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TMI Blog2018 (10) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... addition was made in respect of these transactions. On facts, the transactions cannot be categorised as particularly when the fact of allotment of shares itself is not at all disputed. The Id. CIT(A) erred in making findings on the alleged colourable nature of the transaction without considering the substantial evidence placed on record before him which indicated that the transactions were entirely genuine. 6) In any event, the Ld. CIT(A) failed to appreciate that as a matter of law, even assuming (without conceding) that there was any "loan" which was converted into share capital, that does not at all result in a violation of s. 269T. The question of levying penalty u/s 269T arises only when there is a "repayment". The conversion of a loan into share capital does not amount to a repayment. 7) Without prejudice to the above and in any event, the Ld. CIT(A) ought to have appreciated that relevant amounts were received in the previous years relevant to AY 2010-11 and 2011-12, and were already reflected as share application money in those years. Hence, even assuming (without conceding) that in law there is any repayment, the same has not occurred in the period relevant to the AY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29.09.2015 after following the due process of law. In the said penalty order, the Assessing Officer discussed (a) the details of unsecured loans received by the assessee in the said assessment years; (b) the conversion of the same into share application money (in short 'SAM') by way of journal entries in assessee's books of account; and (c) the same is finally converted into preferential shares and allotment to M/s. VSK Technologies Pvt. Ltd. (in short 'VSK'). Further, the Assessing Officer discussed the details of VSK Company, which is owned by Shri Deepak Bareja and Shri Sunil Suri; the details of loans granted periodically by the said VSK to the assessee; the details of Resolution passed by the company allotting the shares to VSK; the way the Authorized Share Capital was increased from ₹ 5 lakhs to ₹ 60 lakhs over the years; the way the said loans given to the company were utilized for buying the lands through Shri Digambar D Patil and Mrs. Jyotsna Patil, Directors of the assessee company etc., The Assessing Officer also discussed the way the loans given to others amounting to ₹ 4.32 crores by the assessee and the way they are written off as bad debts. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 2013-14. The said paras 11 to 13 are extracted as under:- "11. RM has allotted 51,50,000 preference shares of ₹ 100/- each in lieu of deposit received of ₹ 51,50,00,000/- from VSK. The face value of equity shares of RM is valued at ₹ 10/- each. However preference shares are valued at a premium. Such premium is fixed without any basis. RM has not conducted any business from the date of its incorporation which is evident from NIL turnover reported in the financials year after year. Further, RM has consistently reported losses on account of some indirect expenses. RM has claimed Real estate Development as its objective but there are no instances towards the said objective except for the company's claim that advances are given to the Directors for the purpose of procuring land. The progress on the purpose for which advances are received by the directors is not reported and nothing in support of the same is brought on record. RM has regarded loans given to other entities amounting to ₹ 4.32 Cr. as bad and doubtful. Hence RM is inactive except for the isolated transaction of receiving advances from VSK and giving the same to the Directors . In these circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mality. This wrong understanding of AO led him to the wrong conclusion. 5. The proceedings before CIT(A) : Aggrieved with the above levy of penalty by the Assessing Officer, the assessee filed an appeal before the CIT(A). During the appellate proceedings, the assessee submitted that (i) loans and advances taken by the assessee from VSK were meant always for share application money from the very beginning of receiving loans. Therefore, as per the assessee, the impugned loans do not constitute the loans or advances for attracting the provisions of section 269T of the Act; (ii) the loans and advances were never repaid by cash to the VSK and therefore, the provisions of section 269T of the Act has no application; (iii) it is the case of receiving share application money from VSK and in return, the shares were allotted by passing the Resolution of the Board of the company and therefore, it is always a case of investment in shares, hence penalty levied should not be sustained; and (iv) notwithstanding the above, even if squiring up of entries relating to the loans or advances, amounts to repayment by the assessee and such squiring did not happen in the year under consideration. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions referred by the CIT(A) are narrated in the said paras. 6. Aggrieved with the above order of CIT(A), the assessee is in appeal before the Tribunal with the grounds cited above. BEFORE THE TRIBUNAL 7. Before us, learned Counsel narrated the way the company was originally incorporated, the loans were received from VSK Technologies Pvt. Ltd.