Income Tax Appellate Tribunal - Mumbai
Sumangla Developers Private Limited , ... vs Addl.Cit Cen Cir 6, Mumbai on 12 September, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"E" Bench, Mumbai
Before Shri B.R. Baskaran (AM)& Shri Pawan Singh (JM)
I.T.A. Nos. 437 & 438/Mum/2018 (Assessment Year 2011-12)
Sumangla Developers & Addl.CIT Central
Farms Private Limited Vs . Range-6
Unit No. I/D, 4 t h Floor Room No. 654
Thacker Industrial Estate 6 t h Floor
N.M. Joshi Marg, Jacob Aayakar Bhavan
Circle, Mumbai-400 011. M.K. Road
Mumbai-400020.
PAN : AALCS9363E
(Appellant) (Respondent)
Assessee by Shri V. Shridharan & Shri
Vijay Mehta
Department by Shri R. Manjunatha Swamy
Date of Hearing 12.07.2018
Date of Pronouncement 12.09.2018
ORDER
Per B.R. Baskaran (AM) :-
The assessee has filed these two appeals challenging the common order dated 26-12-2017 passed by Ld CIT(A)-48, Mumbai confirming the penalty levied by the Addl. CIT u/s 271D and 271E of the Act for assessment year 2011-12 for violating the provisions of sec. 269SS and 269T of the Act.
2. The facts that led to levy of penalty under the above said two sections of the Act are set out in brief. The assessee company is engaged in the business of development and construction of real estate properties. It filed its return of income for AY 2011-12 declaring loss of Rs.26.13 lakhs. The assessing officer completed the assessment u/s 143(3) of the Act determining total income at a loss of Rs.20,576/-. During the course of assessment proceedings, the AO noticed that the assessee has accepted/repaid loans from/to various sister concerns through Journal Entries. When enquired about the same, the assessee explained that the journal entries were passed to give effect to the assignment and reassignment of loans from/to other sister concerns and 2 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d subsidiaries. The assessee also submitted that the ultimate source of Journal Entries could be traced to banking transactions. However, the AO took the view that the assessee has not substantiated its explanations and accordingly took the view that the assessee has violated the provisions of sec.269SS and 269T of the Act by accepting and repaying loans otherwise than by account payee cheque or bank draft. Accordingly the AO referred the matters to the Addl. CIT for taking necessary action u/s 271D/271E of the Act, who is the competent authority to initiate and levy penalty under the above said sections.
3. During the year under consideration, the assessee had passed journal entries for assigning and reassigning loans as detailed below:-
Name of Sister Concern Debit Credit
Lodha Estate P Ltd 31,78,48,852 34,65,62,786
Vamadevi Developers & Farms P Ltd 3,00,000 ---
Suryoday Buildwell & Farms P Ltd 3,40,02,143
Sunanda Agrobuild P Ltd 3,986 3,986
------------------ ------------------
31,81,52,838 38,05,68,915
============= ============
Here "Debit" signifies that the assessee has repaid loans (or reassigned debts) and "Credit" signifies that the assessee has accepted loans (or got assignment of debts).
4. The Addl. CIT issued show-cause notice dated 06.08.2014 to the assessee and asked the assessee to show cause as to why penalty u/s 271D and 271E of the Act should not be imposed on the assessee for violation of provisions of sec. 269SS and 269T of the Act. The assessee explained that it has passed journal entries out of business expediencies and there was reasonable cause for the same. The assessee also furnished ledger account copies of sister concerns. The assessee contended that the action of transferring of rights and liabilities to sister concerns by way of journal entries does not constitute "Loan in Money" within the meaning of sec.269SS/269T of the I.T Act. It was submitted that the impugned journal entries were passed to avoid procedural delays in preparing cheques, obtaining signatures and also to avoid banking 3 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d delays involved in encashing of cheques, which would block huge funds for temporary period without any commercial gain. It was also submitted that the transactions are ultimately settled through banking channels.
5. It was also contended that the scope of section 269SS/269T is restricted to the transaction involving acceptance or repayment of money and not intended to effect the cases where debt/liabilities arises on account of book entries. The assessee placed reliance on the decision rendered by Hon'ble Delhi High Court in the case of CIT vs. Worldwide Township Projects Limited (ITA 232/2014) and other decisions, wherein it was held that the liability recorded in the books of accounts by way of journal entries is clearly outside the ambit of provisions of sec.269SS of the Act.
6. The assessee also contended that there exists reasonable cause in transferring of assets/liabilities through journal entries within the meaning of sec.273B of the Act. In this regard, the assessee placed reliance on the decision rendered by Hon'ble jurisdictional Bombay High Court in the case of CIT vs. Triumph International Finance (India) Limited (345 ITR 270), wherein it was held that settling of claims by making journal entries in the respective books is also one of the recognized modes of repaying loan/deposit. Though the Hon'ble Bombay High Court held that the same violates the provisions of sec.269T, yet it was held that the same constitutes reasonable cause within the meaning of sec.273B of the Act, as 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 and further, neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business has been doubted in the regular assessment.
