Income Tax Appellate Tribunal - Ahmedabad
Pan Drugs Limited, Baroda vs Department Of Income Tax on 28 September, 2006
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH - AHMEDABAD
(BEFORE S/SHRI BHAVNESH SAINI, JM AND A. N. PAHUJA, AM)
ITA No.2754, 2755 and 2756/Ahd/2006
A. Y.: 2002-03, 2002-03 and 2003-04
The D. C. I. T. , Vs Pan Drugs Limited,
Baroda, Circle-4(1) , 167, GIDC, Nandesari,
4th floor, Aayakar Bhavan, Dist. Baroda,
Race Course Circle, PA No. AABCP 1997 K
Baroda 390 007
(Appellant) (Respondent)
Appellant by Shri Mathiraman, DR
Respondent by Shri M. K. Patel, AR
ORDER
PER BHAVNESH SAINI: All these three departmental appeals are directed against the order of the CIT(A)-III, Baroda dated 28-09-2006 for the assessment year 2002-03 and 2003-04, challenging the cancellation of penalty u/s 271E and 271D of the Income Tax Act.
2. We have heard the learned representatives of both the parties, perused the findings of authorities below and considered the material available on record.
3. Briefly, the facts of all the appeals are that the AO found that loans were repaid by the assessee otherwise than account payee cheques or account payee drafts in the assessment years in question through book entries to M/s. Cenco Scientific Supply, M/s. Pacific Polymers, M/s. Paradise Enterprises and M/s. Shyam Mercantile Pvt. Ltd. Further, the loans were accepted otherwise than by account payee cheques or account payee drafts from the same parties through book entries.
ITA Nos.2754, 2755 and 2756/Ahd/2006 2Pan Drugs Limited Penalty proceedings were initiated for contravention of the provisions of Section 269SS and 269T of the Income Tax Act. The assessee's explanation that the amounts in question were both taken and repaid by book entries only and did not involve any movement of money as such was not accepted by the AO. It was held that even passing of book entries would amount to constructive receipt/payment and would involve receipt of money or deposit. Vide separate orders penalties u/s 271E and 271D of the Income Tax Act was imposed.
4. It was submitted before the learned CIT(A) inter alia that assessee- company is a manufacturer of Paracetamol powder and was suffering financial difficulties. It had availed of working capital finance from IDBI Bank Ltd. and State Bank of Hyderabad over a period, including the year under consideration. The international prices of Paracetamol plunged because of dumping of the product in the international market by China. Other Indian Manufacturer of Paracetamol also suffered. The assessee- company was not able to service its working capital facilities and as a result, bank put restriction in the operation of the bank account to prevent it from becoming of Non Performing Assets. In order to get higher working capital and to save itself from brink of collapse, the assessee-company had to file the balance sheet which showed a trend healthier than earlier years. However, in views of reduced recoveries from the customers the assessee-company was not able to pay its creditors. The result was that the working capital ratio of the company was badly affected. The company had suffered losses which resulted in erosion of capital. More loans had to be taken and as a result the debit equity ratio was bad. These two ratios form the backbone for financing of a borrower by the financial institutions. The balance sheet position of the assessee- company had become such that bankers would have declined further financing of the working capital for the operation of the company. Therefore, with a view to window dress the balance sheet, the assessee ITA Nos.2754, 2755 and 2756/Ahd/2006 3 Pan Drugs Limited company requested one of its principal shareholder M/s. Shyam Mercantile Pvt. Ltd. to act as a conduit for improving the balance sheer position. The method adopted was that on 31st March of each of the accounting year, M/s. Shyam Mercantile Pvt. Ltd. undertook to pay outstanding amount due by the company to some of its creditors. The particulars of the creditors whose accounts were taken over and transferred to M/s. Shyam Mercantile Pvt. Ltd. have been given in a letter dated 16th May 2005 together with copies of the relevant accounts. The amounts due to these creditors were transferred at the end of each year to the account of M/s. Shyam Mercantile Pvt. Ltd. and the same was shown in the balance sheet as unsecured loan to the extent of the amount transferred from various creditors. These entries were reversed on the first day of April in the subsequent year. This was only a device to improve the balance sheet position. This transaction was legitimate and was carried out with the consent of the parties. There was no giving or taking of any funds and were merely book entries. The case, therefore, would not fall u/s 269SS/269T of the Income Tax Act. Similar is the position with regard to repayments. It was also submitted that the object of the above provisions was to counter the device adopted by people to explain their own unaccounted money found during search proceedings as cash loan or deposits from various persons. Since in this case there was no giving or taking of loan or deposit or repayment of loan or deposit, therefore, these provisions would not apply to the case of the assessee. The decisions of other Benches of the Tribunal were relied upon by the assessee were quoted by the learned CIT(A) in the impugned order.
