Income Tax Appellate Tribunal - Mumbai
Mahabal S. Shetty, Dombivli (W) vs Assessee
1
IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "B", MUMBAI
Before Shri N.V. Vasudevan, Judicial Member and
Shri J. Sudhakar Reddy, Accountant Member
S. No. I.T.(SS)A. No. Asstt. Year.
1. 238/Mum/2006 1996-97.
2. 239/Mum/2006 1997-98.
3. 240/Mum/2006 1998-99.
4. 241/Mum/2006 1998-99.
5. 242/Mum/2006 1999-2000
6. 243/Mum/2006 1999-2000
7. 244/Mum/2006 2000-2001
8. 245/Mum/2006 2000-2001
9. 246/Mum/2006 2001-2002
10. 247/Mum/2007 2001-2002
Mahabal S. Shetty, Addl. Commissioner of
C/O K.B. Amlani (C.A.), Vs. Income-tax, Central Circle,
14, Malkans, Dr. Lazrus Road, Thane.
Opp. Rupee Bank,
Charai Thane (W)-400602.
PAN : AQSPS 3119E
Appellant. Respondent.
Appellant by : Shri Reepal G. Tralshawala.
Respondent by : Shri N.K. Balodia.
ORDER
Per J. Sudhakar Reddy, A.M. :
All these 10 appeals are filed by the assessee. Six appeals challenge the confirmation of penalty levied u/s 271D of the Income-tax Act by the CIT(Appeals)-I, Thane for the assessment years 1996-97 to 2001-2002. The other 2 IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
four appeals, pertain to confirmation of the penalty levied u/s 271E of the Income- tax Act by the CIT(Appeals)-I, Thane for the assessment years 1998-99 to 2001- 2002.
2. Facts in brief :
The assessee is an individual and is in the business of finance and transportation. A search and seizure action was conducted on 14-12-2000 on the residential as well as business premises of the assessee. The search revealed that the assessee had undertaking money lending business. A notice was issued u/s 158BC and in response the assessee furnished return of income in Form No. 2B on 29-8-2002, declaring undisclosed loss of Rs.1,50,00,244/-. A block assessment order was passed by the AO on 31st December, 2002 accepting the undisclosed loss declared by the assessee. In this order the AO observed that the assessee is not maintaining regular books of account. At para 9 it is observed that during the action u/s 132, voluminous record was seized which includes receipts issued to loan creditors which are serially numbered and personal loan ledger books in respect of creditors. Other documents such as loan agreement form, promissory notes, post dated cheques registers etc. were found. At para 13 in the block assessment order, the AO held as follows :
" During the course of business activities, the assessee has obtained loans from various parties. The loans are obtained through cheques and by cash also. On accepting the loan, the loan creditors were given receipts alongwith promissory note and loan agreement and post dated cheques in term of guarantee of repayment of loan. The loan creditors are given interest @ 4% p.m. Such funds were used for giving loans at the interest rate of 10% p.m. It is seen that the assessee has accepted loans above Rs.20,000/- in cash from various parties, list of which is also submitted. By accepting loans above 3 IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
Rs.20,000 in cash, provisions of section 269 SS are violated, for which penalty proceedings u/s 271D are initiated separately."
Thereafter at para 18, it is stated that penalty proceedings u/s 271D are initiated.
3. The Addl. CIT, Central Circle, Thane, vide his order dated 30-06-2005, passed u/s 271D of the I.T. Act, considered the various submissions made by the assessee and rejected the same on the ground that the assessee has accepted deposits in excess of Rs.20,000/-, without reasonable cause, in violation of provision of section 269SS and hence levied penalty u/s 271D. Similarly the AO also levied penalty u/s 271E on the ground that the assessee has violated the provisions of section 269T by repaying deposits otherwise than by account payee cheques in excess of Rs.20,000/-. It is noted that this was the first time when the AO termed the receipt in question as a Deposit and not as a Loan. On appeal, the first appellate authority confirmed the penalty. Further aggrieved, the assessee is before us.
