding that the authorities erred in ignoring the reasonable cause and exercising discretion judicially.

3. SIGNIFICANT HOLDINGS

The Court held:

"A combined reading of the provisions contained in Section 271E of the Act [which provides penalty for failure to comply with the provisions of Section 269T] and Section 273B of the Act makes it abundantly clear that if the assessee shows reasonable cause for the failure to comply with any provision referred thereto, the penalty for its violation of Section 269T of the Act shall not be imposable on the assessee."

"Bona fide belief coupled with the genuineness of the transactions would constitute a reasonable cause."

"The cause shown by the assessee that on the insistence of M/s. Tata Finance Corporation to pay the amount of loan in cash vide its letter dated 5-11-2012, would constitute a reasonable cause within the meaning of Section 273B of the Act."

"All the three authorities... ignored the provision contained in Section 273B of the Act and proceeded to levy penalty under Section 271E of the Act rendering the provision contained in Section 273B of the Act otiose."

"The order imposing penalty dated 28-12-2018... affirmed by the first appellate authority... and further affirmed by the second appellate authority... are liable to be and are hereby set-aside/quashed."

"Since the appellant has shown the reasonable cause within the meaning of Section 273B of the Act, the appellant is not liable to pay penalty under Section 271E of the Act for non-compliance of Section 269T of the Act."