5. The learned CIT(A) considering the facts and circumstances of the case in the light of several decision and submissions canceled the penalties. The findings of the learned CIT(A) in Para 3.5 to 3.5.4 are reproduced below:
ITA Nos.2754, 2755 and 2756/Ahd/2006 4Pan Drugs Limited "3.4.3 On the question of whether the assessee violated the provisions of section 269SS & 269T, reliance was placed on the decision in the case of Sunflower Builders (P) Ltd. v.
DCIT, 61 ITD 227, ITAT, Pune, wherein it was held that section 269SS cannot be applied where money does not pas from one person to another but the debt is acknowledged by passing entry in the books of account, depending upon the facts of the case. Further reliance was placed on the decision of ITAT in Jagvijay Auto Finance (P) Ltd. v. ACIT, 52 ITD 504, and Bombay Conductors and Electricals Ltd. v. DCIT 56 TTJ 580 (Ahd).
3.5 I have considered the submissions of the Id. A.R and the facts of the ease. On a strict und purely tcchnicn.1 view of the matter, it may be true to say that in the instant case, the assesses had received and repaid monies constructively, and that by not accepting and repaying !he amount by way of account payee cheque or account payee bank draft it had contravened the provisions contained in sections 269SS and 269T. Section 269SS expressly prohibits the accepting of any loan (in excess of the specified limits) and section 269T expressly prohibits the repayment of any "loan or deposit"
otherwise than by account payee cheque or bank draft. However, what is material with regard to the interpretation of the wording of the section is to properly appreciate the meaning and scope of the term 'loan or deposit'. This has been clarified in the Explanation, where it has been provided that "loan or deposit" means any loan or deposit of money, which is repayable after notice or repayable after a period. Hence, one of the essential ingredients is that there should be a loan or deposit of money. In Sunflower Builders, the Tribunal has clearly held that section 269SS can be applied only where money passes from on^ person to another by way of "loan or deposit". This provision cannot, therefore, be applied where the money docs not pass from one person to another but the debt is acknowledged by passing entry in the books of accounts. On parity of reasoning, the same test would hold true for the provisions of section 269T as well. The Delhi High Court has held, in CIT v. Noida Toll Bridge Co. Ltd., 262 ITR 260, that the provisions of section 269SS were not attracted in cases where the payment was not made through cash. In Jagvijay Auto Finance (supra), the Jaipur Bench of the ITAT held that if the basic character of a receipt of money does noi have the character of' 'loan' or 'deposit' at the time of taking or accepting the loan of receipt by a company, the provisions of ITA Nos.2754, 2755 and 2756/Ahd/2006 5 Pan Drugs Limited section 269SS would not stand attracted. The Tribunal derived support for this view from the decision of the Supreme Court in CIT v. Bazpur Co-operative Sugar Factory Ltd. 172 ITR 321, where the essence of 'deposit1 was explained to be that there must be a liability to return it to the party by whom and on whose behalf it is made, on the fulfillment of certain conditions. Similarly, in Bombay Conductors & Electricals Ltd.t the Bombay Bench of the Tribunal held that the transfer of liability standing in the goods account to the Sarafi account by passing journal entry would not constitute violation of section 269SS. The Hon'ble ITAT observed that by simply transferring the liability from one account to another by way of book adjustment, such transfer could, by no stretch of imagination, be said to be a 'deposit' or 'loan1 since the alleged deposit or loan was not created by payment of money. Noting that the provisions of section 269SS and 269T had been brought into the statute as a measure to discourage tax avoidance or tax evasion, it was held that in order to bring the transaction of book entry within the mischief of the section, some evidence or material must be brought out by the revenue to show that the transactions were in pursuance to any lax planning or colourable device adopted by the assessee.
