I have found the following order of Ahmedabad ITAT very useful wherein it has been held that repayment of capital to retiring partners through bearer cheques is not violation of section 269T of Income Tax Act, 1961. Section 269T prohibits repayment of loans and deposits of Rs. 20000 or more otherwise than by an account payee cheque or draft.
IN THE INCOME TAX APPELLATE TRIBUNAL
‘B’ BENCH – AHMEDABAD
(BEFORE S/SHRI BHAVNESH SAINI, JM AND D. C. AGRAWAL, AM)
| The Income Tax Officer, Ward 2(1), Aayakar Bhavan, Nakubaug, Jashonath Chowk, Bhavnagar 364 001 | Vs | M/s. Universal Associates, 305, Madhav Hill, Waghawadi Road, Bhavnagar |
| PA No. AABFU 0560 G | ||
| (Appellant) | (Respondent) | |
| Appellant by | Shri Samir Tekriwala, Sr. DR |
| Respondent by | Shri Tushar P. Hemani, AR |
O R D E R
2. The facts of the case are that the AO during the course of assessment proceedings had observed that the assessee had repaid certain amounts to ex-partners and relatives of the partners of the firm by other than account payee cheque/drafts amounting to Rs.30,92,700/-. The matter was referred to the Addl. CIT, Range-1, Bhavnagar. The AO noted that the assessee, by making payments other than account payee cheque/drafts had violated the provisions of section 269T of the Act and the assessee was asked to explain the reasons by issuing notice u/s 271 E of the IT Act. The assessee filed its detailed reply before the Addl. CIT in this regard which is reproduced ditto by the Addl. CIT in his penalty order. The reply of the assessee was not found convincing to the Addl. CIT for the reasons mentioned that when the assessee was in a position to issue bearer cheques to the above parties, he was in a position to issue account payee cheque also. Hence, satisfying himself, the Addl. CIT has concluded that the assessee has committed default within the meaning of section 269T of the IT Act and accordingly imposed a penalty of Rs.30,92,700/- which is the total figure of amounts returned by the assessee to its ex-partners and relatives of the partners of the firm.
3. The penalty was challenged before the learned CIT(A) and the learned Counsel for the assessee submitted that the assessee is a partnership firm in existence since 1986. The assessee is approved “AA” class Government Contractor. During the year, the assessee had made re-payment of credit balance in the ex-partner’s account and their relatives by cheque but by not account payee cheques. These facts were pointed by the AO during the assessment proceedings. The AO then had referred the matter to the Addl. CIT for levy of penalty. Major repayments were made for the credit balance in the ex-partner’s account. Since the inception of the firm, there were changes in the partnership firm at various intervals. Some partners had retired from the firm and some others had joined the firm. All of the partners whether retired or joined, were relatives. The firm did not have any partners apart from the family members. As the firm was constituted of family members, the retiring members had not drawn their capital from the firm. Also in between, the firm had been facing turbulent times and hence could not return the capital to the retired partners. The firm had never paid any interest to the credit in the retired partner’s account. During the year, assessee had returned capital of 6 ex-partners. The firm had repaid the credit in the account of the ex-partners by bank cheques. Only mistake was that, the cheques were not crossed. All the partners were assessed to tax. There was no mala fide intention on the part of the assessee in repaying the credit amount by “other than account payee cheques”.