7. The Ld Addl. CIT, however, took support of the decision rendered by Hon'ble Bombay High Court in the case of Triumph International Finance (India) Ltd (supra) to hold that the journal entries are hit by the provisions of 4 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d sec.269SS and 269T of the Act. By placing reliance on the decision rendered by co-ordinate bench in the case of V.N. Parekh Securities vs. ACIT (ITA No.6082 & 6083/Mum/2009 dated 16-08-2013), the Ld Addl. CIT expressed the view that the assessee is required to show reasonable cause in respect of each and every case. The Ld Addl.CIT took the view that the assessee has not shown reasonable cause for every entry. Further he observed that the facts in the case of Triumph International Finance India Ltd (supra) were that the adjustments by way of journal entries were made with regard to the transactions entered with the same party. The Ld Addl. CIT held that, in the instant case, the acceptance of loan and repayment of loan by way of journal entries are with different parties. He held that the spirit of Bombay High Court judgement is that only such transactions which are in the nature of squaring up the outstanding amounts of each other between two parties can alone claim the benefit of reasonable cause. The Ld Addl. CIT further observed that the assessee is part of Lodha group, which had declared about Rs.200/- crores as unaccounted income during the course of search conducted in their hands. Hence it cannot be ruled out that the entities through whom such repayment/acceptances are done are not part of a chain of entities involved in transaction for the purposes of tax evasion. Accordingly he levied penalty of Rs.38.05 crores u/s 271D of the Act for accepting loan in violation of sec. 269SS of the Act and Rs.31.81 crores u/s 271E of the Act for violation of sec. 269T of the Act.
8. Being aggrieved with the orders passed by Ld Addl. CIT, the assessee filed appeals before Ld CIT(A), who disposed of both the appeals by common order. The Ld CIT(A) called for ledger account details of sister concerns from/to whom the loans were taken/repaid for the three years, viz., for F.Y 2009-10, 2010-11 and 2011-12 relevant to the assessment years 2010-11, 2011-12 and 2012-13. The Ld CIT(A) analysed the journal entries passed in all these three years. The Ld CIT(A) noticed that
(a) the assessee has not clarified as to what was the basis of assignment of assets/liabilities.
5Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d
(b) the balances have been transferred from one company to another company through the assessee company herein, i.e., the assessee company has acted as conduit.
(c) the liabilities and rights of M/s Vamadevi Developers and M/s Chandrakrupa Developers were extinguished incorrectly.
(d) finally, the liabilities/rights of assessee have been settled and extinguished through the book entries made with Suryoday Buildwel & Farms P Ltd.
(e) the payables of Lodha Estates to Chandrakrupa Developers & Farms P Ltd has been converted into payable to Suryoday Buildwel & Farms P Ltd to Sumangala Developers & Farms P Ltd. On the other hand receivables of Lodha Estates from Vamadevi Developers & Farms Ltd has also been converted into receivable from Suryoday Buildwel & Farms P Ltd in the hands of Sumangala Developers & Farms P Ltd.
9. Accordingly the Ld CIT(A) took the view that
(a) without actual and real transactions, the credits and debits of Lodha Estates against two different parties have been cross adjusted through the books of assessee company and other companies involved.
(b) the evaporation of these balances in the books of Lodha Estates and in the books of other entities including assessee without actual payments of these two accounts is the flaw in the whole accounting done by the group. It is not the case here that assessee or Suryaday Buildwel had their own original credits and debits either with Lodha Estates or with Vamadevi or Chandrakrupa.
(c) the tax implication of cessation of liability of Lodha Estates could never be examined by Revenue as the complete details of all the transactions and the web weaved by the Lodha Group could never be seen in totality. Neither Lodha Estates nor anyone else ever actually paid this liability.
(d) the double entry system has been defied in these transactions
(e) the assessee has mixed two different transactions into one.
Accordingly the Ld CIT(A) came to the conclusion that the adjustment of payable and receivable undertaken by assessee is against the very grain of principles of accountancy and such adjustment is clearly done to fraudulently 6 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d extinguish the liability of Lodha Estates on one hand and creation of bogus asset/diversion of money in transactions with Vamadevi Developers & Farms Ltd.
10. The Ld CIT(A) further took the view that the assessee has carried out bogus transactions, i.e., the rights and liabilities of Lodha Estates were artificially transferred through book entries to a third entity M/s Suryoday Buildwel & Farms P Ltd and they were extinguished and adjusted against each other as payables and receivables from assessee company. The assessee had placed reliance on the decisions rendered by the Tribunal in other group cases, wherein following reasons were held to constitute reasonable cause:-
(a) Alternative mode of fund rising
(b) Assignment of receivables.
(c) Squaring of transactions.
(d) Operational efficiencies/MIS purpose
(e) Consolidation of family members debt
(f) Correction of errors
(g) Loans taken in case.