3.5.1 Thus, judicial opinion on the issue appears to veer to the position that merely the making of hook entries would not invite penalty proceedings ii/s 271E and 271D, unless it can be shown that the making of such entry was a colourable device in furtherance of an attempt towards tax avoidance or evasion. In the instant case, the assesse has resorted to window dressing its accounts for presentation to the banking authorities, so that it could continue to avail the working capital facilities. In order to do this, one of the member shareholders in the appellant company, viz. SMPL. undertook to discharge the outstanding amount due by the company to some of its creditors. In turn, the appellant company undertook to re-compensate SMPL for the like amount. Thus, the quantum of creditors appearing in the books remained the same. In this way, the debts of the appellant company were apparently transferred to SMPL. Since SMPL was a shareholder in the company, this inspired better confidence in the banking circles. In the subsequent year, the entry was reversed.
3.5.2 It is well settled that the penal provisions are to be construed strictly and no person can be penalized unless the ITA Nos.2754, 2755 and 2756/Ahd/2006 6 Pan Drugs Limited default lies within the four comers of the penal provisions. It is also a settled provision of law that if the penal provisions are susceptible of two interpretations, the interpretation which is favourable to the assessee should be adopted CIT v. Vegetable Products Ltd. 58 ITR 192 (SC). The Supreme Court has laid down an important principle in Director of Enforcement v Deepak Mahajan and another, AIR 1994 SC 1775. In that case, the apex Court y considered the issue of relevance of intention of the legislature in the interpretation of statutes. The Court held that while in the normal course, the plain ordinary grammatical meaning of the words would afford the best guide, but "to winch up the legislative intent, it is permissible for the Courts to take into account the ostensible purpose and object and the real legislative intent. Otherwise, the bare mechanical interpretation of the words and application of the legislative intent devoid of concept or purpose and object will render the legislature inane" In another case, directly dealing with the issue of penalty u/s.271D, the Supreme Court held as under:
"The object of introducing section 269SS is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money, or if he makes some false entries, he shall not escape by giving false explanation for the same. During search and seizures, unaccounted money is unearthed and the taxpayer would usually give the explanation that he had borrowed or received deposits from his relatives or friends and it is easy for the so-called lender also to manipulate his records to suit the plea of the taxpayer. The main object of section 269SS was to curb this menace of making false entries in the account books and later giving an explanation far the same.
The undue hardship of the provisions of section 27ID. which replaced section 276DD providing fat- a penalty, is substantially mitigated by the inclusion of section 273B providing that if there was a genuine and bonafide transaction and the tax payer could not get a loan or deposit by account-payee cheque or demand draft far some bona fide reason, the authority vested with the power to impose penalty has a discretionary power not to levy the penalty. [ADIT(Investigation) v. Kumari A.B.Shanthi, 255 ITR258].ITA Nos.2754, 2755 and 2756/Ahd/2006 7
Pan Drugs Limited 3.5.3 The scope and effect of section 269T have been elaborated in CBDT Circular No,345 dated 28-6-1982 which stales as under:
"2.2 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 have, in recent past, taken several legislative and administrative measures to unearth black money. The Income-tax (Second Amendment) Act, 198! (hereinafter referred to as the Amending Act), represents another step in the same direction.
