2016 (9) TMI 336 - HC - Income Tax

Penalty under Section 271-D - receipt of unsecured loan in cash - Held that - There is a direct nexus of the money having flown from R.P. Goyal in the books of account of the assessee, may be towards payment of constructional activities of the assessee but it does not alter the character of deposit. The company after having received such amount was duty bound to repay back to the creditor which in the instant case may be a Director or otherwise and it is not the case of the assessee that the amount which was received from R.P. Goyal would remain with the company and was not repayable. The assessee company was duty bound to repay the said loan when demanded by R.P. Goyal or when company had sufficient liquidity. The Tribunal has also come to a finding that there is no agreement in between the two i.e. company as well as R.P. Goyal, and since there is no agreement, it is neither loan nor deposit, the said finding of the Tribunal in our view is wholly perverse. The conduct or the entry and flowing of funds is sufficient to prove that the amount was admittedly received by cash in the account of assessee as having been received from R.P. Goyal and found credited as an unsecured loan , proves that it was in the nature of a loan and certainly such loan having been received by cash, falls within the ambit of Section 269-SS. We are not impressed by the argument raised by the learned counsel for the assessee that R.P. Goyal being a semi literate and educated upto only 9th class, & earlier engaged in Kirana; entered in the field of Cement Trading and Distributorship, promoted this company and became Chairman-cum-Managing Director of the company, was not aware of the provisions of law, in our view such an argument is worth rejection primarily since the instant appeals arose in a case of Limited Company and not R.P. Goyal. Provisions were brought into force from 1.4.1984 and such provisions were in force for almost 8 years and we cannot loose sight of the fact that over the years R.P. Goyal being in the business for years together, was not aware of the provisions of law although the presumption to know the law is to the contrary. Equally important is the fact that a Limited Company right from being formed is assisted by Chartered Accountant and Company Secretary, who are well qualified professionals & the justification tendered that R.P. Goyal being less literate, deserves no indulgence and it goes without saying that ignorance of law is no excuse. This finding of fact that the assessee as well as R.P. Goyal had common bank account in the same bank, remained unrebutted by the assessee as well, and if there is any direct nexus proved by the assessee that the amount as received from the Director was utilised towards payment to various labourers/contractors spent for constructional activities that does not improve the case of the assessee at all in these proceedings. - Decided against assessee

Issues Involved:
1. Imposition of Penalty under Section 271-D of the Income Tax Act, 1961.
2. Applicability of Section 269-SS of the Income Tax Act, 1961.
3. Validity of the Tribunal's decision to delete penalties.
4. Existence of reasonable cause and bona fide belief in the transaction.
5. The distinction between loan or deposit and unilateral act.
6. Burden of proof regarding the source of funds.

Detailed Analysis:

1. Imposition of Penalty under Section 271-D of the Income Tax Act, 1961:
The primary issue was whether the Tribunal was justified in holding that no case for imposition of any penalty under Section 271-D was made out because the provisions of Section 269-SS were not attracted. The Assessing Officer (AO) noticed that the respondent company had received substantial cash deposits from its Chairman-cum-Managing Director, which exceeded the limit prescribed by Section 269-SS. Consequently, penalties were imposed under Section 271-D for the assessment years 1992-93 and 1993-94.

2. Applicability of Section 269-SS of the Income Tax Act, 1961:
Section 269-SS prohibits taking or accepting loans or deposits of ?20,000 or more otherwise than by an account payee cheque or bank draft. The AO found that the respondent company received cash deposits from its Managing Director, which were recorded as unsecured loans. The Tribunal, however, concluded that the deposits were neither loans nor deposits but unilateral acts by the Managing Director for the company's benefit.

3. Validity of the Tribunal's Decision to Delete Penalties:
The Tribunal accepted the explanation offered by the assessee, holding that there was a reasonable cause and bona fide belief in the transaction. It noted that the funds were used for construction and setting up of the plant, and the Managing Director's actions were unilateral, not constituting a loan or deposit. The Tribunal deleted the penalties imposed by the AO.

4. Existence of Reasonable Cause and Bona Fide Belief in the Transaction:
The Tribunal found that the Managing Director's actions were based on a bona fide belief and reasonable cause, considering the delay in obtaining a term loan from financial institutions. The Tribunal concluded that the funds were advanced for the company's construction activities, and there was no intent to evade the provisions of Section 269-SS.

5. The Distinction Between Loan or Deposit and Unilateral Act:
The Tribunal's decision rested on the argument that the funds advanced by the Managing Director were unilateral acts, not loans or deposits, as they lacked the bilateral nature required for such transactions. The Tribunal emphasized that the Managing Director acted independently to support the company's construction activities.

6. Burden of Proof Regarding the Source of Funds:
The AO and CIT(A) raised doubts about the source of the funds advanced by the Managing Director, as the books of M/s. Chintpurni Enterprises (the Managing Director's proprietorship concern) were not produced for verification. The Tribunal, however, did not address this issue adequately, leading to the High Court's criticism of the Tribunal's findings.

Conclusion:
The High Court found that the Tribunal's decision was perverse and contrary to the material on record. The High Court held that the amounts received from the Managing Director were in the nature of loans and deposits, attracting the provisions of Section 269-SS. The High Court emphasized that the assessee company was duty-bound to repay the loans, and the absence of an agreement did not alter the nature of the transactions. The High Court upheld the penalties imposed by the AO and CIT(A), concluding that no reasonable cause or bona fide belief was established. The question of law was answered in favor of the Revenue, and the Tribunal's order was set aside.

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