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TMI Blog2023 (9) TMI 1018X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee that allotment of bonds was on account of loan received in the earlier years and which has been interpreted by the ld. AO that loans were converted into the bonds and therefore, it was observed that the repayment of loan is other than the modes prescribed u/s. 269T and therefore, assessee was liable for penalty u/s. 271E. In response to show- cause notice, assessee had submitted that it has issued bonds to the corporate bodies from whom advances were received having coupon rate of 0.01%. These bonds are in the nature of debt and were reflecting under the head 'long term borrowings' as the said bonds are repayable at the option of the company after one year from the date of issue. Thus, it was stated that borrowings are in the nature of short term borrowings only, because the repayment of the said bonds could be after one year from the date of issue and therefore, the advance which was there, is in the nature of debt and it was the liability of the company and the bonds are also in the nature of debt which is also in the nature of liability of a company. Thus, there is no question that the liability in the form of debt has been changed by converting advances into b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om certain 12 lenders viz (1) Nametech Dealers P. Ltd., (ii) Netra Mercantile P Ltd., (i) Navmi Steels Trading P Ltd., (iv) New Core Steels P. Ltd. (v) Poscho Steels P. Ltd., (vi) Burn Steel Trading P. Ltd. (vii) Deep Star Alloys & Steel P. Ltd., (viii) Credence Logistics Ltd., (ix) Jaltarang Vanijya P. Ltd., (x) Novel Merchants P. Ltd., (xi) Mona Digital Equipments and (xii) Punsuni Agents P Ltd were converted into convertible debentures after making book adjustments by way of journal entries. The complete details in respect of this conversion of loans into convertible debentures in the hands of the assessee as well as the 6 transferor/amalgamating companies is explained in Annexure I to this appellate order. In the cases of the assessee, M/s. Denro Holdings P Ltd and M/s Ushaditya Trading P. Ltd, the concerned Addl./Jt. CIT levied penalty u/s. 271E since the loans were converted into convertible debentures after making book adjustments by way of journal entries but such action was apparently not taken by the Jurisdictional AOs/Addis in the cases M/s. Fiscal Securities India Ltd., M/s. Goldline Tracon P. Ltd., M/s Kartik Credit P. Ltd. and M/s. Navodaya Exim P. Ltd". 6. Ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... informed that its name has been struck off from the ROC and the last Income-tax return filed by it is of the year relevant to AY 2007-08. 8. Accordingly, he issued notice of enhancement as to why the penalty u/s. 271E in respect of conversion of loans into debentures in respect of the said 5 lenders not only relating to the assessee but also relating to the amalgamating companies should not be levied in the hands of the assessee. After reproducing his show-cause notice and also incorporating the reply submitted by the assessee against the levy of penalty for amounting aggregating to Rs. 125,10,00,000/-and adjudicating the penalty of Rs. 61,12,35,000/- as levied by the ld. AO he has though deleted the penalty levied by the AO but has enhanced the penalty on loans received in the earlier years by the amalgamating companies. The reasons for enhancing the penalty in his show cause notice are as under:- 2 In this matter, pursuant to a scheme of amalgamation sanctioned by the Hon'ble High Court of Kolkata vide its order dated 22.03.2016, M/s Denro Holdings P Ltd. Ma Fiscal Securities India Ltd., M/s Gold Line Tracon P Ltd, M/s Kartik Credit P Ltd, Navodaya Exim P Ltd and Ushadity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) Netra Mercantile P. Ltd. This lender company has allegedly given aggregate loans of Rs. 45.24 crs to the assessee and the said 6 amalgamated companies. This lender company belongs to Crest Topworth Group which was subjected to search action by the Investigation Wing on 10.10.2012. Shri Abhay Lodha, main person of this Group, vide letter dated 31.10.2012 had made an aggregate offer of undisclosed income of Rs. 250 crs. for the entire group. Subsequently, Shri PC Lodha, CA and uncle of Shri Abhay Lodha had confirmed the disclosure of Rs. 250 crs, in his statement on oath recorded on 04.11.2012. Against the search action, the assessee had filed a writ petition before the Hon'ble Bombay High Court, however, the same was dismissed vide order dated 13.10.2016. In course of the search action, it was observed that this lender company was maintaining two sets of accounts, one set of account for Income tax purposes and another set of accounts for the banking authorities, ROC etc. Further, there were two different Auditors for the said two sets of accounts. The differences in the balances reported in the said two sets of accounts for the years ending 31.03.2009 to 31.03.2011, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn of income for the year relevant to search date ie for AY. 2013-14 was also not filed In respect of A. Ys. 2009-10 and 2010-11, the assessee offered additional income of Rs 3.71 crs. in the returns filed in response to notice u/s. 153A. The assessee in course of the search related assessment proceedings was specifically asked to reconcile the differences in