(VSK) and also provided date-wise details of loans received. Ld. Counsel submitted that the assessee received ₹ 2.5 crores in assessment year 2010-11 towards the share application money. Further, the assessee received ₹ 49.24 crores in assessment year 2011-12. Thus, the total amount of unsecured loans / deposits / share application money works out to ₹ 51.74 crores. A.Y. Amount received as share application money 2010-11 2.50 crores 2011-12 49.24 crores Total 51.74 crores 7.1 Explaining the appropriation of the said loans, learned Counsel mentioned that out of ₹ 49 crores, ₹ 4.38 crores was given to some unrelated parties as loans by the assessee. Details are given below (Page 17 of the paper book) : Remarks Directors(Digambar D. Patil, Mrs. Jyotsna Patil) 42.72 crores Schedule-7 of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intention of assessee, and therefore, the loan of ₹ 51.74 crores from VSK was never for loans and advances and it is always for the allotment of ownership of the company to VSK eventually. He also submitted that loans and advances were subsequently converted into share application money pending the request for increase of the Authorized Capital limits with the relevant ROC. Soon after the permission is received, the assessee made book entries converting the loan into share application money (in short 'SAM') and then allotted the said 9% RCP shares. These book entries of the said conversion of loan into SAM, which has the consequent effect of repayment of loans to VSK, was considered by the Assessing Officer as contravention to the provisions of section 269T of the Act. These provisions state that the repayment of loan has to be done by way of issue of account payee cheque or Account payee demand draft. Taking objection to the same, learned Counsel submitted that the said provisions do not apply to the case of share application money, more so when the shares are eventually allotted to VSK. Assessee also questions the timing/assessment year in the penalty proceedings is initia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares to the assessee and the default, if any, is not relatable to the year under consideration. A.Y. 2012-13 is the year, where the default occurred and there the penalty should have been initiated. The CIT(A) did not deal with this issue in para 8 of his order, was also highlighted by the learned Counsel. It is the case of learned Counsel for the assessee that the amounts received by the assessee from VSK do not constitute loans or advances. Therefore, the allotment of shares to VSK do not constitute any repayment of said loans or advances in order to attract provisions of section 269T of the Act. Further, it is the case of assessee that, notwithstanding the above arguments, the assessee passed the journal entries for converting the loans and advances to share application money and passing journal entries for squaring up of loans with VSK and eventually allotting preferential shares to VSK, constitutes part of reasonable cause. The assessee had for resorting to book entries, otherwise the assessee had to raise funds to repay the loans to VSK and issue cheques to VSK to square up the loans first. Considering the Investment Agreement on allotment of shares to VSK, the assessee had t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration is in fact advance for purchase of shares and not loan to Radhamadhav Realcon Pvt. Ltd. In this connection, it is pointed out to make things crystal clear that in Note No. 14 for the earlier assessment year, the same amount is reflected as advances for share application. Therefore, the department has proceeded on incorrect presumption about the Balance sheet of VSK Technologies Pvt. Ltd. 1.4 Even otherwise, the department is trying to raise issue of lifting the veil of the company and going into the true nature of the transaction at this stage of imposition of penalty under consideration by the Hon'ble Tribunal, whereas as a matter of fact, throughout the assessment proceedings for all the assessment years involved, the status of corporate entity has not been disturbed by the department itself, even though the scrutiny assessments have been made. It is also the fact that all rules and regulations relating to Registrar of Companies and Companies Law have been complied and have been acknowledged by the department on various stages of imposition of this penalty. Such issues cannot be raised in isolation only to suit the purpose of the department ignoring the blun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to receive amount towards the sale price of the shares sold by the assessee to the person from whom the loan/deposit was received by the assessee. It would have been an empty formality to repay the loan/deposit amount by account payee cheque/draft and receive back almost the same amount towards the sale price of the shares." 2.4 In the present facts of the case, the situation is exactly identical. The loans were accepted in the past and were lying in the books of account of the appellant as share application money. It was decided to issue shares against the share application money. There exists a Board Resolution to this effect which is on record and admitted in the orders of lower authorities. A strict compliance of Section 269 T would have required repaying the share application money by issue of cheque/draft and then receiving back the same amount by cheque /draft. This would have been, to use the terminology as done by Hno'ble Court, "An empty formality" only. 2.5 Further, Hon'ble Court have also observed as under: "Neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncelled. 