2009 (11) TMI 578 - AT - Income Tax

Penalties under s. 271D and s. 271E - The AO initiated penalty proceedings under s. 271D on the ground that there was a contravention of s. 269SS of the Act in as much as the assessee took a loan in cash in a sum exceeding Rs. 20,000 - The assessee was given the dealership of IOC gas agency in the name and style of M/s Tina Gas Service in the reserved category, that in order to augment the capital he accepted Rs. 8 lakhs from one Praful Patel who was the proprietor of Mahindra Traders as capital for the partnership which was proposed to be constituted under a MoU. The definition of a loan or deposit in s. 269SS merely says that it means a loan or deposit of money as per Expln. (iii) - Under Expln. (iii) of s. 269T it is defined as money which is repayable after notice or after a period and in the case of a person other than a company includes loan or deposit of any nature - The popular meaning of a loan or deposit involves the idea of charging interest and in ordinary parlance it would be difficult to conceive of a loan or deposit of money without any provision for payment of interest - In the case of a capital contribution to a partnership firm, there can be a contract amongst the partners that the capital contribution would carry interest - In the present case however it was provided that if the partnership does not materialise, the money would be returned without interest - The idea of a loan or deposit within the meaning of ss. 269SS and 269T is therefore ruled out - the assessee bona fide thought that he could take the capital contribution in cash since it did not carry any interest and cannot be considered as a loan or deposit - Thus, there was bona fide belief which also constitutes reasonable cause within the meaning of s. 273B. No motive of evade tax - Praful Patel was already assessed to tax. Though he advanced the monies to the assessee in cash, the assessee immediately deposited the same in his bank account - Thus, the amount was brought on record and into the accounts of the assessee -The Hon ble Gujarat High Court has held in the judgment cited supra, on behalf of the assessee, that it is necessary to show the motive to evade tax in order to justify the levy of penalty under s. 271D and s. 271E - Hence, cancel the penalties of Rs. 8 lakhs each imposed under ss. 271D and 271E and allow the appeals of the assessee with no order as to costs.

Summary

Issues: Penalties under sections 271D and 271E of the IT Act for the assessment years 2001-02 and 2003-04 respectively.

Analysis:
1. The penalties were imposed on the assessee for accepting a cash sum exceeding Rs. 20,000 from M/s Mahindra Traders, violating sections 269SS and 269T of the Act. The AO initiated penalty proceedings based on these violations.

2. The assessee explained that the cash was accepted as capital for a proposed partnership, which did not materialize, and the amount was returned by cheques. The AO, however, found the explanation unsatisfactory and imposed penalties, which were upheld by the CIT(A).

3. The Tribunal considered the circumstances and found it difficult to confirm the penalties. The assessee had deposited the cash sum in the bank, entered into a MoU with Praful Patel for a partnership, and returned the amount without interest when the partnership did not materialize. The Tribunal noted the absence of a motive to evade tax.

4. The Tribunal observed that the transaction did not fit the definition of a loan or deposit under sections 269SS and 269T, as there was no provision for interest on the amount advanced. The Tribunal also highlighted the importance of the MoU and Praful Patel's confirmation of the transaction.

5. The Tribunal concluded that the transaction was a capital contribution, not a loan or deposit, and there was a bona fide belief that justified the cash acceptance. The absence of tax evasion motive and the repayment of the amount by cheques further supported the cancellation of penalties under sections 271D and 271E.

6. Based on the above analysis, the Tribunal canceled the penalties imposed under sections 271D and 271E, allowing the appeals of the assessee with no order as to costs.