2019 (2) TMI 1000 - HC - Income Tax

Penalty u/s 271D and 271E - Deposit of the cash by the Director into the bank account of the assessee - running account maintained between the promoter/director and the Appellant company in the context of the transactions covered in section 269SS - Held that - Deposit of the cash by the Director received from Mr.J.D. into the bank account of the assessee on the same day and those amounts, being utilized for making several payments including salaries, apart from that the Director withdrawing money from the assessee s bank account and remitting to the Financier by cash can never be taken to be a bona fide transaction. It is not a solitary instance, as the same type of transactions have been carried on by the assessee and the Director from the assessment year 2012-13. Most of the cases, which were relied on by the assessee are of either individual or rare transactions of the assessee. Therefore, we are of the clear view that there is absolutely no genuinity or bonafideness in the transaction done by the assessee and it will not amount to reasonable cause for the purpose of exercise or discretion by the Assessing Officer under Section 273B of the Act. Alternate plea raised by Mr.A.S.Sriraman stating that the penalty should be restricted to the peak of the cash deposits, we find that such a plea did not find favour with the Tribunal and in the light of the reasons assigned by us in the preceding paragraphs, we reject such a plea raised by the assessee. The Tribunal while considering the correctness of levy of penalty under Section 271E of the Act found that it has been admitted that cash has been deposited into the bank account of the assessee, the funds having been routed through the bank accounts, why the same was withdrawn in cash for repayment to the Director and subsequently, to Mr.J.D. This transaction remained unexplained. Further, the Tribunal pointed out that perusal of the assessment order of the Financier, Mr.J.D., gives a picture that moneys were the unaccounted cash of Mr.J.D., and this cash was laundered through the accounts of the two assessee s herein. Thus, the Tribunal concluded that the assessees have been used as custodian of the unaccounted cash of Mr.J.D. by depositing it in the bank accounts of the assessee by their Director, Dr.A.M. The assessee was not able to give any explanation to substantiate with evidence for repayment of the deposits to Dr.A.M., Director in cash. Examining the transaction, the Tribunal noted that as and when Mr.J.D. required cash, which appears to have been withdrawn by Dr.A.M., Director from the bank accounts of the assessee and paid to Mr.J.D. Thus, after considering all the factual aspects, the Tribunal confirmed the levy of penalty under Section 271E. The assessee s have not been able to convince us to take a different view. If loan in cash is taken once or twice, in exceptional exigencies, may be a ground for interference, but when the fact remains that a lender not even licensed was illegally giving loans only in cash and accepting repayment in cash cannot be a ground for condonation of regular transaction with such unauthorised lender. Therefore, we find the findings and observations in M.Sougoumarin 2018 (5) TMI 1731 - MADRAS HIGH COURT to aid the case of the Revenue. - Decided against assessee.

Issues Involved:
1. Applicability of Section 271D of the Income Tax Act to transactions between the promoter/director and the appellant company under Section 269SS.
2. Applicability of Section 271E of the Income Tax Act to transactions between the promoter/director and the appellant company under Section 269T.
3. Legitimacy of penalties under Sections 271D and 271E for transactions accepted as genuine and taxed in the financier's hands.
4. Interpretation of penalties under Sections 271D and 271E in a chain of transactions.
5. Equating utilization charts to cash flow statements in sustaining penalties under Sections 271D and 271E.
6. Consideration of commercial expediency and business compulsions as reasonable cause under Section 273B.

Detailed Analysis:

1. Applicability of Section 271D to Transactions under Section 269SS:
The court examined whether Section 271D applies to a running account between the promoter/director and the appellant company. The court found that the transactions between the director and the company were not genuine running accounts but were structured to bypass the prohibition on borrowing from individuals. The director acted as a conduit for cash loans from an individual financier, Mr. J.D., which were then deposited into the company’s account. The court held that these transactions violated Section 269SS, attracting penalties under Section 271D.

2. Applicability of Section 271E to Transactions under Section 269T:
The court also evaluated the applicability of Section 271E for the repayment of loans in cash. The tribunal noted that the company withdrew cash from its account to repay the director, who in turn repaid Mr. J.D. The court found that this series of transactions was designed to circumvent the legal restrictions on cash transactions, thereby violating Section 269T and justifying penalties under Section 271E.

3. Legitimacy of Penalties under Sections 271D and 271E:
The appellants argued that since the transactions were accepted as genuine and taxed in the financier's hands, penalties should not be imposed. However, the court rejected this argument, emphasizing that the genuineness of the transactions does not exempt the parties from complying with the statutory requirements of Sections 269SS and 269T. The court upheld the penalties, noting that both the director and the company were independently liable for their respective violations.

4. Interpretation of Penalties in a Chain of Transactions:
The appellants contended that imposing penalties at different stages of a chain of transactions was unreasonable. The court clarified that penalties under Sections 271D and 271E apply to each person involved in violating Sections 269SS and 269T. The definition of "person" under Section 2(31) includes individuals and companies, making both the director and the company liable for penalties. The court found no multiplicity of proceedings, as each entity's actions independently triggered the penalties.

5. Equating Utilization Charts to Cash Flow Statements:
The appellants argued that the utilization charts should be considered equivalent to cash flow statements, proving the genuineness of transactions. The court, however, found the cash flow statements questionable and noted that the assessment was based on reworked notional balance sheets and statements from seized records. The court concluded that the cash flow details did not demonstrate a reasonable cause for the cash transactions, thus sustaining the penalties.

6. Commercial Expediency and Business Compulsions as Reasonable Cause:
The appellants claimed that commercial expediency and business compulsions constituted reasonable cause under Section 273B. The court referred to the Supreme Court's ruling in Kum. A.B. Shanthi, which allows for discretionary power in genuine and bona fide transactions. However, the court found that the appellants failed to demonstrate that they could not obtain loans through account payee cheques or drafts for bona fide reasons. The court noted that the director’s actions as a conduit for cash loans lacked bona fides and were not genuine business transactions.

Conclusion:
The court dismissed the appeals, affirming the penalties under Sections 271D and 271E. The substantial questions of law were answered against the appellants, and the court found no reasonable cause to interfere with the tribunal's order. The court emphasized that the appellants' transactions were structured to evade statutory provisions, and the penalties were justified.

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