The Ld CIT(A) took the view that the above said reasons do not apply in the instant case, as the assessee has passed book entries which are flawed and further they are not in line with accounting policies/standards. She further held that the various case laws relied upon by the assessee are distinguishable. The Ld CIT(A) further observed that the financial statements of the assessee and M/s Suryoday Buildwell did not show any significant activity apart from functioning as conduits for transfer of funds for other group companies. Finally, the Ld CIT(A) concluded as under:-
"In view of comprehensive details brought out above in the order, together with violation of accountancy principles and malafide intention of the assessee in passing the book entries in books of various concerns including entries in the books of assessee for various amounts shown as payables and receivable and the distinguishing features of all the case laws relied upon by the assessee and absence of any reasonable cause justifying such book entries, it is held that assessee company has violated the provisions of sections 269SS and 269T regarding accepting and repaying loans and deposits through modes other (sic. than by way of) account payee cheque. Intention was actually to evade taxes by illegally 7 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d extinguishing Business Liability and diversion of funds. Therefore, penalty under section 271D for contravention of provisions of section 269SS and penalty under section 271E for failure to comply with provisions of sections 269T are levieble and Addl. CIT's order in this regard is lawful. Further in view of the complete facts of assessee's case, it could not be proved by assessee that there was any reasonable cause for failure to comply with provisions of section 269SS and 269T. In fact it would be pertinent to bring on record here that there was not only absolute absence of reasonable cause but in fact there was clear mala- fide connivance on the part of assessee company to extinguish the trade liability of M/s Lodha Estates P Ltd related to transaction with Chandrakrupa Developers & Farms P Ltd and creation of bogus or unverifiable expenses/diversion of funds for non-business purposes in relation to transactions with Vamadevi Developers & Farms P Ltd.
In view of above all the grounds of appeals individually and together and also additional grounds do not have any force and are dismissed in view of detailed discussion above. Therefore both the appeals of assessee filed against penalty orders u/s 271D & 271E are dismissed in entirety and the orders of Addl. CIT(C)-6 are upheld."
11. The assessee has challenged the common order passed by Ld CIT(A) by filing these appeals before the Tribunal.
12. The Ld A.R submitted that the provisions of sec.269SS and 269T governs the mode of taking or accepting/repaying certain loans or deposits. He submitted that under Explanation to sec. 269SS, the term "loan or deposit"
is defined as per which it would mean "loan or deposit of money". He submitted that the provisions should normally attract only when the transactions involving "money" are undertaken. He submitted that the term "money" is defined in P Ramanatha Aiyar's Advanced Law Lexicon as "a medium of exchange authorised or adopted by a domestic or foreign government as a part of its currency" (one of the meanings given). The Ld A.R further submitted that the object of introducing the provisions of sec. 269T and 269SS is explained in Circular No.345 of 1982 dated 28-06-1982 and in Circular No.387 of 1984 dated 06-07-1984 respectively. It has been stated that these provisions have been introduced to curb the practice of explaining unaccounted cash found in the course of searches as representing loans or deposits taken from various persons. Thus these provisions mainly aim at 8 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d curbing the attempts to circulate black money through the transactions of loans or deposits. Accordingly the Ld A.R submitted that the provisions of sec.269SS and 269T should be applicable only the transactions involving exchange of "physical form of money". He further submitted that the transactions carried out through journal entries, which does not involve exchange of physical form of money, should not be hit by the provisions of sec.269SS and 269T of the Act.
13. The Ld A.R submitted that, in the instant cases, the transactions of transferring or assigning assets and liabilities have been undertaken by passing journal entries between the group concerns. This is quite common in business circles and is also recognised under accounting principles. He submitted that the Lodha Group is one of India's large infrastructure developer. For practical and commercial reasons, the group establishes and incorporates Special Purpose Vehicles in the form of Companies for each project/business line it proposed to enter. This is necessitated to have better control over the projects, to insulate the project from legal/financial risks of other projects, to raise project specific finances. In this process, the assessee was constrained to assign and reassign certain debts and liabilities between the group concerns, which has been done through passing of journal entries.
14. The Ld A.R submitted that the provisions of sec.269SS/269T should apply only the transactions take place between two persons. However in the instant cases, three persons are involved. These types of transactions fall in the category of "Novation" as defined under sec.62 of the Indian Contract Act, 1872, which reads as under:-
"62. Effect of novation, rescission, and alteration of contract:- If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.
Illustration (a) A owes money to B under a Contract. It is agreed between A, B and C that B shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted."9
Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d The ld A.R submitted that, in the case of novation of contract, three parties are involved, i.e., one of the parties of old contract is substituted by a new person. The effect of such substitution is that the old contract comes to an end and a new contract is created. In the above example, according to the revenue, penalty u/s 271E shall be levied for abatement of old contract and the penalty u/s 271D shall be levied for the new contract created. In this process, two penalties are sought to be levied for a single transaction. The Ld A.R submitted these provisions should not be applicable to "novation of contract"
explained in sec. 62 of the Indian Contract Act, where three persons are involved. The Ld A.R submitted that the transactions carried out through journal entries, in the instant case, are in the nature of novation of contract, by which debts/liabilities of one concern is assigned or transferred to another concern. He submitted that application of the above said provisions to a case of Novation of Contract would result in absurd and unintended results. He submitted that the revenue has to look into the transactions in a holistic manner as held by Hon'ble Supreme Court in the case of Vodafone International B.V (2012)(341 ITR 1)(SC). Accordingly he contended that the provisions of sec.269SS/269T do not get attracted to these kinds of transactions.
