2016 (5) TMI 1145 - AT - Income Tax

Penalty u/s 271D - Held that - No penalty can be levied u/s 271D of the Act, when the loan is accepted by acknowledgement of debt by passing journal entries in the books of accounts. In the present case on hand, on perusal of the facts available on record, we find that the A.O. has not doubted the genuineness of the transactions. The firm has accepted loan from the partners and also explained sources. Moreover, the repayment of loan is made to a nationalized bank. Under these circumstances, the A.O. was not correct in levying penalty u/s 271D of the Act. Therefore, we direct the A.O. to delete the penalty levied u/s 271D of the Act. - Decided in favour of assessee

Issues Involved:
1. Violation of Section 269SS of the Income Tax Act, 1961.
2. Imposition of penalty under Section 271D of the Income Tax Act, 1961.
3. Acceptance of loan through journal entries.

Detailed Analysis:

1. Violation of Section 269SS of the Income Tax Act, 1961:
The core issue revolves around whether the assessee firm violated Section 269SS by accepting loans of ?25 lakhs each from its partners otherwise than by way of crossed cheque/demand draft. The Assessing Officer (A.O.) observed that the firm accepted these loans in contravention of Section 269SS, which mandates that loans or deposits above a specified limit must be taken by an account payee cheque or draft. The assessee contended that the loans were acknowledged through journal entries in the books of accounts, not in cash, and thus did not violate Section 269SS.

2. Imposition of Penalty under Section 271D of the Income Tax Act, 1961:
The A.O. imposed a penalty of ?50 lakhs under Section 271D for the alleged violation of Section 269SS. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the transactions were genuine, the loans were repaid by the partners from their individual accounts to Andhra Bank, and the firm merely acknowledged the debt via journal entries. The CIT(A) ruled in favor of the assessee, stating that no penalty could be levied as the loans were recorded through journal entries and not in cash, and the transactions were genuine.

3. Acceptance of Loan through Journal Entries:
The primary contention was whether acknowledging loans through journal entries constitutes a violation of Section 269SS. The assessee argued that the firm had not accepted cash loans; instead, the partners repaid the bank loan from their accounts, and the firm acknowledged this by passing journal entries. The genuineness of the transactions was not disputed by the A.O. The Tribunal noted that Section 269SS aims to prevent unaccounted cash transactions and that genuine transactions recorded through journal entries do not fall under its purview. The Tribunal referred to precedents such as the ITAT Pune Bench in Sun Flower Builders Pvt. Ltd. Vs. DCIT and ITAT Ahmedabad Bench in ACIT Vs. Gujarat Ambuja Proteins Ltd., which held that journal entries acknowledging debt do not constitute acceptance of loans violating Section 269SS.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the transactions were genuine, recorded through journal entries, and did not involve actual cash loans. Consequently, the penalty under Section 271D was not applicable. The appeal by the revenue was dismissed, and the cross-objection by the assessee was deemed not maintainable and also dismissed.

Final Pronouncement:
The order was pronounced in the open court on 6th May 2016, dismissing both the appeal filed by the revenue and the cross-objection filed by the assessee.

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