2,2 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 bnami names. The Income-tax (Second Amendment) Act, 1981, seeks to counter attempts to circulate black money in this manner."
3.5.4 From the foregoing, it is evident that primarily with a view to counter attempts at tax evasion, it was provided in sections 269SS & 269T that acceptance and repayments of any loan or deposit by modes other than by account payee cheque or account payee bank draft would invite penalty. The over-arching objective was the prevention of further generation of black money and the mechanism adopted was to ensure that black monies invested would leave an audit trail, which could be detected by the tax authorities. In the instant case, there does not appear to be any evidence of tax planning or tax evasion by resorting to the impugned transactions. Since the transactions are reported in the Balance Sheet of the company which has to be filed before the Registrar of the Companies, Income Tax Department, Bank etc., there was sufficient audit trail so that the transaction could not escape unnoticed. The company, finding itself in dare financial state, resorted to window dressing of its accounts. Such window dressing did not have the result of either understating its taxable income or generating or aiding or abetting the generation of black money. Section 273B specifically states that no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in, inter alia, section 27ID and section 271E, if he proves that ITA Nos.2754, 2755 and 2756/Ahd/2006 8 Pan Drugs Limited there was reasonable cause for the said failure. In view of the circumstances as above, I am of the opinion that firstly, the provisions of sections 269SS & 269T and penal provisions of sections 271D & 27iE would not be applicable in the case of transfer by way of book entries; and secondly that there was reasonable cause on the part of the assessee for the accepting and repaying the monies otherwise than by way of account payee cheque or account payee bank draft. Accordingly, it is held that the penalty was not justified and is, therefore, cancelled".
6. The learned DR relied upon the order of the AO. On the other hand, the learned Counsel for the assessee reiterated on the submissions made before the authorities below and relied upon the decision of the Hon'ble Gujarat High Court in the case of CIT Vs Bombay Conductors and Electricals Ltd. 301 ITR 328 (Guj) and the decision of the Hon'ble Gujarat High Court in the case of CIT Vs Natvarlal Puroshottamdas Parekh 303 ITR 5 (Guj).
7. We have considered the rival submissions and perused the material on record. It is not in dispute that there is no giving and taking of any loans or deposits in cash and there is no repayment in cash. The mode of the repayment and mode of acceptance are only book entries from the parties connected with the assessee. The Hon'ble Gujarat High Court in the case of CIT Vs Bombay Conductors and Electricals Ltd. 301 ITR 328 (Guj) has held as under:
"While introducing section 269SS of the Income-tax Act, 1961, section 273 was also incorporated in the statute which provides that no penalty shall be imposable on a person or an assessee, as the case may be, for any failure referred to in the said provision if the assessee proves that there was reasonable cause for such failure. In other words penalty is not automatic under section 271D of the Act on mere violation of the provisions of section 269SS.
The assessee was a subsidiary of L. The assessee purchased goods from time to time from L. As the assessee was not in a position to make payment of the outstanding ITA Nos.2754, 2755 and 2756/Ahd/2006 9 Pan Drugs Limited purchase price immediately the parties arrived at an understanding whereunder the outstanding purchase price was to be treated as a loan on sarafi account after making part payment of the outstanding dues. As per the terms agreed upon, on May 31, 1989, a sum of Rs.24,908 was paid by account payee cheque out of total of Rs.9,24,908 and the balance of Rs.9 lakhs was simultaneously transferred to the L account. The balance outstanding liability in the goods account was adjusted by way of journal entries. Similarly, out of total outstanding dues of Rs.14,08,165 a sum of Rs.8,165 was paid by account payee cheques and the balance amount of Rs.14 lakhs was identically treated as a loan outstanding in the sarafi account with requisite journal entries in support thereof. During the course of assessment proceedings the Assessing Officer treated the outstanding amounts of Rs.9 lakhs and 14 lakhs respectively as acceptance of deposits in violation of the provisions of section 269SS of the Act and referred the matter for levy of penalty to the Deputy Commissioner. After issuing show-cause notice and considering the written explanation tendered by the assessee and after hearing the assessee the Deputy Commissioner came to the conclusion that he conversion of the outstanding balance from goods purchase account to the sarafi account by transfer entries was a deposit in violation of the provisions of section 269SS. Penalty was levied but it was cancelled by the Tribunal on a reference:
Held, that the Tribunal had found that there was no evidence to show that infraction of the provisions was with knowledge or in defiance of the provisions. It had further been held that there was nothing on record to indicate that the assessee had indulged in any tax planning or tax evasion. Not only was there a reasonable cause, as found by the Tribunal, but in the light of the finding of the Tribunal that the breach, if any, was merely a technical or venial breach no penalty was leviable".