15. The ld A.R submitted that the co-ordinate bench of Tribunal has considered an identical issue of undertaking transactions by way of journal entries in the case of Lodha Builders P Ltd & others (ITA No.476/M/2014 & others) and the Tribunal, vide its order dated 27-06-2014, has deleted the penalty levied u/s 271D and 271E of the Act. He submitted that the above said decision of the Tribunal has since been upheld by the Hon'ble Bombay High Court in its order dated 06-02-2018 passed in Ajitnath Hi-tech Builders P Ltd & others in Income tax Appeal No.171 of 2015 and others. The Ld A.R submitted that the parties accepted in this case before Hon'ble Bombay High Court that the transactions of accepting/repaying loans by way of journal entries are hit by the provisions of sec. 269SS and 269T of the Act, in view of the binding decision of the Hon'ble Bombay High Court in the case of Triumph 10 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d International Finance (I) Ltd (345 ITR 270). Hence there was no occasion for the Hon'ble Bombay High Court to examine the arguments now advanced, i.e., relating to "involvement of money" and the provisions of "novation of contract"
u/s 62 of The Indian Contract Act, 1872
16. He submitted that the Hon'ble Bombay High Court has held in the case of Triumph International Finance (I) Ltd (345 ITR 270) that the transactions of receipt and repayment of loans or deposits are hit by the provisions of sec.269SS and 269T of the Act. The above said decision was rendered on 12- 06-2012. The Ld A.R submitted that the Hon'ble Delhi High Court in the case of CIT vs. Noida Toll Bridge Co. Ltd (262 ITR 260) and the Tribunal in many other decisions, had taken the view that the transactions undertaken by way of journal entries are not hit by the provisions of sec.269SS/269T of the Act. Various assessees were undertaking transactions through journal entries on the strength of the above said decisions. Since the Hon'ble Bombay High Court has taken a different view in the case of Triumph International finance (I) Ltd (supra) with regard to journal entries, it was pointed out to Hon'ble Bombay High Court that the parties were undertaking the transactions of accepting/repaying loans or deposits through journal entries on the strength of decisions that were prevailing, prior to the decision rendered by Hon'ble Bombay High Court. The Hon'ble High Court, while hearing the appeal filed in the case of Ajitnath Hi-tech Builders P Ltd & others (supra), accepted the above said position and accordingly held as under:-
"(i) In the present facts, the period during which the journal entries were made by the respondents was in the previous year relevant to the Assessment year 2009-10, i.e., Financial year 2008-09. At that time, the decisions of the Tribunal in the cases of Triumph International (supra) and decision of V.H. Parekh (P) Ltd, Ketan V Parekh, Sunflower Builders (supra), Ruchika Chemicals (supra), Lala Murari Lal (supra0 and the decision of Delhi High Court in Noida Toll Bridge Co. Ltd (supra) were holding the field. Thus, not in breach of Section 269SS of the Act. In the above view, while agreeing with the submission of Mr. Mohanty, learned Counsel for the appellant that the decision of this Court in Triumph International Finance (supra) has only clarified/stated the position as always existing in law, the receiving of deposits/loans through journal entries would certainly be hit by Section 269SS of the Act. Nevertheless, 11 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d prior to the decision of this Court in Triumph International Finance (supra), there was reasonable cause for respondents to receive deposit / loan through journal entries. This non-compliance with Section 269SS of the Act would certainly be a reasonable cause under Section 273B of the Act for non-imposition of penalty under section 271D of the Act."
The Ld A.R submitted that year under consideration in the instant cases is 01- 04-2010 to 31.03.2011, which is much before the date of 12-06-2012, i.e., the date on which the decision of Hon'ble Bombay High Court in the case of Triumph International Finance (I) Ltd was pronounced. Accordingly the Ld A.R submitted that the transactions of acceptance/repayment of loan or deposit undertaken through journal entries on the strength of various decisions rendered by the Tribunal and Hon'ble Delhi High Court, referred above, would constitute "reasonable cause" as per the decision rendered by Hon'ble Bombay High Court in the case of Ajitnath Hi-tech Builders P Ltd & others (referred supra).
17. The Ld A.R submitted that the revenue had levied penalties u/s 271D and 271E of the Act for identical reasons of receiving/repaying loan or deposits through journal entries, in the following cases and the co-ordinate benches of Tribunal has deleted the penalty in the following cases, by following the decision rendered by Hon'ble jurisdictional Bombay High Court in the case of Ajitnath Hi-tech Builders P Ltd & others (supra):-
(a) National Standard India Ltd (ITA No.6607 & 6609/Mum/2016 dated 06-06-2018)
(b) Ashtavinayak Estate Company Ltd (ITA No.602/Mum/2016 dated 31.05.2018)
(c) Palava Dwellers Private Ltd (ITA No.6422/Mum/2016 dated 15-06-
2018)
(d) Jineshwar Real Estate & Farms P Ltd (ITA No.598/Mum/2017 dated 26-06-2018).
The ld A.R submitted that the facts and circumstances prevailing in the present case are identical with the cases decided by the co-ordinate benches of Tribunal referred above and also with the cases decided by Hon'ble Bombay 12 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d High Court in the cases of Ajitnath Hi-tech Builders P Ltd & others (supra). Accordingly, the Ld A.R submitted that the orders passed by Ld CIT(A) should be set aside and the impugned penalties should be deleted. The Ld A.R submitted that the transactions entered with the company named Standard Agrobuild Pvt. Ltd were only for an amount of Rs.3,986/- only, which is well below the prescribed limit of Rs.20,000/- in sec. 269SS/269T of the Act and hence penalty u/s 271D/271E should not have been levied on this transaction.