4. Mr. Reepal G. Tralshawala, learned counsel for the assessee, submitted that the assessee has studied upto only 3rd standard in a small village in Karnataka and thereafter came to Mumbai and was selling Vada-Pav on the road in Dombivali. He submitted that these facts are not in dispute and could be found at pages 61 and 62 of the paper book. He took this Bench through various papers, such as, block assessment order, the explanation given by the assessee, orders u/s 271D and u/s 271E as well as the order of the CIT(Appeals) and contended that the penalty is wrongly levied. He contended that the AO after due verification in search proceedings, has accepted that all the loans in question are genuine and this is evident from page 5 of the assessment order which is an office note. He specifically drew our attention to para 4 therein which is at page 8 of the 4 IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
assessment order and submitted that the AO has issued summons u/s 131 to certain creditors on test check basis and has confirmed the genuineness of the loans. He submitted that once the genuineness of the transaction is not doubted then penalty cannot be levied u/s 269SS. He relied on the following case laws :
i) CIT vs. Lakshmi Trust Co. 303 ITR 99 (Mad.).
ii) Dillu Cine Enterprises vs. CIT 80 ITD 484 (Hyd).
5. The second limb of his argument, he submitted that the fact that the assessee is an illiterate and has no knowledge of tax laws and that he has come from a small village in Karnataka and had no capital of his own etc. and other reasons, demonstrate that the assessee had reasonable cause inasmuch as he has taken the loans in cash, under the bonafide belief that he is not violating any Law of the Land. For the proposition that no penalty can be levied when there is reasonable cause, he relied on the judgment of the Madras High Court in the case of CIT vs. Jayasakthi Benefit Fund Ltd. 303 ITR 29 (Mad). The next proposition is that the assessee was ignorant of this particular provision of law and for the proposition that no penalty can be levied when the assessee is ignorant of the law, he relied on the following case law :
i) Motilal Padmpat Sugar Mills Co. Ltd. vs. State of Uttar Pradesh and Others 118 ITR 326.
ii) ITO vs. Prabhulal Sahu 99 TTJ (Jd) 177.
6. The learned counsel for the assessee took this Bench through the copy of the loan agreement which is at page 94 of the assessee's paper book to demonstrate that whatever was taken by the assessee was a loan and not a deposit. Thereafter he submitted that repayment of the loan is not covered u/s 271E, prior to its 5 IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
amendment by the Finance Act 2003 with effect from 01-06-2003. In addition to the propositions relied upon while arguing the penalty levied u/s 271D, the learned counsel relied on the following case laws:
i) Bindya Nath Plastic Industries (P) Ltd. and others vs. K.L. Anand, ITO 230 ITR 522 (Del).
ii) Muller and Phipps (I) Ltd. vs. ACIT & others 249 ITR 266 (Mad).
iii) ITO vs. Sudesh Kumar Sareen 5 ITR (Trib) 829 (Del).
He reiterated his contentions that the assessee being an illiterate and ignorant of the law and as the genuineness of the transactions are not doubted, penalties levied should be cancelled.
7. The learned DR, Mr. Balodia, on the other hand, strongly opposed the contentions of the assessee's counsel and drew the attention of the Bench to the assessment order to show that the assessee was dealing in huge volumes of transaction. He pointed out that the assessee had Rs.9.71 crores of credits and Rs.5.79 crores of debts. He also pointed out that the assessee had borrowed from more than 3500 persons and that he had employees and under those circumstances it was not correct to hold that the assessee has a reasonable cause for violating the law. He relied heavily on the order of the AO as well as the order of the CIT(Appeals). He cited the following case laws:
i) Narsingh Ram Ashok Kumar vs. Union of India and others 234 ITR 414 (Patna).
ii) Kasi Consultant Corporation vs. DCIT 311 ITR 419 (Mad).
iii) Dhanji R. Zalte vs. ACIT 265 ITR 204 (Bom).
6IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
8. Rival contentions heard. On a careful consideration of the facts and circumstances of the case, a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we hold as follows:
9. The explanation of the assessee is brought out at para 2 of the order levying penalty u/s 271D. The same is extracted below for ready reference :
" In response to the show cause notice the assessee furnished his explanation vide his letter dated 22.12.04. In his explanation dated 22.12.04 the assessee has stated as under :-
"I studied upto 3rd std. only in village in Karnataka. Up to 1994, I was selling Pav Vada on Road in Dombivali. With this illiterate & poor back ground, in 1994/95 I started money lending business, that too, having no own capital, by borrowing from people @ 4% to 6% p.m. & lending & 6% to 10% p.m. My most of lenders are all small and illiterate village people who never maintain bank account & cheques/drafts transactions but insist for giving loan in cash and similarly insist for paying them interest & repaying loan in cash. Very fact is that my nature of business in money lending and it demanded for borrowing and lending in cash. I had no option but to take and give in cash just to earn something out of margin earning against interest payment and after meeting, Salaries, Commission and other expenses. I have been lending immediately to earn the interest out of the said interest bearing funds. I acted in bonafide belief without malafide intention to violate the law I had to take and repay loan in whatever way I get from people. Where ever possible, I have taken loan by A/c payee cheque & repaid by a/c payee cheques also. I also submit that from seized records and also by external verification, during assessment proceedings, the transaction of loans taken and returned are proved genuine. Due to heavy loss as assessed by the assessed by the Assessing Officer. After search, I am facing heavy recovery pressure from lenders & at the same time my all debtors are bad debts, having no recovery from debtors being their papers & documents are seized by the Department. Due to all these problems, I suffered paralysis in August, 2001 and since then I am unable to talk and work properly & permanently disabled. On several complaints of creditors in Police and courts, I was imprisoned in Thane Jain for 6 months and now released on 7 IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
bail but I have to attend almost daily in Courts in ample or recovery cases against me.
I further submit that list enclosed is of creditors on last day of F.Y. only & most of the loans are not repaid but continued since so many years, only changing P/L numbers time to time."
10. Undisputed facts that emerged are:
a) The assessee had studied only upto 3rd standard in a small village of Karnataka and thereafter migrated to Mumbai where he sold Vada-Pav on road in Dombibali.
b) Most of the lenders are small and illiterate village people who never maintain bank accounts and do transactions of giving loans in cash and similarly insists for repayment in cash.
c) The AO in the block assessment order, has accepted the block return filed by the assessee wherein he has declared a loss of Rs.1.5 crores for the period 1995-96 to 14-12-2000.
d) In the office note para 4, the AO has clearly stated that on verification he found that the loans in question are genuine.
e) A perusal of the agreement at page 94 of the assessee's paper book shows that the assessee has taken loans on certain terms and conditions. The assessee has also executed a promissory note along with the agreement and has also given post dated cheques. The promissory notes states that the amount is repayable on demand. A perusal of these three documents disclosed that the AO's finding in the block assessment order, that what was borrowed was loan, is correct. The latter version that this amount is nothing but deposit, in our opinion, is not supported by documentary evidence.
11. On this factual matrix, we examine the legal position. The Hon'ble Supreme Court in the case of Motilal Padmpat Sugar Mills Co. Ltd. vs. State of Uttar Pradesh and Others 118 ITR 326 has held that there is no presumption that every person knows the law. At page 339, the Hon'ble Supreme Court observed as under :
8IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
" Moreover, it must be remembered that there is no presumption that every person knows the law. It is often said that every one is presumed to know the law, but that is not a correct statement: there is no such maxim known to the law. Over a hundred and thirty years ago, Maula J. pointed out in Martindale v. Falkner [1846] 2 CB 706: "There is no presumption in this country that every person knows the law : it would be contrary to common sense and reason if it were so." Scrutton L. J. also once said : "It is impossible to know all the statutory law, and not very possible to know all the common law."
But it was Lord Atkin who, as in so many other spheres, put the point in its proper context when he said in Evans v. Bartlam [1937] AC 473: ".......... The fact is that there is not and never has been a presumption that every one knows the law. There is the rule that ignorance of the law does not excuse, a maxim of very different scope and application." It is, therefore, not possible to presume, in the absence of any material placed before the court, that the appellant had full knowledge of its right to exemption so as to warrant an inference that the appellant waived such right by addressing the letter dated 25th June, 1970. We, accordingly, reject the plea of waiver raised on behalf of the Statement Government."
12. The Jodhpur Bench of the Tribunal in the case of ITO vs. Prabhulal Sahu 99 TTJ (Jd) 177 held that when the assessee was ignorant of the relevant provisions on which, the assessee was not advised by his counsel and more specifically in the background where the assessee was only matriculate and was not aware or enlighten about this fact, the imposition of penalty u/s 271D was not justified.