It was also not the case that the assessee had given any false explanation about the repayment. The AO had also not mentioned in the assessment order passed u/s 143(3) of the Act that the said transactions were sham or not genuine. Transactions were recorded in the books of both the parties. Accordingly, there was only a small technical breach for which your appellant has been penalized for an amount of Rs. 30,92,700/-. For the repayment of loan/deposit to parties other then ex-partners one Hitesh Kalthia, whose account was squared, happens to be son of ex-partner Ratilal Laljibhai Kalthia. He is also nephew of present partner Rajnikant Laljibhai. He was repaid an amount of Rs.32,620/-. He is regularly assessed to tax. The amount repaid to him has been reflected in his books of accounts. Also his PAN was mentioned. Account was also settled with M/s R L Kalathia Construction Co. Private Limited. One of the partners of this firm is director in the said Company. Copy of account of the company was submitted. Another party, Mr Tulsi S. Vanani was also relative of the partners. His account was also settled during the year. He was repaid amount of Rs.4,60,000/-. He is regularly assessed to tax. The amounts repaid to him were reflected in his books of accounts. The assessee had in fact consulted the legal counsel before doing and as per his advice that, provisions of Section 269T would not be applicable had proceeded in returning the amounts to the ex-partners. Further, also the books of accounts of assessee were audited by a Chartered Accountant under the provisions of section 44 AB of the Income Tax Act 1961. The Learned Chartered accountant, in his statutory audit report has nowhere mentioned that there was breach of provisions of Sec. 269T of the IT Act. Further, the said credits in the partner’s account and other parties were verified by the relevant AOs from time to time. In fact, most of the assessment proceedings in the past years were completed by passing order u/s 143(3) of the Act so the genuineness and identification of the parties were never a question. The assessee was earlier assessed to tax with Central Circle, Rajkot. The learned Counsel had drawn attention of the learned CIT(A) to the legislative intention for which the provisions of section 269 SS and 269 T were inserted by the Finance Act, 1984. The Board, vide Circular No.387 dated 6th July, 1984 [printed at (1984) 43 CTR (TLT) 3], have elaborately explained the scope and intention of inserting the provisions of Section 269 SS and 269 T in the following words in Para 32.1 and 32.2 and published in Income-tax Law, 5th Vol. at page 5732, so far as section 269 SS is concerned.
It was also not the case that the assessee had given any false explanation about the repayment. The AO had also not mentioned in the assessment order passed u/s 143(3) of the Act that the said transactions were sham or not genuine. Transactions were recorded in the books of both the parties. Accordingly, there was only a small technical breach for which your appellant has been penalized for an amount of Rs. 30,92,700/-. For the repayment of loan/deposit to parties other then ex-partners one Hitesh Kalthia, whose account was squared, happens to be son of ex-partner Ratilal Laljibhai Kalthia. He is also nephew of present partner Rajnikant Laljibhai. He was repaid an amount of Rs.32,620/-. He is regularly assessed to tax. The amount repaid to him has been reflected in his books of accounts. Also his PAN was mentioned. Account was also settled with M/s R L Kalathia Construction Co. Private Limited. One of the partners of this firm is director in the said Company. Copy of account of the company was submitted. Another party, Mr Tulsi S. Vanani was also relative of the partners. His account was also settled during the year. He was repaid amount of Rs.4,60,000/-. He is regularly assessed to tax. The amounts repaid to him were reflected in his books of accounts. The assessee had in fact consulted the legal counsel before doing and as per his advice that, provisions of Section 269T would not be applicable had proceeded in returning the amounts to the ex-partners. Further, also the books of accounts of assessee were audited by a Chartered Accountant under the provisions of section 44 AB of the Income Tax Act 1961. The Learned Chartered accountant, in his statutory audit report has nowhere mentioned that there was breach of provisions of Sec. 269T of the IT Act. Further, the said credits in the partner’s account and other parties were verified by the relevant AOs from time to time. In fact, most of the assessment proceedings in the past years were completed by passing order u/s 143(3) of the Act so the genuineness and identification of the parties were never a question. The assessee was earlier assessed to tax with Central Circle, Rajkot. The learned Counsel had drawn attention of the learned CIT(A) to the legislative intention for which the provisions of section 269 SS and 269 T were inserted by the Finance Act, 1984. The Board, vide Circular No.387 dated 6th July, 1984 [printed at (1984) 43 CTR (TLT) 3], have elaborately explained the scope and intention of inserting the provisions of Section 269 SS and 269 T in the following words in Para 32.1 and 32.2 and published in Income-tax Law, 5th Vol. at page 5732, so far as section 269 SS is concerned.
