2016 (4) TMI 378 - AT - Income Tax

Penalty u/s 271D - whether there was a reasonable cause in accepting the deposits in contravention of provisions of section 269SS of the Act? - Held that - The cash transactions of the assessee were with the directors and share holders of the company due to business expediency. Nobody has doubted the genuineness of the transactions. In my opinion, the assessee has proved throughout without any shadow of doubt that the transactions are genuine and there is a reasonable cause within the meaning of section 273B of the Act, which provides that no penalty shall be imposed on person or assessee as the case may be for any failure referred to in section 269SS of the Act, if he proves that there was reasonable cause for failure to take a loan or deposit otherwise than by account payee cheque or account payee bank draft, then the penalty should not be levied. Accordingly, do not see any reason to sustain the penalty levied u/s 271D of the Act. Consequently, the impugned penalty levied u/s 271D of the Act is cancelled. - Decided in favour of assessee

Issues Involved:
1. Validity of penalty under Section 271D of the Income-tax Act, 1961.
2. Classification of share application money as deposits.
3. Applicability of Section 269SS to share application money.
4. Establishment of reasonable cause under Section 273B.

Detailed Analysis:

1. Validity of Penalty under Section 271D of the Income-tax Act, 1961:
The primary issue was the imposition of a Rs. 5 lakh penalty under Section 271D for allegedly accepting deposits in cash, which contravened Section 269SS. The assessee argued that the amount was share application money and not a loan or deposit. The Assessing Officer (AO) rejected this explanation, noting that no shares were allotted, and no application for increasing authorized capital was filed with the Registrar of Companies. Consequently, the AO imposed the penalty, which was upheld by the CIT(A).

2. Classification of Share Application Money as Deposits:
The AO and CIT(A) treated the share application money as deposits, citing that it was received in cash and no shares were allotted. The assessee contended that the transactions were family transactions and relied on judicial precedents, including the Hon'ble Punjab & Haryana High Court in CIT v. Sunil Kumar Goel and the Hon'ble Madras High Court in CIT v. Idhayan Publication Limited, which held that amounts received from directors or shareholders do not constitute deposits under the Companies (Acceptance of Deposits) Rules, 1975.

3. Applicability of Section 269SS to Share Application Money:
The Tribunal noted that there were conflicting decisions from various High Courts on whether share application money received in cash falls under the purview of Section 269SS. The Hon'ble Jharkhand High Court in Bhalotia Engineering Works (P) Ltd v. CIT held that share application money partakes the character of deposits. However, other High Courts, including Delhi and Madras, held that such amounts do not constitute loans or deposits.

4. Establishment of Reasonable Cause under Section 273B:
The Tribunal considered whether there was a reasonable cause for the assessee's failure to comply with Section 269SS. The assessee argued that the cash was introduced due to business exigencies and substantial losses, and the transactions were genuine and from explained sources. Citing the Hon'ble Supreme Court in Asst. Director of Inspection (Investigation) v. Kum. A.B. Shanthi, the Tribunal emphasized that Section 273B provides relief from penalties if there is a reasonable cause. The Tribunal found that the transactions were genuine, the sources were verified, and the funds were introduced due to business necessity.

Conclusion:
The Tribunal concluded that the transactions between the company and its directors/shareholders were genuine and due to business exigencies. It held that the assessee had established a reasonable cause under Section 273B, and therefore, the penalty under Section 271D was not sustainable. Consequently, the penalty was canceled, and the appeal was allowed.

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