3.3 There is no transaction of cash. There is no stipulation at all that the moneys involved are unaccounted money either of appellant or of VSK Technologies Pvt. Ltd. The journal entries have not been doubted in the assessment proceedings. The transaction of transfer of share application money to share account by passing journal entries has been done as a prudent commercial transaction. This mode is a recognized mode of transaction in commercial as well as accounting world. The genuineness of these JV transactions has not been questioned in assessment proceedings. There is no purpose imputed outside the commercial motive of appellant. There is no involvement of cash alleged. No undisclosed income is alleged associated either of the appellant or of VSK Technologies Pvt. Ltd. There is no allegation of proliferation of black money which was the intending objective behind insertion of Section 269SS and 269 T of the Act. Therefore the objective as explained in CBOT circular no 345 dated June 28, 1982 are not being violated in the facts of the case. All that appellant has done is that instead of repaying the amount by account payee cheque/demand draft and receiving back the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asonable cause and also in view of the decision of the jurisdictional High Court in the case of CIT Vs. Triumph International Finance (I) Ltd. (supra). 9. Decision of the Tribunal : We have heard both the parties and perused the orders of the Revenue, written submissions, paper book filed before us. We find there are couple of major issues for adjudication. They are (1) whether the transactions in question between the VSK to assessee and to VSK constitutes the loan transaction- payments/loan repayments thereby attracting the provisions of section 269T of the Act; (2) year of initiation of penalty proceedings and (3) whether the reason of lock of funds with the assessee or coupled with the empty formality of repayment by cheque/demand draft to VSK to squire up the loans and receiving the same by same route for allotment of shares, constitute a reasonable cause (RC) within the meaning of section 273B of the Act or not for deleting the penalty u/s.271E of the Act. 9.1 For adjudication of these two core issues, we proceed to first extract relevant provisions of section 269T and 273B etc. Relevant portions are extracted as under : "269T : Mode of repayment of certain loans or deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure]." 9.2 From the above, it is the spirit of the above provisions relating to repayment of loan/advance and the same needs to be done by the specified modes only, i.e. account payee cheque/demand draft and not by other modes. Legal provisions and the other judgmental law do not allow transaction of repayment of loan is done by way of cash or by way of book entries without having a reasonable cause. The reasonable cause is not defined in the Act and therefore, the same differ from case to case. We shall now examine the aforesaid three issues in the succeeding paragraphs. 10. Whether transaction constitute loan - therefore loan repayment : The transactions of flow of funds from VSK-Assessee-VSK, constitutes loans at all or nor, when the same is intended for share application money from the very beginning of the inception of company. Further, the book entries leading to conversion of said loan to share application money and then the allotment of shares, constitute any violation of the provisions of section 269T of the Act. 10.1 Relevant facts are already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and VSK, we find the orders of AO/CIT(A) are fair and reasonable. We proceed to extract the relevant lines from the order of CIT(A). The same reads as under : "6.1.3 The appellant also claimed that the share application money is not a loan or deposits. The appellant claimed that the loan connotes a transaction in which the borrower approached the lender for certain sum for a fixed period on the terms and conditions agreed between them which includes the rate of interest, the tenure of loan and other security conditions. The deposit connotes a transaction in which the depositor gives to another person a deposit of his belongings which may be money on certain terms and conditions. The deposits can also be made for assuring the other of the performance of a contract etc., in the case of Bailment Contracts. The appellant holds that the test applicable to the deposits and loans when applied to the receipt of share capital would not constitute the same as deposit or loan. The appellant relied on the following case laws : 1. CIT Vs. M/s, Shri Sidhdata Ispat (P) Ltd. 2012 (9) TMI 846 (Delhi HC) 2. CIT Vs. Rugmini Ram Raghav Spinners (P) Ltd. 304 ITR 0417 (Madras HC) 3. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Y. 09-10 filed with ROC. Even otherwise, mere representation of an amount as share application money would not be the true criteria to determine its correct nature. 6.2.2 The appellant company received an amount of ₹ 49 crores and ₹ 24 lakhs during the F.Y. 10-11. On verification of the ledger extract, it is seen that the appellant company had received an amount of ₹ 33.71 crores (2.5 crores in F.Y. 09-10 and ₹ 31,21,25,000/- by 29-10-2010) even before passing the resolution for increasing the authorized share capital in respect of preference shares. Further, the appellant had received the total amount of ₹ 51.74 crores by 24-2-2011 which is the date on which the resolution was passed to increase the authorized share capital from ₹ 49 crores to ₹ 59 crores. Thus, the appellant had received ₹ 33.71 crores and another ₹ 2.5 crores prior to having the authorized share capital. Under no circumstances, this amount of ₹ 36.21 crores can be treated as share application money in the absence of required authorized share capital. In the case of ITO Wd.13(1) New Delhi Vs. Nandi Promoters Pvt. Ltd. in ITA No.3462/Delhi/2009 for A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the existing loan to the share application money by way of the book entries only. These entries resulted in squiring up of the said loans and therefore, in this case, the loans got repaid neither by way of account payee cheque nor by demand draft as specified in the Act. On these facts, the case of the assessee is that VSK never gave loans to the assessee and they are part of the investment into shares and therefore, the repayment by way of book entries does not arise. 