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2015 (2) TMI 212 - HC - Income TaxPenalty under Section 271-D - firm had accepted payments from the partners, during the relevant year corresponding to the Assessment Years, in cash - Held that - The answer to the issue which arises for our consideration has its contours in realm of the Partnership Law as well as the Act.The transactions between the partner and the firm do not partake the character of a loan or deposit and therefore, there is no applicability of the provisions of Section 269-SS of the Act. There is no separate legal entity for the partnership firm and the partner is entitled to use the funds of the firm. The transaction was bona fide and not aimed to avoid any tax liability. Creditworthiness of the partners and genuineness of the transactions coupled with the relationship between the two persons and two different legal interpretations put forward could constitute a reasonable cause in a given case for not invoking Section 271-D and 271-E of the Act. Section 273B of the Act would come to the aid and help of the respondent-assessee. See Commissioner of Income Tax, Madras Vs. R.M.Chidambaram Pillai & Ors 1976 (11) TMI 2 - SUPREME Court and Commissioner of Income Tax Vs. V.Sivakumar. 2013 (3) TMI 265 - MADRAS HIGH COURT - Decided in favour of assessee.
Issues Involved:
1. Whether the Income Tax Appellate Tribunal was correct in law and on fact in holding that penalty under Section 271-D of the Income Tax Act, 1961 could be levied on the assessee? Issue-wise Detailed Analysis: 1. Facts and Background: The appeals under Section 260-A of the Income Tax Act, 1961, involve partnership firms engaged in banking and registered under the Kerala Money Lending Act. The firms had accepted payments from partners in cash, which led to the issuance of notices under Section 148 of the Act. The Assessing Officer found that these transactions violated Section 269-SS, leading to penalties under Section 271-D. 2. Assessing Officer's View: The Assessing Officer held that the partners and the firm are distinct entities and that the transactions in question were loans given in cash, thus violating Section 269-SS. Penalties under Sections 271-D and 271-E were imposed. 3. Commissioner of Income Tax (Appeals) View: The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, emphasizing that there was no reasonable cause for the cash transactions and that the firm was aware of the provisions of Section 269-SS. 4. Income Tax Appellate Tribunal's (Tribunal) View: The Tribunal concluded that advances made by partners to the firm could not be regarded as loans and that the transactions did not violate Section 269-SS. The Tribunal held that the amount brought by the partner into the firm was part of the firm's capital. 5. Arguments by Appellant-Revenue: The appellant-revenue argued that the firm and its partners are separate legal entities and that the cash transactions violated Section 269-SS. They cited judgments from Commissioner of Income Tax Vs. Nagpur Golden Transport Co. and Soundarya Textiles Vs. Assistant Commissioner of Income Tax to support their contention. 6. Arguments by Respondent-Assessees: The respondent-assessees argued that the transactions between partners and the firm should be treated as capital contributions, not loans, and thus do not violate Section 269-SS. They cited several judgments, including Commissioner of Income Tax, Madras Vs. R.M.Chidambaram Pillai, Commissioner of Income Tax Vs. V.Sivakumar, and Commissioner of Income Tax Vs. Lokhpat Film Exchange (Cinema). 7. Court's Analysis: The Court analyzed the interplay between Partnership Law and the Income Tax Act, referring to the Supreme Court's decision in R.M.Chidambaram Pillai, which stated that a firm is not a legal person and that transactions between a firm and its partners do not constitute loans. The Court also referred to judgments from the Madras High Court and Rajasthan High Court, which supported the view that Section 269-SS does not apply to transactions between a firm and its partners. 8. Reasonable Cause and Section 273B: The Court noted that the transactions were bona fide and not aimed at tax evasion, and the partners' creditworthiness and the genuineness of the transactions provided a reasonable cause under Section 273B, thus protecting the assessees from penalties under Section 271-D. 9. Distinguishing Other Judgments: The Court distinguished the judgments cited by the appellant-revenue, noting that they did not directly address the issue of Section 269-SS violations in the context of transactions between a firm and its partners. Conclusion: The Court concluded that the transactions in question did not constitute loans or deposits and therefore did not violate Section 269-SS. The appeals filed by the revenue were dismissed, and the substantial question of law was answered in favor of the respondent-assessees. The penalties under Section 271-D were not upheld, and the appeals were dismissed with no costs.
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