“32.1 Unaccounted cash found in the course of searches carried out by the IT Department is often explained by taxpayers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits, and taxpayers are also able to get confirmatory letters from such person in support of their explanation.
32.2 With a view to counter in this device, which enables Taxpayers to explain away unaccounted cash or unaccounted deposits/the, Finance Act, 1984, has inserted a new s.269 SS in the IT Act debarring persons from taking or accepting, after 30th June, 1984, from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of such loan or deposit or the aggregate amount of such loan and deposit is Rs. 10,000/- or more this prohibition will also apply in cases where on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not) and the amount or the aggregate amount remaining unpaid is Rs. 10,000* or more. The prohibition will also apply in cases where the amount of such loan or deposit, together with the aggregate amount remaining unpaid on the date on which such loan or deposit is proposed to be taken is Rs. 10,000 or more.” (Raised to Rs.20,000 w. e. f. 1st April, 1989)”.
“2.1 the proliferation of black money poses a serious threat to the national economy and it was considered necessary to take effective steps to contain and counter this major economic evil. The Government has, in recent past, taken several legislative and administrative measures to unearth black money. The Income-tax (Second Amendment) Act, 1981 (hereinafter referred to as the Amending Act), represents another steps in the same direction.
2.2.1 It came to Government’s notice that a substantial amount of black money was deposited by tax evaders with banks, companies, co-operative societies and partnership firms either in their own names or in benami names. The Income-tax (Second Amendment) Act, 1981, seeks to counter attempts to circulate black money in this manner.”
Provisions of sec.26T
“269 T Mode of repayment of certain deposits -
No branch of a banking company or a co-operative bank and no other company or co-operative society and no Company or other person shall replay any loan or any deposit made with it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who had made the loan or deposit if -
(a) the amount of the loan or deposit together with the interest, if any, payable thereon, or
(b) the aggregate amount of the loans or deposits held by such “person with the branch of the banking company or cooperative bank or, as the case may be, the other company or cooperative society or the Company, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits, is twenty thousand rupees or more:
Provided that where the repayment is by a banking company or co- operative bank, such repayment may also be made by crediting the amount of such deposit to the account (if any) with such company or bank of the person to whom such deposit has to be repaid-
Provided further that nothing in this section shall apply to repayment of any loan or deposit taken or accepted from-
(i) Government;
(ii) any banking Company, post office savings bank or cooperative bank;
(iii). any corporation established by a Central, State or Provincial Act;
(iv) any Government company as defined in section 617of the Companies Act, 1956 (1 of 1956)
(v) Such other institution, association or body or class of institution, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.]
Explanation- For the purposes of this section,-
(i) “banking company” shall have the meaning assigned to it in cl.(i) of the Explanation to s.26955;
(ia) “co-operative bank” shall have the meaning assigned to it in part V of the Banking Regulation Act, 1949 (10 of 1949);
(ii} “loan or deposit” means any loan or deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company, includes loan or deposit of any nature].
Further, provisions of sec.271E are discussed here under:
[Penalty for failure to comply with the provisions of section 269T.
271E (1) If a person repays any [loan or] deposit referred to in section 269T otherwise than in accordance with the provisions of that section he shall be liable to pay, by way of penalty, a sum equal to the amount of the [loan or] deposit so repaid.]
[(2) Any penalty imposable under sub-section (1) shall be imposed by the [Joint] Commissioner.]
It is clear from the aforesaid circulars issued by the Board that these provisions were introduced with a view to countering the various devices adopted by the tax evaders for explaining their unaccounted cash found cash found during the course of search or for introducing their unaccounted income in the form of loans and deposits and it was introduced for countering the major economic evil of proliferation of black money, etc.”
It was further submitted that assessee has not accepted any deposits or loans in cash violating the provisions of section 269 SS of the IT Act. It is only that, it had repaid the credit in the ex-partners account and some other parties who happens to be relatives. The assessee had no intention of any sort of tax planning or evasion of taxes. The amounts were in the balance sheets past many years. The assessee being Government approved contractor and claiming refunds, have being continuously scrutinized past 5-8 years where by the AO has verified the credit amounts. Further, most of the parties were ex-partners and also family members. So there is no question of benami parties. The assessee also drawn attention of the learned CIT(A) to the provisions of section 273B of the IT Act which reads as under:
“Penalty not to be imposed in certain cases.
Notwithstanding anything contained in the provisions of [clause (b) of sub-section (1) of ] [section 271, section 271A, 77[section 271AA,] section 271B [,section 271BA], [section 271BBJ section 271C, [section 271CA,] section 271D, section 271E, [section 271F, [section 271FA,] [section 271FB,] [section 271&,]] clause (c) or clause (d) of sub-section (1) of section 272AA] or [section 272B or] [sub-section (1) [or sub-section (1A) of section 272BB] [sub-section (1) or clause (b) or clause (c) of sub-section (2) of section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause89 for the said failure.]
Reasonable cause as applied to human action, is that which would constrain a person of average intelligence and ordinary prudence. The expression ‘ reasonable’ is not susceptible of a clear and precise definition; for an attempt to give a specific meaning to the word ‘ reasonable’ is trying to count what is not number and measure what is not space. It can be described as rational according to the dictates of reason and is not excessive or immoderate. 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 ordinary prudence and average intelligence, acting under normal circumstances, without negligence or inaction or want of bona fides – Azadi Bachao Andolan v. Union of India (2001) 252 ITR471 (Delhi).
The learned Counsel for the assessee also drew attention of the learned CIT(A) to the Hon’ble Supreme Court decision in the case Hindustan Steel Ltd. vs. State of Orissa reported at 83 ITR 26 where it was held by the Apex court that, “An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation – Penalty will not also be imposed merely because it was lawful to do so- Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances-Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. He further referred to the decision of the Hon’ble Supreme Court in the case of Asstt. Director of Inspection (Investigation) vs. Kum. A. B. Shanthi wherein it has explained the object of introducing s. 269SS as under:
“The object of introducing s. 269SS is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money, or if he has given some false entries in his accounts, he shall not escape by giving false explanation for the same. During search and seizures, unaccounted money us unearthed and the would usually give the explanation that he had borrowed or received deposits from his relatives or friends that it is easy for the so-called lender also to manipulate his records later to suit the plea of the taxpayer. The main object of s. 269SS was to curb this menace. As regards the tax legislations, it is a policy matter, and it is for the parliament to decide in which manner the legislation should be made. Of course, it should stand the test of constitution validity. The object sought to be achieved was to eradicate the evil practice of making false entries in the account books and later giving explanation for the same.”
He has also referred to the decision of the Hon’ble Gauhati High Court in the case of CIT vs Bhagwati Prasad Barjoria HUF reported at 183 CTR (Gau) 484, in which it was held that “In view of the decision of the apex court upholding the constitutional validity of S.296 SS, penalty under S.271D could not be set aside on the ground that the provision of S.269 SS is ultra vires the constitution; however, penalty was not leviable for the reason that the impugned transaction of loan finds place in the books of account of the assessee as well as the lender and none of the authorities found that the transaction was not genuine or that it was a sham transaction to cover up unaccounted money.”
The learned Counsel for the assessee further referred to the decision of the ITAT Amritsar Bench in the case of Skyline Silk Mills 101 TTJ 798 in which it was held that “payments made in cash by the Assessee-firm in respect of amounts standing in the capital accounts of two outgoing partners and the payments made to the wife of one partners from her current account were not payments of deposits, and the source of such payments not being in doubt, penalty under s. 271 E was not leviable.” He has also referred to the decision of the ITAT Delhi Bench in the case of Farrukhabad Investment (I) Ltd. Vs JCIT 85 ITD 230 wherein it was held that “there being no intention on the part of the Assessee to introduce unaccounted cash in accepting/repaying loans/deposits in violation of s. 269 SS/269T, penalty under s. 271D/E was not liable.” He has also referred to the decision of the Hon’ble Supreme Court in the case reported in 174 CTR 513 wherein it was held that “If there was a genuine and bona fide transaction and if for any reason the taxpayer could not get a loan or deposit by account-payee cheque or demand draft fro some bona fide reasons, the authority vested with the power to impose penalty has got discretionary power” and the decision of the ITAT Ahmedabad Bench in the case of Shreenath Builders vs. Deputy Commissioner of Income Tax (2000) 66 TTJ (Ahd) 113 where in it was held that “A harmonious construction of the relevant provisions of SS.271D, 271E and 273B clearly reveals that the use of the expression “shall be liable to pay” in ss.271D and 271E and the provisions of S.273B providing that no penalty would be leviable if the person concerned proves that there was reasonable cause for the said failure clearly indicates that these provisions give a discretion to the authorities to impose the penalty or not to impose the penalty. Such discretion has to be exercised in a just and fair manner having regard to the entire relevant facts materials existing on records. – ITO vs. Lakshmi Enterprises & Ors. (1990) 185 ITR 595 (AP) applied. Ordinarily a plea as to the ignorance of law cannot support the breach of a statutory provisions; but the facts of such an innocent mistake due to ignorance of the relevant provisions of law, coupled with the fact that the transactions in question are genuine and bona fide transactions and were undertaken during the regular course of its business, will constitute a reasonable cause” and the decision in the case of Muthoot M. George Brothers Vs ACIT (1993) 47 TTJ (Coach) 434 : 46 ITD 10 wherein it was held as under:
“Bona fide transactions between sister concerns with centralized accounts and management do not attract provisions of ss. 26955 and 269T and, therefore, penalty under ss. 271D/271E is not leviable.”
He has also referred to the decision of the Hon’ble High Court of Jharkhand in the case of Omec Engineers vs. Commissioner of Income Tax reported at 217 CTR 144 where the Hon’ble High Court has held that, “There being no finding of AO, CIT(A) or Tribunal that the transactions in violation of s. 269SS were not genuine, assessee’s return having been accepted under s. 143(3) after scrutiny, there being also no finding that transactions were mala fide aimed at disclosing concealed money, imposition of penalty under s. 271D merely for technical mistake could not be sustained” and also to the decision of the Hon’ble Gujarat High Court in the case of CIT Vs Shree Ambica Flour Mills Corporation 6 DTR (Guj) 169, wherein it was held that “Tribunal having deleted penalty under ss. 271D and 271E observing that transactions between sister concerns are not covered by either provisions of s. 26955 or s. 269T and that the default, in any, was of venial nature, no interference is called for” and also to the decision of the Hon’ble Bombay High Court in the case of CIT Vs Eetach Agencies therein it was held that “Tribunal having found that assessee committed violation of 269T under a genuine belief that s. 269T had no application to deposits and that it only plied to loans penalty under s. 271E was rightly deleted.”
3. I have carefully considered the submissions and arguments of the learned counsel for the appellant with case law relied upon by him and have also carefully gone through the penalty order as well as assessment order. The Appellant is a partnership firm engaged in business of road construction as Government approved AA class road contractor. The firm was incorporation w.e.f. 02-11- 1986. Thereafter, changes in constitution of the firm had taken place from time to time. This is evident from the true copy of Form no. & issued by Registrar of Firms, Bhavnagar Division, Bhavnagar. There were in total 8 partners who retired from the firm since inception till date. These retired partners had credit in their account, which was on account of their capital contribution and profit earned. These retired partners were paid their capital only lying with the firm by other than account payee cheque during the year. The Learned AR had placed on record copy of each ex-partner from the day of their retirement till the date the payment was made. Copies of the capital accounts placed on the file shows that the amounts which were paid were the closing balances in the capital accounts and the same included initial contribution and share of profit earned by the firm during the period when they were partners. There were no other credit or debit transactions in their accounts. The Learned Authorised representative has clarified that no interest was paid on the credit balance. Secondly all the partners were assessed to tax. The Assessing officer, while completing the scrutiny assessment had no where brought on the record that the said transactions were sham or bogus. It is no doubt, true that at the time of retirement of the partners the firm was required to repay the amounts standing in their capital accounts and, therefore, the same represented as liability of the firm towards partners. But the said liability does not automatically take the shape of deposits. The Learned AR also placed a paper book containing the confirmations of the ex-partners. Keeping in view the intent of the legislature behind enacting S.269 SS/269T, the transactions as are found in the books of accounts of the appellant cannot be termed as deposits or loans as understood in common parlance. It only represents the capital in their accounts on the day of retirement from the firm. Further, the transactions have not been treated as non-genuine or bogus. Hence, provisions of sec. 269T are not attracted to the facts of the case. Accordingly, penalty levied for repayment of credit in the ex-partner’s capital accounts is here by cancelled.
3.1 As regards the repayments made to Hitesh Kalthia, son of Ex-partner Ratilal Laljibhai Kalthia, Tulsi Vanani son-in law of ex-partner Batukbhai Naranbhai and R L Kalthia Construction Private Limited, where Director R.LPatel is a partner of the appellant firm, the Assessing Officer has not proved the said transaction as bogus or sham. The provisions of sec.269T have been inserted in the Act with a view to curb tax evasion. The source of payments made by the Assessee is not in doubt. No material has been brought on record by the Assessing Officer to show that such repayments were claimed by the creditors for explaining the source of certain unexplained investments or expenditure. Therefore, in no way such repayments could be considered for the purpose of evading tax. The levy of penalty under sec.271E is not automatic. The bona fides of the transactions is not in doubt either in the case of the payer or recipient, as source of payment is not in doubt. Therefore, even with regard to the merits of the case, penalty under sec.271E is not leviable. Therefore, the penalty levied u/s.271E in such facts and circumstances is directed to be canalled.”
6. On the other hand, the learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that partners introduced the capital in the assessee firm and on retirement by the partners their share capital was returned on which no interest has been paid. It was, therefore, not a loan or deposit as prescribed u/s 269 T of the IT Act. He submitted that there is no dispute that the transaction was genuine and all the partners are assessed to tax. The assessee made bona fide payment to the partners who are closely related with each other. He has submitted that since the partnership firm is represented by the partners collectively, therefore, re-payment was made to self. He has further submitted that at least all these facts show that the assessee proved that there was a reasonable cause for failure to comply with the provisions of law. Therefore, penalty was rightly canceled by the learned CIT(A). He has relied upon the order of the ITAT Amritsar Bench in the case of Skyline Vs ACIT 12 SOT 8 and the order of the ITAT Ahmeabad Bench in the case of M/s. Honest Enterprises Ltd. Vs ACIT in ITA No.3539/Ahd/2008 dated 15-02-2011. Copies of the same are filed in the paper book.
7. We have considered the rival submissions and the material available on record. The facts as noted above are not in dispute. It is also not in dispute that the ex-partners joined the assessee firm andintroduced their capital in the assessee firm. Late on the ex-partners retired from the assessee firm and the amounts were refunded to them through bearer cheques. Repayment was also made to the son and son-in-law of the ex-partners. The AO has not proved that the said transaction was bogus or sham. Since the partners introduced capital in the partnership firm at the time of joining the assessee firm, therefore, the character of the introduction of capital was not in the nature of loan or deposit as is provided u/s 269 T of the IT Act. Section 269T of the IT Act provides penalty for repayment of any loan or deposit made with it in the mode other than provided by law. The character of return of the capital by the assessee firm would remain same as was introduced at the time of joining the assessee firm. The character of repayment of the sum introduced as capital would not change on the date of retirement from the partnership firm. Since the character of introduction of the capital by the partners would remain same at the time of retirement, therefore, it would not take the character of loan or deposit made with the assessee firm at the time of retirement. Further, it is not in dispute that all the partners are close relatives and even the return of the amount was made to son and son-in-law of the ex-partners, would prove that repayment was made to the closely related persons. Even some of them were family members. Section 4 of the Partnership Act provides the definition of partnership, partner, firm and firm name. It provides partnership is the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually partners and collectively a firm and the name under which their business is carriedon is called the firm name. This would prove that the partners on retirement from the assessee firm taken back their amount introduced in the partnership firm which is the collective name of the partners. Thus, it could be assumed that it was an amount returned to the self. It would, therefore, prove that perhaps there may not be violation of section 269 T of the IT Act in the given set of facts and circumstances. The assessee also relied upon Board Circular which provides that the above provision has been introduced in the Act with a view to overcome tax evasion. The source of the payment made by the assessee is not in doubt. No material has been brought on record by the AO to show that such repayments were claimed by the creditors for explaining the source of certain unexplained investment or expenditure. The Board Circular would thus squarely apply in favour of the assessee in this case. The decision of ITAT Amritsar Bench in the case of Skyline Silk Mills (supra) would also support the case of the assessee. ITAT Ahmedabad Bench in the case of M/s. Hones Enterprises Ltd. (supra) in Para 5 to 7 held as under:
“5. We have considered the rival submission and the material available on record. The authorities below have relied upon the decision in the case of Bhalotia Engineering Works Pvt. Ltd. (supra) in which it was held share application money received in cash exceeding prescribed limit amounts to deposit within the meaning of section 269 SS of the IT Act and penalty can be imposed u/s 271D of the IT Act. In this case the Tribunal referred the following question to the Hon’ble High Court for its opinion “whether acceptance of share application money in cash amounting to Rs.20,000/- or more violative of the provisions of section 269 SS.” The reference was decided accordingly by holding that “share application money amounts to deposit within the meaning of section 269SS.” In this case, the question of reasonable cause as is prescribed u/s 273B of the IT Act was not decided. The provisions of section 273B of the IT Act provides that no penalty shall be imposable on the person or the assessee as the case may be for any failure referred to in section 271D of the IT Act if the assessee proves that there was reasonable cause for the said failure. The reasonable cause would mean a cause which is beyond the control of the assessee. Reasonable cause obviously means a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction for want of bona fide. The assessee explained in its reply that in order to get enhanced facilities for finance for development of the business, the directors have to arrange for increase in paid up capital of the company and for this purpose money to be converted into paid up capital after complying with the formalities for allotment of shares. This was business necessity and expediency. It was also explained that further due deposits were brought through account payee cheques and all of them have confirmed the transaction. Further, all the directors were assessed with the same AO of the assessee company. The assessee, therefore, pleaded that the cash was introduced with bona fide intention to develop company’s business and all the directors are identifiable. Above facts would prove that genuine cash transaction was entered into between the directors and the assessee company due to urgent business exigency. The authorities below have not given any finding that the transaction was not genuine. The Hon’ble Jharkhand High Court in the case of Omec Engineers Vs CIT 294 ITR 599 held as under:
“Held, that there was no finding of the assessing authority, the appellate authority or the Tribunal that the transaction made by the assessee in breach of the provisions of section 269SS was not a genuine transaction. On the contrary, the return filed by the assessee was
accepted after scrutiny under section 143(3) of the Act. Further, there was no finding of the appellate authority that the transaction in breach of the aforesaid provisions made by the assessee was mala fide and with the sole object to conceal money. Consequently, penalty imposed under section 271D merely on technical mistake committed by the assessee, which had not resulted in any loss of revenue, was harsh and could not be sustained in law.”