the figures reported in the Income Tax returns and the figures reported to the Banks, ROC etc. However, there was no compliance and the AO was constrained to complete the assessment u/s 144. From the accounts submitted by this lender company as per the Income Tax return for the year ending 31.03.2011, it is observed that loans and advances are shown to be of Rs. Nil as against the aggregate loans claimed to have been given of Rs. 45.24 to the assessee and the said 6 amalgamaed companies. The factual position which emerge from the findings of the search action as well as the non-submission of the returns of income in response to notice u/s 153A for the years ending 31.03 2011 and 31.03.2012 and non-filing of the regular return for the year ending 31.03.2013 raises serious doubts about the bonafide of the alleged loan given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to A.YS. 2007-08 to 2009-10, the said lender offered undisclosed income of Rs. 8.87 crs. in response to notices issued u/s. 153A. Since, there was no compliance in course of the search related assessment proceedings, the AO adopted a profit margin of 2 19% as disclosed in the case of M/s. Posco Steel P Ltd. and computed the concealed income of the assessee for the various relevant years. From the return of income of the assessee for the year ending 31.03.2012 is observed that the loans and advances given are shown to be of Rs. Nil as against the aggregate loan claimed to have been given of Rs 55.43 crs to the assessee and the said 6 amalgamated companies. The factual position which emerges from the findings of the search action as well as the non-submission of the returns of income in response to notice u/s 153A for the years ending 31.03.2011 and 31.03.2012 and non-filing of the regular return for the year ending 31.03.2013 raises serious doubts about the bonafide of the alleged loan given by this lender company to the assessee and the other amalgamated companies (iv) Deep Star Alloys & Steel P Ltd. This lender company has allegedly given aggregate loans of Rs 4.33 crs to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. Ushaditya Trading P. Ltd. had merged with the assessee and therefore, the penalty u/s 271E for the said alleged loans received by M/s. Denro Holdings P Ltd. and M/s. Ushaditya Trading Ltd. from the aforesaid 8 lenders, which were converted into debentures by way of journal entries, was required to be levied in the hands of the assessee itself. However, the AO appears to have wrongly levied penalty u/s. 271E in the hands of M/s Denro Holdings and M/s Ushaditya Trading P Ltd. It is therefore proposed to levy penalty u/s 271E in respect of the alleged loans received by M/s. Denro Holdings P. Ltd. and M/s. Ushaditya Trading P. Ltd. from the aforesaid 8 lenders, in the hands of the assessee itself, which will result into appropriate enhancement. 7. Moreover, it is also observed that M/s. Fiscal Securities India Ltd., M/s. Goldline Tracon P. Ltd., M/s. Karthik Credit P. Ltd. and M/s. Navodaya Exim P. Ltd. had also amalgamated with the assessee. However, penalty u/s. 271E has not been levied in respect of the alleged loans received by these 4 amalgamated entities from the aforesaid 8 lenders, which were converted into debentures. Since these 4 entities had also amalgamated with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held by the Hon'ble Jurisdictional High Court, he held that onus is on the assessee to prove that transaction is genuine and bonafide. However, with respect to penalty levied by the ld. AO in respect of transaction entered into with 7 lenders falls within the reasonable cause and therefore, penalty is not leviable. His relevant observation in this regard reads as under:- 5.11.7 It is observed that in respect of the transactions of conversion of loans to debentures in the assessee company as well as 6 amalgamating/transferor companies for the 7 lenders, M/s Namtech Dealers P Ltd., M/s New Core Steels P Ltd., M/s Burn Steel Trading P Ltd., M/s Credence Logistics Ltd., M/s Jaltarang Vanijya P Ltd., M/s Novel Merchants P Ltd. and M/s Punsuni Agents P Ltd., it is observed that the said 7 lender companies are part of the assessee group itself. Moreover, the assessee has also furnished their confirmations and other supporting evidences in respect of the said transactions related to conversion of loans to debentures. It is observed that in the case of Lodha Group of cases, the transactions of repayments were among the entities of Lodha Group itself and after considering this importan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tax Audit Report of the assessee, these transactions are now being claimed to be of the nature of loans and not of the nature of advances. To ascertain the actual nature of the original transactions, whether they were of the nature of loans or of the nature of advances, the assessee was asked to furnish the Tax Audit Reports of the earlier years when the said loans / advances were received. However, the assessee has failed to provide the requisite Tax Audit Reports to ascertain as to whether the original transactions were of the nature of loans or of the nature of advances. The assessee contended that the original loans/advances were received several years back and it is not legally bound to maintain such old records. However, he observed from the ledgers that some of the said transactions of loans/advances are quite recent related to the years ending 31.03.2011 & 31.03.2012 and therefore this contention of the assessee is found to be erroneous. 