The Hon'ble Gujarat High Court in the case of CIT Vs Natvarlal Puroshottamdas Parekh 303 ITR 5 (Guj) held as under:
"The assessee carried on the business of money-lending and trading in jewellery. During the course of assessment proceedings for the assessment year 1991-92 the Assessing Officer noticed that the assessee had accepted loans/deposits from different parties and repaid such loans/deposits to the parties in contravention of the provisions of sections 269SS ITA Nos.2754, 2755 and 2756/Ahd/2006 10 Pan Drugs Limited and 269T of the Income-tax Act, 1961. Rejecting the explanation offered by the assessee he imposed penalty. The Tribunal found that most of the amounts represented book entries except amounts of NSCs of family members which had matured and which were reinvested. The Tribunal had also found that the assessee was prevented by reasonable cause in the light of the affidavit of an advocate and income-tax practitioner having standing of 33 years who had opined that the assessee would not violate the provisions of sections 269SS and 269T of the Act if the assessee receives amounts from the family members and repays to different family members. It cancelled the penalty. On a reference:
Held, that the Tribunal had found that on the facts and in the light of the evidence on record there was no violation of either the provisions of section 269SS or section 269T of the Act. The Tribunal had further found that there was reasonable cause, assuming that there was nay violation by the assessee. Hence, the Tribunal had rightly deleted the penalties levied under sections 271D and 271E"
The Hon'ble Punjab & Haryana High Court in the case of CIT Vs Sunil Kumar Goel 315 ITR 263 (P & H) has 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 were 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 273B of the Act. Since the assessee had satisfactorily established "reasonable cause" under section 273B of the Act, he must be deemed to have established sufficient cause for not invoking the penal provisions of sections 271D and 271E of the Act against him. The deletion of penalty by the Tribunal was valid".
8. Considering the facts of the case in the light of the findings given by the learned CIT(A) and the decisions noted above, we do not find any infirmity in the orders of the learned CIT(A) in canceling the penalties. Since only book entries were entered into between the parties connected with each other for business purpose to improve the balance sheet of the ITA Nos.2754, 2755 and 2756/Ahd/2006 11 Pan Drugs Limited assessee, therefore, the learned CIT(A) was justified in canceling the penalties. More particularly, the facts and circumstances explained above clearly show that there exists sufficient cause for taking the book entries. Therefore, the learned CIT(A) was justified in accepting the alternative contention of the assessee that there was reasonable cause on the part of the assessee in accepting and repaying the loans through book entries otherwise than by way of account payee cheques or account payee bank drafts. We, accordingly do not find any error in the orders of the learned CIT(A). We confirm his findings and dismiss the departmental appeals.
9. As a result, all the departmental appeals are dismissed. .
Order pronounced on 23rd December 2009
Sd/- Sd/-
(A. N. PAHUJA) (BHAVNESH SAINI)
ACOUNTANT MEMBER JUDICIAL MEMBER
Date : 23-12-2009
Lakshmikant/-
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad