2018 (10) TMI 52 - AT - Income Tax

Levy of penalty u/s 271E r.w.s. 269T - reasonable cause - proper year for levy of said penalty qua the year of book entries - reasonable cause for such book entries and subsequent allotment of 9% Redeemable Preference Shares - method of repayment of loans - Held that - The entries in the books of the assessee and the VSK are not in sync in this regard. Therefore we find the reason given by the CIT(A) has merits. Therefore we dismiss relevant arguments of Ld. Counsel for the assessee. Squiring up of loans by way of book entries constitutes violation The reason of lack of funds caused by the act of utilisation of it for the business purposes of the assessee shall constitute reasonable cause in this case. Raising the funds by sale of lands or borrowing from other parties to repay to VSK is an unnecessary exercise when the funds so paid to VSK is destined to return to the assessee s bank account. On this reasoning the assessee s decision in favour of squiring up of the loans account through passing of journal entries shall constitute a reasonable cause on the facts of the present case. The same reasoning has the strength of the binding jurisdictional High Court judgment in the case of CIT Vs. Triumph International Finance (I) Ltd. 2012 (6) TMI 358 - BOMBAY HIGH COURT . In this case the amount was to come back to that assessee towards the sale price of the shares. Therefore on the ground of reasonable case as envisaged in the provisions of section 273B of the Act we are of the opinion that the levy of penalty is not sustainable. - Decided in favour of assessee.

Issues Involved:
1. Levy of penalty under section 271E read with section 269T of the Income Tax Act, 1961.
2. Whether the allotment of shares against share application money amounts to repayment of loan.
3. Applicability of section 269T to share application money.
4. Reasonable cause for the alleged violation of section 269T.
5. Proper year for the levy of penalty.
6. Nature of the transactions and whether they constitute loans or advances.
7. Mode of repayment and its compliance with section 269T.
8. Whether the transaction was a colorable device.
9. Interpretation of "reasonable cause" under section 273B.

Detailed Analysis:

1. Levy of Penalty under Section 271E read with Section 269T:
The assessee was penalized for allegedly violating section 269T by repaying loans through journal entries instead of account payee cheques or drafts. The Assessing Officer (AO) levied a penalty of ? 51.50 crores, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Allotment of Shares Against Share Application Money:
The assessee contended that the allotment of shares against share application money did not constitute a repayment of loan or deposit. The CIT(A) disagreed, stating that the amounts received were initially loans and their conversion into share application money and subsequent allotment of shares were considered a repayment of loans through journal entries, violating section 269T.

3. Applicability of Section 269T to Share Application Money:
The assessee argued that share application money is not a loan or deposit under section 269T. However, the AO and CIT(A) treated the amounts as loans initially, which were later converted into share application money and then into shares, thus falling under the purview of section 269T.

4. Reasonable Cause for Alleged Violation:
The assessee claimed a reasonable cause under section 273B, arguing that the transactions were genuine business transactions and that repayment through journal entries was a practical necessity due to the lack of funds. The AO and CIT(A) did not accept this argument, considering the transactions as colorable and not genuine.

5. Proper Year for Levy of Penalty:
The assessee argued that the penalty should have been levied in the years when the loans were converted into share application money, not in the year of share allotment. The CIT(A) held that the default was not year-specific and upheld the penalty for the year under consideration.

6. Nature of Transactions - Loans or Advances:
The Tribunal examined whether the amounts received from VSK were loans or share application money. It concluded that the amounts were initially treated as loans in the books of both the assessee and VSK, and thus, their repayment through journal entries violated section 269T.

7. Mode of Repayment and Compliance with Section 269T:
The Tribunal referred to the jurisdictional High Court's decision in CIT Vs. Triumph International Finance (I) Ltd., which held that repayment of loans through journal entries constitutes a contravention of section 269T. Therefore, the Tribunal upheld the violation of section 269T by the assessee.

8. Colorable Device:
The CIT(A) found the transactions to be colorable, aimed at circumventing the provisions of section 269T. The Tribunal noted the lack of authorized share capital at the time of receiving the amounts and the delay in allotting shares, supporting the CIT(A)'s conclusion.

9. Interpretation of "Reasonable Cause" under Section 273B:
The Tribunal examined the concept of "reasonable cause" and concluded that the assessee's use of funds for business purposes and the impracticality of repaying loans through specified modes constituted a reasonable cause. The Tribunal relied on the jurisdictional High Court's decision in CIT Vs. Triumph International Finance (I) Ltd., which recognized similar circumstances as a reasonable cause.

Conclusion:
The Tribunal partly allowed the appeal, holding that the assessee had shown a reasonable cause for the failure to comply with section 269T, and thus, the penalty under section 271E was not sustainable. The Tribunal emphasized the impracticality of repaying loans through specified modes when the funds were already utilized for business purposes and the repayment would constitute an "empty formality."

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