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TMI Blog2015 (2) TMI 212X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax, Madras Vs. R.M.Chidambaram Pillai & Ors [1976 (11) TMI 2 - SUPREME Court] and Commissioner of Income Tax Vs. V.Sivakumar. [2013 (3) TMI 265 - MADRAS HIGH COURT] - Decided in favour of assessee. - ITA 336/2002, ITA 338/2002, ITA 341/2002 , ITA 345/2002 - - - Dated:- 3-2-2015 - MR. SANJIV KHANNA AND MR. V.KAMESWAR RAO, JJ. For the Appellant: Mr. Rohit Madan, Sr.Standing Counsel with Mr. Akash Vajpai, Advocate For the Respondent : Mr.Rajat Navei, Advocate with Mr.Kushagra Pandit, Advocate JUDGEMENT V.KAMESWAR RAO, J. 1. This batch of appeals under Section 260-A of the Income Tax Act, 1961 ( Act , in short) even though pertains to the different assessees, involve a singular substantial question of law are being decided by this common order. 2. The substantial question of law as framed in these appeals is as under: Whether the Income Tax Appellate Tribunal was correct in law and on fact in holding that penalty under Section 271-D of the Income Tax Act,1961 could be levied on the assessee? 3. The facts in all these appeals are not disputed. They are common in the sense that the respondent assessee in all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted and repaid loans in cash, and accordingly, initiated the proceedings under Section 271-D and 271-E of the Act and thereby imposed penalty under Section 271-D of the Act. 5. In appeals, the Commissioner of Income Tax (Appeals) upheld the order of the Assessing Officer imposing penalty under Section 271-D of the Act. The relevant observation of Commissioner of Income Tax (Appeals) in ITA 336/2002 is as under:- 40. The Bombay ITAT had held that both the Assessing Officer and the CIT(A) have held and correctly that there was absolutely no reason for making or receiving cash payments in the present case. In case the transactions were with partners or members of their family or the sister concerns, it was all the more necessary that such transactions ought to have been entered into in cash but by crossed account payee cheques or drafts. In this connection, counsel referred to s.273B and submitted that the explanation offered by the assessee shows a reasonable cause for the failure of the assessee to comply with the provisions of s.269-SS and 269-T. This argument is not acceptable. The circumstances clearly indicate that in transactions of this type between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that advanced made to the firm by one of its partners cannot be regarded as a loan advanced to the firm. It was also the conclusion that there was no dispute that the amount taken is capital of the firm and amount being not a loan, it cannot be said that the advance made is said to have violated the terms of the Statute. The following is the conclusion of the Tribunal in ITA 336/2002:- 5. We have heard the parties and taken ourselves through the record. The undisputed fact is that Mr.George is a partner in the firm. It is also not in dispute that money has been brought into the firm by Mr.George. The other undisputed fact is that source of money which has been brought into the firm is not disputed by the revenue. The legal precedent cited by the ld. AR are all to the effect that the advance made to the firm by one of its partners cannot be regarded as a loan advanced to firm. The prohibition u/s 269-SS is not the loan or to the advances made to the firm. In view of the settled legal position, the amount brought by the partner to the firm cannot be said to be a loan. It is also not in dispute that the amount taken is capital of the firm in view of the languag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court was of the view that a firm is not a legal person even though it has some attributes of the personality. According to the Court, partnership is a certain relation between persons, the product of agreement to share the profits of a business. Firm‟ is a collective noun, a compendious expression to designate an entity, not a person. In Income Tax Law, a firm is a unit of assessment by special provisions but is not a full person; which leads to the next step that since a contract of employment requires two distinct persons viz. the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration of a partner for taking part in the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in. The Supreme Court, further relying upon its own judgment reported as Commissioner of Income Tax, Bihar vs. Ramniklal Kothari [1969] 74 ITR 57 SC, wherein it had concluded that business of the firm was a business of the partner and the profits of the firm, were the profits of the partners and the expenditure incurred b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se (supra), wherein the assessee was a partner in four firms and the proprietor in Reliance Realtors and in the Assessment Year 2005-06, the assessee had taken loan from the four firms which were found to be in cash. The Assessing Officer initiated penalty proceedings under Section 271D of the Act and imposed penalty of ₹ 18 lakhs. The Commissioner of Income Tax (Appeals) dismissed the appeal. On a further appeal before the Tribunal, the Tribunal remitted the matter to the Assessing Officer to give a definite finding whether the transaction was between the firm and partner. The Assessing Officer passed a fresh order that the assessee individual was a partner in four firms from where funds had been advanced to the assessee and imposed a penalty of ₹ 18 lakhs. The Commissioner of Income Tax (Appeals) allowed the appeal holding that the transactions between the partner and the firm do not partake the character of a loan or deposit and therefore, there is no applicability of the provisions of Section 269-SS of the Act. The further appeal preferred by the revenue was dismissed by the Tribunal which resulted in the revenue filing an appeal before the High Court. The High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of V.Sivakumar (supra). 14. Having said that, it is clear that any interest, salary, bonus, commission or remuneration paid by a firm to any of its partners should be regarded as a mode of adjusting the amount that must have been taken to have been contributed to the partnership assets by a partner, who can really contribute in kind as well as in money. Applying this principle, we are of the view that the transaction effected in these cases cannot partake the colour of loan or deposit and as such, Section 269-SS nor Section 271-D of the Act would come into play. 15. We further find, it is an undisputed fact that the money was brought by the partners of the assessee-firms. The source of money has also not been doubted by the appellant revenue. The transaction was bona fide and not aimed to avoid any tax liability. Creditworthiness of the partners and genuineness of the transactions coupled with the relationship between the two persons and two different legal interpretations put forward could constitute a reasonable cause in a given case for not invoking Section 271-D and 271-E of the Act. Section 273B of the Act would come to the aid and help of the respondent-assessee. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 273B of the Act. Since the respondent-assessee had satisfactorily established reasonable cause under Section 273B of the Act he must be deemed to have established sufficient cause for not invoking the penal provisions (sections 271D and 271E of the Act) against him . 17. Insofar as the judgments relied by the learned counsel for the appellant-revenue, are concerned, we first refer to the judgment in the decision of this Court in Nagpur Golden Transport Company (supra). At the outset, we note that the said case was not with regard to the violation of Section 269-SS or the penalty imposed under Section 271-D of the Act. Even on facts, it is seen that assessee firm in that case namely Nagpur Golden Transport Company has paid interest to the firm Laxmi Chand Jiwan Dass. The controversy arose because the partner in the firm Laxmi Chand Jiwan Dass was the same as in the assessee firm i.e. Nagpur Golden Transport Company. The Income Tax Officer formed the opinion that the payment of interest by one firm to the other was the payment to the partners of the firm inasmuch as the partners in the two firms were common, attracting the applicability of Section 40(B) which has an overriding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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