13. The Madras High Court in the case of CIT vs. Lakshmi Trust Co. (supra) held as follows :
" In the instant case, the Commissioner of Income-tax (Appeals) and the Appellate Tribunal found on the facts that the transactions were genuine and the identity of the lenders was also satisfied. The Appellate Tribunal also upheld the order of the Commissioner of Income-tax (Appeals) that there was no intention on the part of the assessee to evade the tax.
Once the said finding as to the genuineness of the transactions is arrived at by the Tribunal on the facts, following the decision of this court in 9 IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
CIT v. Ratna Agencies [2006] 284 ITR 609, wherein it was held that the finding recorded by the Tribunal in this regard is a finding of fact and no question of law much less a substantial question of law would arise, we do not have any hesitation to hold that it may not be proper for this court to interfere with such a finding of fact."
14. In the case of CIT vs. Jayasakthi Benefit Fund Ltd. 303 ITR 29 (Mad), the Hon'ble Madras High Court was considering a situation where the assessee was in receipt of deposits over and above Rs.20,000/- in cash from agriculturists, who had deposited the amount from their savings of agricultural income. It was also stated that none of the persons from whom the deposits were received in cash were having any bank account. The confirmations in this regard were filed. The Hon'ble Court observed as follows :
" The circumstances under which such deposits received have also been explained by the assessee by submitting that the assessee was located in Maraimalai Nagar which is a suburb of Chennai city and the residents in that area are mostly agriculturists and hardly having any bank account, that the assessee caters the needs of the agriculturists, labourers and house-wives, who do not have bank account and the assessee also stated that there was a turmoil in the finance business with the number of finance companies breaking down unable to repay the deposits taken from the public and in those compelling circumstances, the assessee had to oblige his customers by accepting the deposits in cash and refunding deposits in cash in order to establish credibility in business among the assessee's customers and further explained that the assessee was financing to agriculturist mainly and to people of very small means. The assessee could not insist on cheque payments for deposit as the depositors were not aware of the banking operations. Each of the depositor has also confirmed the deposit made by them out of their agricultural income or small savings and that they were not having any banking transactions.
Thus, it could be seen that the transactions were not camouflaged transactions or out of account transactions but bona fide transactions by persons of the vocation of agriculture and small traders and thus there was a reasonable cause for the failure."10
IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
The Hon'ble High Court further observed as follows:
"There is no material available on record for us to suspect or reject the transaction as not bona fide. Further, the Tribunal's decision relied upon by the Commissioner of Income-tax (Appeals) as well as the Tribunal, i.e. Kundrathur Finance and Chit Co.'s case [2006] 283 ITR 329 and upheld the case of CIT v. Kundrathur Finance and Chit Co. [2006] 283 ITR 329 and upheld the order of the Tribunal, which concluded that the reasoning given by the finance company for accepting deposits in cash was a genuine and bona fide transactions and held that if the transaction was a genuine and bona fide transaction, that the taxpayer could not get loan or deposit by account payee cheque or demand draft for a bona fide reason, the authorities are vested with the discretion not to levy penalty. The above decision of the Division Bench reported in CIT Kundrathur Finance and Chit Co. [2006] 283 ITR 329 squarely covers the issue in this case also."
15. In our humble opinion, this case law applies in all fours to the facts of this case. Admittedly the persons who have given loans are small and illiterate villagers who never maintained bank accounts. The assessee borrowed money from these numerous villagers and was conducting finance business in the suburbs of Bombay. There is reasonable ground of belief that the assessee was ignorant of the law and the revenue held that the transactions were genuine. The assessee was under a bonafide belief that he has not violated any law as he was not aware of this Section 269SS or 269T.
16. Coming to the judgment of the Hon'ble Madras High court in the case of Kasi Consultant Corporation vs. DCIT 311 ITR 419 (Mad), relied upon by the learned DR, the facts are found different for the reason that the assessee firm in that case had accepted deposits from the public for the purpose of business in real estate and property development carried on by the related concerns. It was a case where the assessee had not produced any material whatsoever to sustain the plea of reasonable cause.
11IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
17. This case law is not applicable for the reason that the assessee in this case has demonstrated that he was under a bonafide belief that he has not violated any law and he had reasonable cause to take loans in cash.
18. Coming to the decision of Narsingh Ram Ashok Kumar vs. Union of India and others 234 ITR 414 (Patna), the Hon'ble Patna High Court was considering a petition under Article 226 and 227 of the Constitution, challenging the constitutional validity of section 269SS and section 271D. The Hon'ble Court held that the provision is enacted to crumb ramped circulation of black money and is not discriminatory and arbitrary and is valid. This case is not of much help to the Revenue.