18. The Ld D.R, on the contrary, strongly supported the orders passed by the tax authorities. He submitted that the journal entries have been passed for transferring the assets/liabilities at the instance of Lodha Estates P Ltd, the flagship company of Lodha Group. He submitted that the assets and liabilities have been artificially assigned and the procedure of squaring up the outstanding amounts without actual payments defies the basic principles of accounting. The Ld D.R submitted that the Ld CIT(A) has explained as to when lawful adjustments are possible through journal entries. He submitted that the lawful adjustment through journal entries is possible in the following situation:-
(a) A has to pay X
(b) A has to receive from Y
(c) Y has to pay X (independent of A's transaction)
(c) Then Y, instead of paying to A, can pay to X in settlement of dues of A. In this illustration, each of the parties are having connections and hence book entries can be passed to settle the dues, in which case, a reasonable cause would exist. In the above said example, if Y has no independent liability towards X, then the liability of A towards X cannot be discharged by book entries in the books of A, X and Y. If any such adjustment is made, the same is unlawful.
19. The Ld D.R submitted that the assessee had placed reliance on various decisions rendered by Tribunal. However, the Ld CIT(A) has held that 13 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d complete facts of the case and the transactions between group companies were not brought to the notice of the Tribunal and further held that such kind of passing of journal entries are against the principles of accountancy. Accordingly the Ld CIT(A) has held that the decisions rendered by the Tribunal are distinguishable. The Ld D.R submitted that the Hon'ble Bombay High Court in the case of Triumph International Finance (supra) was concerned with the adjustments made by way of journal entries between two parties, who owed money to each other. However, in the instant cases, the one to one liability was not shown and further the transactions were carried between different companies through journal entries without showing the subsistence of liability interse the parties. Accordingly he submitted that the assessee cannot place reliance on the decision rendered by Hon'ble Bombay High Court in the case of Triumph International Finance (supra) as the "reasonable cause", as understood in the above said case is different and the assessee has failed to show that the adjustments were carried out through journal entries between two parties. The Ld A.R further submitted that the assessee is required to show the reasonable cause for each of the entry of receipt/repayment of loans, but the assessee has failed to show the same. The assessee did not explain the business compulsion or necessity, which compelled it to pass journal entries.
20. The ld CIT-DR submitted that the Tribunal has rendered its decision in other cases by accepting reasonable cause and the reasons so accepted were grouped into seven categories (discussed supra). The assessee herein also, has tried to explain that the transactions carried on by it through journal entries in one or more of the seven categories. However, the Ld CIT(A) has held that none of the classification shall apply to the transactions carried on by the assessee herein. The Ld CIT(A) has also observed that none of the seven categories shall apply to the transactions carried on by the assessee for detailed reasons in page 53 -54 of her order. The Ld CIT(A) has further pointed out that the transactions carried through journal entries are not real 14 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d transactions, but the liabilities of original party (Lodha Estates P Ltd) has been extinguished by the same party's own assets.
21. The Ld CIT-DR further submitted that the assessee has explained that these transactions have been entered by the group entities for genuine business purposes. However, the Ld CIT(A) has observed that the assessee did not clarify the basis of assignment of assets/liabilities. He submitted that the assessee has not proved business exigencies or compelling reasons or business constraints for undertaking the transactions through journal entries. The Ld D.R placed his reliance on the following case laws in support of his arguments:-
(a) Five Star Marine Exports (P) Ltd vs. DCIT (2018)(92 taxmann.com
404)(Mad)
(b) CIT vs. Al-Ameen Education Trust Kulapully (2018)(254 Taxman
402)
22. We have heard rival contentions and perused the record. The assessee herein belongs to Lodha group of companies, which is one of the leaders in infrastructure and real estate development. The Ld A.R submitted that the group, as part of its business strategy, incorporates various subsidiary and associate companies as Special Purpose Vehicle, in order to execute various projects. It is the contention of the assessee, that due to business exigencies and upon commercial considerations, the debts and liabilities outstanding in the books of one company is assigned to another company. It is also submitted that the process of issuing cheques to group companies, encashing of the cheques by them would result in avoidable paper works, wastage of time and also blocking of huge funds for a shorter period without any commercial gains. It was further submitted that the transfer of assets and liabilities from one company to another company could be done by passing journal entries is one of the recognised methods under accounting principles and is also carried out in the ordinary course of business by all. It is also stated that this is quite common in business circles. The specific reasons cited by the assessee for 15 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d undertaking loan transactions through journal entries before Ld CIT(A) are extracted below:-
"2.2.2 We hereby submit that due to following reasons the Appellant had passed journal entries in the books of account:-
(i) Group entities have made "on behalf" payments for doing business efficiently and ensuring third party payments are made in time and saving operating cost.
(ii) Assignment of receivables and payables
(iii) Squaring up of receivables and payables among group entities
without exchanging cheques to achieve operational efficiency and minimise operating cost.
The above mentioned commercial reasons for passing journal entries represents existence of reasonable cause as contemplated under section 273B of the Act. We have tabulated reason for impugned passing of journal entries herein below:-
Sl.No. Particulars Amount Reason
I PENALTY U/S 271D:-
1. Lodha Estates P Ltd Rs.34,65,62,786 ii & iii
2. Vamadevi Developers & Farms NIL NA
Pvt Ltd
3. Suryoday Buildwell & Farms Rs.3,40,02,143 i
Pvt Ltd
4. Sundanda Agrobuild P Ltd Rs.3,986 i
II PENALTY U/S 271E
1. Lodha Estate Pvt Ltd Rs.31,78,48,852 ii & iii
2. Vamadevi Developers & Farms Rs.3,00,000 ii & iii
Pvt Ltd
3. Suryoday Buildwell & Farms NIL NA
Pvt Ltd
4. Sundanda Agrobuild P Ltd Rs.3,986 I
2.2.3 We submit that the above reasons have been upheld as a "reasonable cause" for the purpose of Section 273B of the Act by Hon'ble Mumbai Tribunal at Para 34 & 35 of its order in case of associated entity of Appellant named Lodha Builders Pvt Ltd and Others vs. ACIT, Central Circle (ITA No.476/M/2014) and (ITA No.481/M/2014). Copy of the decision is attached herewith as Annexure IV.
16Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d 2.2.4 Further, reliance is also placed on the specific findings/ observations of Hon'ble Bombay High Court in CIT vs. Triumph International Finance (I) Ltd (2012)(345 ITR 270)(Bom)......"
23. The Addl. CIT was not convinced with the explanations so given by the assessee. The Ld Addl. CIT took view that the assessee cannot take support of the decision rendered by Hon'ble Bombay High Court in the case of Triumph International Finance (I) Ltd (supra), since the High Court was considering a case of adjustment of cross outstanding between two parties through journal entries, i.e., both the parties owned money to each other. However, in the instant case, the transactions through journal entries have been entered between parties who did not owe money to each other. However, we notice that the very same contention was raised by the revenue before the Hon'ble Bombay High Court in the case of CIT vs. Ajitnath Hi-tech Builders P Ltd (supra) and the Hon'ble Bombay High Court, vide its order dated 06-02-2018 has held as under:-
"(e) Mr. Mohanty's submission that the test laid down in Triumph International Finance (supra) will have no application in the present facts in view of large number of entries in this case as compared to only one entry in the case before this Court. The test of reasonable cause cannot, in the present facts be determined on the basis of the number of entries. If there was a reasonable cause for making the journal entries, then, the number of entries made, will not make any difference. Besides, on facts, the Tribunal was satisfied with the reasons given by the Assessee for reasonable cause and this finding is not shown to be perverse. Finally the issue of there being a reasonable cause or not is an issue of fact. No inference of law and / or issue of interpretation is to be made......"
Hence what is required to be seen is whether, in the facts of the case, the explanations furnished by the assessee constitutes "reasonable cause" or not within the meaning of sec.273B of the Act. Hence the reasoning given by Addl. CIT that if transactions through journal entries entered between two parties, who owe each other alone would constitute "reasonable cause" fails. As held by Hon'ble Bombay High Court, referred above, the question that needs to be considered is-whether there exists reasonable cause or not for the transactions undertaken by the assessee through journal entries?
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24. We shall now examine the reasoning given by Ld CIT(A) for confirming the penalties levied by Ld Addl. CIT. We notice that the Ld CIT(A), in effect, has given following reasoning:-
(a) There is no basis for assignment of debts and liabilities.
(b) The assessee has acted as conduit for transfer of debts and liabilities of Lodha Estates (P) Ltd to some other company.
(c) Through the process of journal entries, the liabilities of one company has been closed in an incorrect manner.
(d) The transactions undertaken through journal entries are not real transactions.
(e) The transactions undertaken by the assessee are against accounting principles and policies.
(f) There is no cross adjustments as considered by Hon'ble Bombay High Court in the case of Triumph International Finance (supra)
(g) The transactions undertaken through journal entries are fraudulent transactions undertaken with malafide intentions.
(h) There is no reasonable cause for undertaking these transactions.
(i) The intention of the assessee is to evade taxes by illegal extinguishment of debts/diversion of funds.
25 We notice that the Ld CIT(A) has taken the view that the group of the assessee has undertaken these transactions of transfer/assignment of debts and liabilities with malafide intentions to defraud the revenue by evading taxes. Thus, the Ld CIT(A) has taken the view that the impugned transactions are not genuine and also against accounting principles. The Ld CIT(A) has also taken the view that there is no reasonable cause for the assessee.
26. It can be noticed that the impugned entries have been passed by the entities, which are corporate entities incorporated under the provisions of Companies Act. It is also in the knowledge of every one, the Companies are subjected to statutory audit under the Companies Act, who are required to mandatorily follow Accounting principles and Accounting Standards. The 18 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d accounts so audited are required to be approved in the Annual General Meeting and also required to be filed with Registrar of Companies. Even though the Ld CIT(A) states that the journal entries passed by the assessee are against Accounting principles, yet she has not identified the accounting principles, which have been violated. In any case, the application of correct accounting principles and accounting standards should have already been examined by the Statutory auditors. The Ld CIT(A), in any case, has not taken support of any authority to come to her conclusion that the accounting policies have been violated.
