2018 (3) TMI 375 - AT - Income Tax

Levying the penalty u/s 271E - loan received by the assessee from Prakash Electronics System Ltd had been squared off by way of conversion of loan into equity - Held that - In the instant case, the loan has been borrowed from Prakash Electronics System Ltd in the earlier year and the same has been converted into equity during the year under appeal. Hence the genuinity of the said transactions cannot be questioned by the CIT-A. The said transaction cannot be considered to be in violation of provisions of section 269T of the Act. We hold that the assessee had properly explained the entire gamut of transactions together with its end use i.e for investment in co-ownership property. It was a conscious business decision taken by the assessee to use the amounts raised through share capital for investing in co-ownership property for the purpose of its business and the businessman (i.e. assessee) cannot be compelled by the revenue to conduct its business as per the whims and fancies of the revenue. Hence the observation of the ld CIT-A that the assessee could have utilized the amounts raised through share capital from other sources to repay the loan to Prakash Electronics System Ltd would only tantamount to stepping into the shoes of the businessman and we hold that the said observation is not warranted, more so in the penalty proceedings u/s 271E of the Act. The business compulsions of the assessee warranting such conversion of loan into equity cannot be brushed aside simply as a matter of doubt merely because the shares were issued at premium. - Decided in favour of assessee

Summary

Issues Involved:
1. Justification of the penalty levied under Section 271E of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Justification of the Penalty Levied Under Section 271E of the Income Tax Act:

The core issue in this appeal is whether the Commissioner of Income Tax (Appeals) [CITA] was justified in upholding the penalty levied under Section 271E of the Income Tax Act by the Additional Commissioner of Income Tax (AO).

Facts and Background:
The assessee, engaged in the trading of iron and steel, filed its return of income declaring a loss. The AO observed a reduction in loans by ?6,76,500 during the year, which was repaid otherwise than by account payee cheque or draft, thus initiating penalty proceedings under Section 271E for violating Section 269T.

Assessee's Stand:
The assessee contended that the term 'repayment' in Section 269T refers only to repayment in money, not in kind or through book adjustments. The loan from Prakash Electronics System Ltd was converted into equity shares, and the loan from Shri Rajesh Bhutoria was squared off by selling shares. The loan from Shri G.P. Bhutoria was repaid in cash within the prescribed limit.

AO's Observations:
The AO noted that the assessee had sufficient funds raised through share capital and advances, which could have been used to repay the loan through account payee cheques. The AO concluded that the assessee's claim of compulsion to convert the loan into equity was factually incorrect and levied a penalty of ?6,70,875 under Section 271E.

CITA's Decision:
The CITA upheld the penalty for the loan converted into equity, stating the transactions were not genuine. However, the penalty for the loan repaid by selling shares was deleted.

Tribunal's Analysis:
The tribunal observed that the entire transaction of raising share capital and its utilization was explained during the assessment. The AO had accepted the genuineness of the share capital during the assessment, which contradicts the penalty proceedings. The tribunal emphasized that converting loans into equity is a common business practice and cannot be considered a violation of Section 269T. The tribunal also noted that the revenue did not take any action to treat the share capital as unexplained cash credit under Section 68.

Conclusion:
The tribunal held that the levy of penalty under Section 271E was not justified. The assessee's business decisions and the genuineness of the transactions were acknowledged, and the penalty was deleted.

Final Order:
The appeal of the assessee was allowed, and the penalty levied under Section 271E was deleted.

Order Pronounced:
The order was pronounced in the court on 07.03.2018.