19. In the case of Dhanji R. Zalte vs. ACIT 265 ITR 204 (Bom), the Hon'ble Bombay High Court was considering the case of an Advocate who claimed to have specialized in land acquisition cases. It was a case where there was certain admissions by the assessee. It was not a case where the assessee claimed reasonable cause or ignorance of law. Thus this case also does not help the case of the Revenue.
20. In view of the above discussion, we are of the considered opinion, that the penalties levied in all these cases have to be cancelled for the reason that we accept the statement of the assessee that he was under a bonafide belief that he has not violated any law and also for the reason that the assessee had reasonable cause for accepting the loans in cash as they were from creditors who were agriculturists residing in remote villages and many of them were not having bank account and for the reason that the assessee was not professionally managed nor professionally advised and also for the reason that an enquiry conducted by the Revenue in the 12 IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
block assessment proceedings subsequent to the search and seizure action, revealed that all these transactions were genuine transactions. When a transaction is genuine, then the violation at best can be termed as a technical violation. When there is a technical violation, the reason given by the assessee to demonstrate that he had a reasonable cause, should be viewed in the context of the nature of technical violation and the burden to prove that the assessee has no reasonable cause should lay on the revenue.
21. We draw strength from the decision of the Chennai Bench of the Tribunal in the case of DCIT, Central Circle III(1) vs. Vignesh Flat Housing promoters 105 ITD 359 (Chennai) wherein it is held as follows :
"When section 271D is read with section 273B, which begins with the non obstante clause 'Notwithstanding any thing contained in the provisions of inter alia section 271D, it is clear that in spite of the provisions of section 271D, the enactment following, namely, '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 cause for the said failure', will have its full operation. Under section 273B, a judicial discretion is left with the assessing authority not to levy a penalty under section 271D, if the authority is satisfied that there was a reasonable cause for not complying with the provisions of section 269SS. The power to impose penalty has to be exercised judicially with due regard to all the facts and circumstances. It cannot be exercised mechanically. It is all very well to paint justice blind, but she does better without a bandage round her eyes. She should be blind indeed to favour or prejudice, but to see which way lies the truth and the less dues there is about the better. In the instant case, the undisclosed income, as declared in the block return, remained the assessed income. The revenue did not doubt the veracity of the creditors. The Assessing Officer did accept the credits as genuine. Most of the creditors were agriculturists, residing in remote villages and many of them were not having any bank account. The assessee-firm was not professionally managed. From that, it could be concluded that breach flowed 13 IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
from a bona fide belief. Ex facie it was a venial breach. Cash appeared to be accepted because of the business exigencies. As such, there existed a reasonable cause in accepting cash loans from various parties. The assessee might, therefore, be exonerated from the rigour of the penalty. Therefore, the order of the Commissioner (Appeals) was to be upheld. In the result, the appeal of the revenue stood dismissed."
22. Coming to the argument, that no penalty can be levied u/s 271E of the Act prior to the amendment brought in with effect from 1st June, 2003, when what was repaid was loan, we hold that the issue is covered in favour of the assessee and against the Revenue by the following decisions :
i) ITO vs. Sudesh Kumar Sareen (2010) 5 ITR (Trib) 829 (Delhi).
ii) Baidya Nath Plastic Industries (P) Ltd. and others vs. K.L. Anand, Income Tax Officer 230 ITR 522 (Delhi).
23. Respectfully following the same, in addition to the reasons given by us for deleting the levy of penalty u/s 271D, we delete the levy of penalty u/s 271E.
24. In the result, all the penalties are cancelled and the appeals of the assessee are allowed.
Order pronounced in the open court on 25th February , 2011.
Sd/- Sd/-
(N.V. Vasudevan) (J. Sudhakar Reddy)
Judicial Member. Accountant Member
Mumbai,
Dated: 25th February, 2011.
14
IT(SS)A.Nos.238 to 247/Mum/2006.
Mahabal S. Shetty.
Wakode
Copy to :
1. Appellant
2. Respondent
3. C.I.T.
4. CIT(A)
5. DR, B-Bench
(True copy)
By Order
Asstt. Registrar,
ITAT, Mumbai.