27. The question of transferring an asset or a liability through journal entries shall arise only when the concerned asset or liability already exists in the books of accounts. The assessee has furnished the reasons for undertaking the transactions through the journal entries. However, the Ld CIT(A) did not accept the said reasoning and further taken the view that the assessee has undertaken the transactions with malafide intentions to defraud revenue. In our view, these observations are adverse inferences drawn by the Ld CIT(A) without any basis. The transfer of assets/liabilities have been undertaken through journal entries in the books of accounts of the companies in the ordinary course of business, which is accepted as quite normal in business circles. The accounts have been audited, meaning thereby, the transactions have been accepted as normal transactions carried out in the ordinary course of carrying of business. Under these set of facts, we are unable to understand as to how these transactions could be considered to be illegal. When the transactions cannot be considered to be illegal, the question of malafide intentions, defrauding of revenue should not arise. There should not be any dispute that the legal transactions may also give rise to any income, but the said aspect is required to be examined during the course of regular assessment proceedings. In the instant case, the issue considered by the Ld CIT(A) related to the penalty levied u/s 271D and 271E of the Act, where the existence or otherwise of reasonable cause is required to be examined. Hence the view drawn by the Ld CIT(A) that these transactions are not genuine are mere 19 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d inferences drawn without any basis. In any case, we notice the assessing officer has not doubted with the genuineness of the transactions during the course of assessment proceedings. We are of the view that the Ld CIT(A) has attempted to brush these transactions with the colour of non-genuine nature. For the reasons stated above, in our view, the Ld CIT(A) was not justified in trying to establish that the transactions are not genuine. In any case, we notice that the observations made by the Ld CIT(A) are inferences drawn by her without any supporting materials. We notice that the Hon'ble Bombay High Court in the case of Ajitnath Hi-tech Builders P Ltd (supra) has found that the journal entries were passed to raise funds from sister concerns, to adjust or transfer balances to consolidate debts, to correct clerical errors etc. The said observations hold good in the present case also.
28. We notice that the Ld CIT(A) has passed the impugned order prior to the order passed by Hon'ble Bombay High Court in the case of Ajitnath Hi-tech Builders P Ltd (supra). In the above said case, the assessee argued that the transactions of accepting/repaying loans through passing of journal entries passed, prior to the ruling given by Honble Bombay High Court in the case of Triumph International Finance (supra), should be considered as reasonable cause, as they have been entered on the strength of the decisions rendered by Hon'ble Delhi High Court and Tribunals, which had held that the transactions undertaken through journal entries are not covered by sec. 269SS/269T of the Act. The Hon'ble Bombay High Court has rendered it decision in the case of Ajitnath Hitech Builders P Ltd on 12.06.2012. The Hon'ble Bombay High Court accepted the said contentions and the relevant observations made by Hon'ble High Court are extracted below:-
"(h) In any event, as rightly pointed out by Mr. Sridharan, learned Senior Counsel for the respondents assesses, the order of this Court in Triumph International Finance (supra) was rendered on 12th June, 2012. This, was in an appeal filed by the Revenue from the order of the Tribunal dated 29th January, 2008, which had held that deposits/loans received through journal entries do not fall with the mischief of Section 269SS of the Act, so as to invite penalty under Section 271D of the Act. This, the Tribunal did by following its earlier orders in the case of V.N. Parekh Ltd. and Ketan 20 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d Parekh as indicated in the order of this Court in Triumph International Finance (supra). Our attention was also invited to numerous reported decisions of the Tribunal in the cases of Sunflower Builders Vs. Dy. CIT, 1997 (61) ITD (Pune 227, Asst. CIT Vs. Ruchika Chemicals & Investment P) Ltd. 2004 (88) TTJ (Delhi) 85 and Asst CIT Vs. Lala Murari La I & Sons, 2004(2) SOT (Luck) 543 wherein it has been held journal entries in the book of accounts indicating deposit/ loans will not fall foul of Section 269SS of the Besides, the Delhi High Court in Commissioner of Income Tax ITA No.6607/Mum/2016 & 6609/Mum/2016 National Standard India Ltd., Noida Toll Bridge Co. Ltd. 262 ITR 260 inter alia held that payment of Rs.4.85 crores made by the assesses by a journal entry in its books of account by crediting the account of lLFS, would not fall foul of Section 269SS of the Act. This particularly in the absence of any payment being made in cash.
(i) In the present facts, the period during which the journal entries were made by the respondents was in the previous year relevant to the Assessment Year 2009-10 i.e. Financial Year 2008-09. At that time, the decisions of the Tribunal in the cases of Triumph International (Supra) and decision of V.H. Parekh (P) Ltd.. Ketan V. Parekh, Sunflower Builders (supra), Ruchika Chemicals (supra). La/a Murari La/ (supra) and the decision of the Delhi High Court In Noida Toll Bridge Co. Ltd, (supra) were holding the field. Thus, not in breach of Section 269SS of the Act. In the above view, while agreeing with the submission of Mr. Mohanty, learned Counsel for the appellant that the decision of this Court in Triumph International Finance (supra) has only clarified/stated the position as always existing in law, the receiving of deposits/ loans through journal entries would certainly be hit by Section 269SS of the Act Nevertheless, prior to the decision of this Court in Triumph International Finance (supra), there was reasonable cause for respondents to receive deposit/loan through journal entries.
This non- compliance with Section 269SS of the Act would certainly be a reasonable cause under Section 273B of the Act for non-imposition of penalty under Section 271D of the Act"
29. We have already noticed that the transactions, in the instant cases, were undertaken during the period from 01-04-2010 to 31.03.2011, i.e., much prior to the decision dated 12-06-2012 rendered by Hon'ble Bombay High Court in the case of Ajitnath Hi-tech Builders P Ltd (supra). Hence the transactions undertaken through journal entries prior to 12-06-2012 shall constitute reasonable cause within the meaning of sec.273B of the Act.