5.1 The Hon’ble Punjab & Haryana High Court in the case of CIT Vs Saini Medical Store 276 ITR 79 held as under:
“In the present case, the Commissioner of Income-tax (Appeals) in his order dated January 18, 1999, whereby the penalty under section 271D of the Act was deleted, had accepted the version given by the assessee that violation of the provisions of the Act was under a bona fide belief of the assessee and the same was not with any intention to avoid or evade the tax. The findings of the Commissioner of Income-tax (Appeals) have been confirmed in appeal by the Tribunal. The cancellation of penalty was valid.”
5.2 The Hon’ble Gauhati High Court in the case of CIT Vs Bhagwati Prasad Bajoria (HUF) 263 ITR 487 held as under:
“Section 273B of the Income-tax Act, 1961, provides that notwithstanding anything contained in the provisions of section 271D, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the provisions of section 269SS, if the assessee proves that there was a reasonable cause for such failure and if the assessee proves that there was a reasonable cause for failure to take a loan otherwise than by account payee cheque or account payee bank draft and in such circumstances the penalty shall not be levied. In view of this provision, it is apparent that there is a discretion left with the authority concerned whether to levy the penalty or not in the given circumstances if the assessee comes and proves a reasonable cause for not accepting the loan by account payee cheque or account payee bank draft.
Where the facts which emerged in the case were that as a result of advancement of the loan by U on three different dates the assessee had executed promissory notes in favour of U, the transaction of loan had found place in the books of account of the assessee as well as the lender of the loan and none of the authorities had reached the conclusion that the transaction of loan was not genuine and it was a sham transaction to cover up the unaccounted money:
Held, that the deletion of penalty under section 271D was justified.”
5.3 The Hon’ble Punjab & Haryana High Court in the case of CIT Vs Speedways Rubber Pvt. Ltd. 326 ITR 31 considering the decision in the case of Bhalotia Engineering Works Pvt. Ltd. (supra) held that “since findings to the fact have been given that transaction was bona fide and the penalty was of technical nature, which do not justify penalty, the order of the Tribunal was not shown to be in any manner perverse or unreasonable. The departmental appeal was dismissed.”
5.4 ITAT Kolkata Bench in the case of ITO Vs Avadh Rubber Ltd. 43 SOT 309 considering the Board circular
No.387 dated 06-07-1984 on the subject in which it was provided that new section 269 SS has been inserted in the Act with a view to counter the device of unaccounted money brought into books of account in the form of loans and deposits in order to explain the deposits. Therefore, by the new provisions such persons are debarred from taking or accepting any loan or deposit. The Tribunal, therefore, opined that the above provision was introduced to eliminate a proliferation of black money in the society at large and not otherwise.
5.5 The Hon’ble Punjab & Haryana High Court in the case of CIT Vs Sunil Kumar Goel 315 ITR 163 held as under:
“Held, that there was no dispute about the fact that the cash transactions of the assessee were with the sister concern and these transactions within the family and due to business exigency. A family transaction, between two independent assessees, based on an act of casualness, specially in a case where the disclosure thereof was contained in the compilation of accounts, and which had no tax effect, established “reasonable cause” under section 2738 of the Act. Since the assessee had satisfactorily established “reasonable cause” under section 2738 of the Act, he must be deemed to have established sufficient cause for not invoking the penal provisions of sections 271D and 271E of the Act against him. The deletion of penalty by the Tribunal was valid.”
6. Considering the facts in the light of the above decisions, we are of the view that the assessee has been able to explain reasonable cause for failure to comply with the provisions of law. The directors have introduced share capital money through cash for urgent business need; therefore, the assessee is able to prove that it has reasonable cause for failure to comply with the provisions of law. We accordingly, set aside the orders of the authorities below and cancel the penalty.
7. In the result, the appeal of the assessee is allowed.”
9. In the result, the appeal of the revenue has no merit and is dismissed.
Order pronounced in the open Court on 17-06-2011
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