14. Ld. CIT(A) further held that assessee had entered into transaction of accommodation entries with the aforesaid four lenders of Crest Topworth Group. The relevant observation in this regard reads as under:- "5.11.10 Further, as reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pments Ltd., whose name has been struck off from ROC and who has not filed the return of income from AY 2008-09 onwards, can be considered as bonafide transactions undertaken on account of business exigencies. 15. Thereafter, the ld. CIT(A) has discussed various judgments on power of enhancement and finally has levied / enhanced the penalty of Rs. 25.10 Crores after observing as under:- "5.137 As regards the contention of the assessee that the power to levy penalty in available to an Appellate Commissioner only under the provisions of Sec. 271(1) of the Act the same is also found to be erroneous. As per Sec 251(1)(b) of the Act, the powers of the Appellate Commissioner includes the power to enhance a penalty as well This is not a case of levy of a new penalty on the quantum enhancement made by the CIT(A) which is governed by the provisions of sec. 271(1) This only is a case of enhancement of the penalty already levied by the AO u/s 271E. After the amalgamation, the liability for the penalty u/s 271E in all the cases of violation of provisions of Sec 269T on account of repayment other than by the prescribed modes including in respect of the said 6 transferor/amalgamating compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gamation in the assessee but also in respect of the loans converted into debentures prior to the amalgamation in the transferor / amalgamating companies viz M/s Denro Holdings P. Ltd., M/s Ushaditya Trading P. Ltd, M/s Fiscal Securities India Ltd., M/s Goldline Tracon P. Ltd., M/s Kartik Credit P. Ltd and M/s Navodaya Exim P. Ltd. The aggregate loans related to M/s Netra Mercantile P Ltd., M/s Navmi Steels Trading P Ltd. M/s Poscho Steels P Ltd. and M/s Deep Star Alloys & Steel P Ltd converted into debentures in respect of the assessee company and in the said 6 transferor / amalgamating companies is of amounts Rs 45,24,75,000/-, Rs 55,43,35,000/- Rs 17,08,00,000/- and Rs 4,33,90,000/- respectively, totally aggregating to Rs 122,10,00,000/ On this aggregate amount of Rs 122,10,00,000/- penalty u/s 271E is held to be leviable in the hands of the assessee itself being the transferee / amalgamated company Moreover, since in respect of one another lender company, M/s Mona Digital Equipment P Ltd. whose name has been struck off by the ROC and it has not filed its return of income from AY 2008-09 onwards, the transaction of conversion of loan to debentures is also held to be not bonafide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e parties at length and perused the relevant finding given in the impugned appellate order as noted above. In so far as the penalty which has been levied by the ld. AO u/s. 271E amounting to Rs. 61,12,35,000/- which was on account of conversion of loan into redeemable convertible bonds has been deleted by the ld. CIT(A) for which there is no appeal filed by the department. The reasons for deletion of penalty have already been mentioned above. 18. Now, the issue is with regard to enhancement made by the ld. CIT (A) whereby he has levied penalty of Rs. 125.10 Crores. The penalty u/s. 271E is levied if a person repays any loan or amount or deposit in violation of Section 269T. Section 269T provides for mode of repayment of certain loans or deposits otherwise than by an account payee cheque or account payee demand draft drawn in the name of person who has made the loan or deposit which exceeds to Rs. 20,000/- or more. The entire edifice for levy of penalty u/s. 271E is based on reasoning that earlier loan take by erstwhile amalgamating company who had taken loan from very same lender companies of Crest Topworth Group which was found to be involved in some kind of accommodation entries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20. Another important fact is that if advances / loans are received in earlier years which have been shown as short term borrowings in the F.Y. 2012-13, then how adverse inference can be drawn about same loan in the A.Y. 2014-15. One debt has been converted into another kind of debt, because the bonds are also in the nature of debt which is reflected in the long term borrowings in the balance sheet as on 31/03/2014. Once it is debt which is a liability of the assessee, how it can be treated as repayment of loan received in the earlier years. The liability towards the lender entities has not been discharged as there is no repayment, because the liability still subsists against the name of the same party in the books. 21. The ld. CIT(A) has relied upon information which he had called for and came to the conclusion that transaction on receipt of loan is itself doubtful and has given his exhaustive finding and observation based doubting the genuineness of the loan taken in the earlier years. The issue before the ld. CIT(A) was whether there is any default in terms of Section 269T justifying the levy of penalty u/s. 271E. Once, the original transaction of loan is not a subject matter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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