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30. The co-ordinate bench of Tribunal has taken the above said view in the case of National Standard India Limited (ITA No.6607 & 6609/Mum/2016 dated 06-06-2018). The co-ordinate bench has also noticed that the Hon'ble Delhi High Court and various benches of Tribunal has held that the transactions undertaken through journal entries are not hit by the provisions of sec. 269SS/269T, prior to the decision rendered by Hon'ble Bombay High Court on 12-06-2012. Some of the decisions noted by the co-ordinate bench are:-
"(i) Order of Cochin Bench of the Hon'ble Tribunal in Muthoot M. George Bankers v. ACIT (46 ITD 10), dated 16.04.1993;
(ii) Order of Ahmedabad Bench of the Hon'ble Tribunal in Bombay Conductors & Electricals Ltd. v. DCIT (90 Taxman 138), dated 30,11.1995;
(iii) Judgment of Hon'ble Delhi High Court in CIT v. Noida Toll Bridge (262 ITR 260), rendered on 28.01.2003;
(iv) Order of Agra Bench of the Hon'ble Tribunal in ITO v. Amarnath Shivraj (HUF) (1 SOT 346), dated 28.02.2003;
(v) Order of Ahmedabad Bench of the Hon'ble Tribunal in ACIT v. Gujarat Ambuja Proteins Ltd. (3 SOT 811), dated 28.10.2003;
(vi) Order of Kolkata Bench of the Hon'ble Tribunal in Krishna KR Pathak (HUF) (90 TTJ 940), dated 12.03.2004;
(vii) Judgment of Hon'ble Rajasthan High Court in CIT v. Hissaria Bros (291 ITR 244), rendered on 21.07.2006; off Mumbai Bench of Hon'ble Tribunal in Triumph International Finance (I) Ltd. in FTA No. 542/Mum/2007, dated 29.01.2008;
ix) Judgment of Hon'ble Gujarat High Court in CIT v. Bombay Conductors & Electricals Ltd (301 ITR 328), rendered on 11.02.2008;
(x) Order of Ahmedabad Bench of Hon'ble Tribunal in Jitu Builders (P) Ltd.
v. Addl. CIT [124 ITD 134 (Ahd) (TM)], dated 16.07.2009; and
(xi) Order of Ahmedabad Bench of Hon'ble Tribunal in ACIT v. Western India Ceramics (P.) Ltd (20 taxmann. Com 317), dated 12.10.2010."
Identical views have been taken by the co-ordinate benches in the following cases:-
(a) Ashtavinayak Estate Company Ltd (ITA No.602/Mum/2016 dated
31.05.2018) 22 Su m a n g l a D e v e l o p e r s & F a r ms P r i v a te L i m i te d
(b) Palava Dwellers Private Ltd (ITA No.6422/Mum/2016 dated 15-06- 2018)
(c) Jineshwar Real Estate & Farms P Ltd (ITA No.598/Mum/2017 dated 26-06-2018).
31. During the course of hearing, the Ld CIT-DR placed his reliance on the decision rendered by Hon'ble Madras High Court in the case of Five Star Marine Exports (P) Ltd (supra). We notice that was a case of acceptance of loans by way of cash. The Ld CIT-DR also placed reliance on the decision rendered by Hon'ble Kerala High Court in the case of Al-Ameen Educational Trust Kulapully P.O. (supra). This was also a case of acceptance of deposits by way of cash from staff members. The facts in the instant case relate to the transactions of accepting/repaying loan through journal entries. Hence, we are of the view that the above said decisions, relied upon by Ld CIT-DR, are not applicable to the facts of the present case.
32. In view of the foregoing discussions, we are of the view that the transactions of accepting/repaying loans by way of assignment of debts/liabilities have been undertaken by the assessee in the normal course of carrying on of business in the ordinary course and hence they constitute reasonable cause within the meaning of sec. 273B of the Act. In any case, these transactions have been undertaken prior to 12.06.2012, i.e., the date on which the decision in the case of Triumph International finance (supra) holding that the journal entries are hit by the provisions of sec. 269SS/269T of the Act. The Hon'ble Bombay High Court, in the case of Ajitnath Hi-tech Builders P Ltd (supra) has held that the transactions of loans undertaken through journal entries on the strength of the decision rendered by Hon'ble Delhi High Court and tribunals, prior to the ruling given by it in the case of Triumph International finance (supra) is covered by "reasonable cause" within the meaning of sec.273B of the Act. Hence we are unable to sustain the view taken by Ld CIT(A). Accordingly we set aside the orders passed by Ld CIT(A) and direct the AO to delete the penalties levied u/s 271D and 271E of the Act for the year under consideration.
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33. The ld A.R put forward arguments that the provisions of sec.269SS/269T should apply only if the transactions involve "money". He also argued, by placing reliance on sec.62 of Indian Contract Act, 1872, that novation of contract are not covered by sec.269SS/269T of the Act. We do not find it necessary to consider these contentions in view of the binding decision rendered by Hon'ble Bombay High Court rendered in the case of Triumph International Finance (supra), wherein it has been held that the transactions of loans undertaken through journal entries are hit by the provisions of sec. 269SS/269T of the Act.
34. In the result, both the appeals of the assessee are allowed.
Order has been pronounced in the Court on 12.9.2018.
Sd/- Sd/-
(PAWAN SINGH) (B.R.BASKARAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated : 12/9/2018
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT(A)
4. CIT
5. DR, ITAT, Mumbai
6. Guard File.
BY ORDER,
//True Copy//
Senior Private Secretary
PS ITAT, Mumbai