13.1 On the other hand, the case of the Revenue is that it is the case of repayment of loan only and the mode of the said repayment by way of book entries constitutes violation of section 269T of the Act. In this regard, Ld. DR submitted that the issue stands covered in favour of the Revenue by virtue of the binding judgment in the case of CIT Vs. M/s.Triumph International Finance (I) Ltd. (supra). 14. Whether the book entries constitutes violation of the provisions of section 269T of the Act : On hearing both the sides, we perused the orders of the Revenue and the said judgment. We find, on similar facts, the repayment of loan by way of book entries constitutes violation of provisions of section 269T of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use for the assessee for the failure to make the repayment of loans in the modes other than the specified ones. Relevant extract from the said section reads as under : "273B. Notwithstanding anything contained in the provisions of....................................... Section 271E......................., no penalty shall be imposable on the persons or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure." In this regard of reasonable cause, the case of the assessee is that loans received by the assessee from VSK are used for the purpose of the business in acquiring the land for building the SEZs. This activity is relatable to the primary object of the company. We find that the same is undisputed by the Revenue. Thus, by appropriating the said loans for land purchase, the assessee is devoid of required funds to repay the loans to the VSK by an account payee/cheque or demand drafts. Assessee showed repayment by squaring up the accounts in the books by way of book entries. Consequently, when assessee does not have funds to repay and hence, the possibility of repayment to VSK by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manju Kataruka Vs. ITO 74 TTJ (Kol.) 873. Relevant lines are extracted here as under : "12. What would constitute reasonable cause cannot be laid down with precision. It would depend upon the factual background. Reasonable cause, as applied to human action, is that which would constrain a person of average intelligence and ordinary prudence. The word 'reasonable' has in law the prima facie meaning of reasonable with regard to those circumstances of which the actor, called on to act reasonably, knows or ought to know. Reasonable cause can be reasonably said to be a cause which prevents a man of average intelligence and ordinary prudence, acting under normal circumstances, without negligence or inaction or lack of bona fide. What can be construed as a reasonable cause is to be decided on the available facts of each and very case in a judicious manner. The decision on the matter should be taken by giving sufficient attention to particular facts of the case. It is to be looked from the view point of a man of average intelligence and ordinary prudence. It should also be borne in mind, that the law itself spells out the circumstances in which penalty can be levied by providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would have met the requirement of the statute, i.e. repayment through account payee cheque or demand draft when (a) the assessee is divested of the funds and (b) there is need for allotment of shares to VSK. As a first option, assessee should have sold the said acquired lands and raise the funds to repay to VSK by account payee cheques/demand drafts. This is a difficult option and it goes against the object of the company. Alternatively, assessee should have borrowed further funds from third parties or from the other promoters to raise funds to repay to the VSK through the specified modes of payment. This is an impossible option for exercising as the company itself already borrowed funds of ₹ 51.74 crores and borrower is bent on demanding for allotment of share on a guarantee. On having given ₹ 51.74 crores of the loans to the assessee, like any other creditor, VSK needed some control on the company one form or other. For that , assessee is under obligation to allot shares resorting to squaring the book entries through vouchers. Thus, the assessee is under the obligation or pressure to allot the shares. This method of repayment of loans is obviously outside the scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business has been doubted in the regular assessment. There is nothing on record to suggest that the amounts advanced by Investment Trust of India to the assessee represented the unaccounted money of the Investment Trust of India or the assessee. The fact that the assessee company belongs to the Ketan Parekh Group which is involved in the securities scam cannot be a ground for sustaining penalty imposed under Section 271E of the Act if reasonable cause is shown by the assessee for failing to comply with the provisions of Section 269T. It is not in dispute that settling the claims by making journal entries in the respective books is also one of the recognized modes of repaying loan / deposit. Therefore, in the facts of the present case, in our opinion, though the assessee has violated the provisions of Section 269T, the assessee has shown reasonable cause and, therefore, the decision of the Tribunal to delete the penalty imposed under Section 271E of the Act deserves acceptance. 25. In the result, we hold that the Tribunal was not justified in holding that repayment of loan / deposit through journal entries did not violate the provisions of Section 269T of the Act. However, i ..... 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