I-T - Whether expression 'any other person' in Sec 269 excludes Directors of assessee company which accepts loans or deposits - NO; Penalty upheld: HC

 THE issues before the HC are - Whether provisions of Sec 269SS do not get attracted when the deposits are in the nature of share application money; Whether the expression 'any other person' in Sec 269 excludes the Directors of the assessee company which accepts the loans or deposits and whether relief u/s 273B is available to the assessee only if it establishes the presence of reasonable cause for accepting the payment not by account payee cheque. And the verdict goes against the assessee.

Facts of the case

In the course of assessment proceedings, the AO noticed that a sum of Rs. 66.50 lakhs was shown to have been received by the assessee from three persons (Mr Rajinder Diwan, Mr Puneet Diwan & Mrs Urmil Diwan – promoter directors) by way of unsecured loans. What was significant was that, out of the said amount of Rs. 66.50 lakhs, a sum of Rs. 23.25 lakhs was received by the assessee from the said three persons (Mr Rajinder Diwan – Rs. 5,00,000/-, Mr Puneet Diwan – Rs. 9,95,000/- & Mrs Urmil Diwan – Rs. 8,30,000/-) in cash / bearer cheques in excess of the limit of Rs. 20,000/- laid down in section 269SS of the Income Tax Act, 1961. Inasmuch as the Assessing Officer felt that loans to the extent of Rs. 23.25 lakhs had been received and accepted by the assessee company in a manner prohibited by section 269SS of the said Act, he initiated penalty proceedings under section 271D of the said Act.

In the penalty proceedings, it was submitted on behalf of the assessee company that a hotel was being set up by it at Shimla and for the purpose of construction of the said hotel, funds were contributed by its directors / shareholders in the form of loans, as and when required. It was also submitted that the said amount was actually contributed by them towards share capital and the same being in the nature of share capital money the provisions of Section 269SS were not applicable. The Assessing Officer, however found that the authorised share capital of the assessee company as on 31.03.2001 was only Rs. 5 lakhs which was raised to Rs. 25 lakhs only on 31.3.2003. He also noted that the amounts standing in the name of the three creditors were shown by the assessee company in its balance sheet as unsecured loans and even in the confirmation letters filed by the said creditors, the said amounts were stated to have been paid to the assessee company as loans without any mention of share application money. The Assessing Officer did not, therefore, accept the explanation of the assessee that the amount in question received from the three creditors was on account of share application money. The Assessing Officer also held that the assessee had failed to prove that the said amount had been accepted by it in cash or bearer cheques in exceptional circumstances of urgent requirement of funds or business exigencies. The assessee’s plea that there was a reasonable cause which prevented it from complying with the requirements of Section 269SS was also found to be unacceptable by the Assessing Officer. He, therefore, proceeded to impose penalty of Rs. 23.25 lakhs under section 271D.

Being aggrieved by the penalty order, the assessee company preferred an appeal before the Commissioner of Income Tax (Appeals). Before the CIT(A), it was submitted that the amounts received from the directors/ shareholders were strictly not in the nature of loans and the source of the said amounts having allegedly been explained in the hands of the concerned creditors, imposition of penalty under section 271D was not justified keeping in view the legislative intent behind enacting the said provisions. It was reiterated that the said amounts were contributed by the director / shareholders as their share application money and the same having allegedly been finally adjusted against the shares allotted to the said creditors, the amounts in questions could not be treated as loans in the strict sense so as to attract the provisions of Section 269SS. It was also submitted that there was a reasonable cause for having taken the said amounts from its directors/ shareholders in cash / bearer cheques and it was therefore not a fit case for imposition of penalty under section 271D. The submissions made on behalf of the assessee company, however, did not find favour with the CIT (A) and he confirmed the penalty imposed by the Assessing Officer under section 271D. The CIT (A) held that no evidence had been produced to show that the said sum had been received as share application money. According to the CIT (A), the story of share application money was an after-thought, once the assessee realized that the unsecured loans taken in cash / bearer cheques clearly violated section 269SS of the said Act.

On appeal, the Tribunal ruled in favour of the assessee.

On appeal, the HC held that,

++ Section 269SS prohibits “a person” from taking or accepting from “any other person” any “loan or deposit” otherwise than by an account payee cheque or account payee bank draft if the amount of such loan or deposit or the aggregate amount of such loan and deposit is twenty thousand rupees or more. The assessee company being a juristic person would be covered by the said provision. There is no dispute with this. However, it was contended that the expression “any other person” would not refer to a director or shareholder of the company in question. Such a view is not warranted from a plain reading of the section. There is no indication that the corporate veil is to be pierced so as to bring about an identity between the company as a juristic person and its directors or members. Therefore, in our view, the expression “any other person” does not exclude the directors or members of the assessee company which has received or accepted the loans or deposits;

++ the view taken by the Tribunal that the assessee company had entertained a bona fide belief that the loans accepted by it from its directors/ shareholders were not covered by the provisions of section 269SS, we are afraid, is not borne out by the record. When the assessee company was asked to furnish its answer in the penalty proceedings, the assessee company did not take the plea that the receipts in question were loans but, because they were from directors/shareholders, the loans were not covered under section 269SS. On the contrary, the specific plea of the assessee company was that the amounts in question represented share application money and were not loans or deposits at all! When the clear stand of the assessee was that the amounts in question were not loans or deposits how can it said that the assessee company had entertained a bona fide belief that the loans accepted by it from its directors/ shareholders were not covered by the provisions of section 269SS? It is another matter that the story of share application money was itself an after thought and was rightly rejected by all the authorities below. At the same time, there was no belief what to speak of “bona fide belief” that the loans taken from directors/ shareholders were not within the ambit of section 269SS;

++ in the case at hand, the assessee contended that the amounts in question represented share application money. In any event, Rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules, 1975 would have no application in the present case. This is because the said rule carries a proviso which stipulates a condition precedent which has not been satisfied in the present case. There is no evidence that the three persons from whom the amounts were received had furnished such declarations. Clearly, then, the assessee cannot take refuge under the said rule;

++ the meaning of Sec 271D is clear. If a person takes or accepts any loan or deposit in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so taken or accepted. Once it is established that there is a violation of section 269SS, the penalty is mandatory and so is the amount of penalty.

++ in such an eventuality where section 271D is attracted, it is only section 273B of the said Act which can save a person from penalty. Section 273B provides that, notwithstanding anything contained in the provisions of section 271D, no penalty shall be imposable on the assessee for any failure referred to in section 271D if he proves that there was “reasonable cause” for the said failure.

++ the Supreme Court in Asst. Director of Inspection (Investigation) v. Kum. A.B. Shanthi observed that (1) if there was a genuine and bona fide transaction and (2) if for any reason the taxpayer could not get a loan or deposit by account-payee cheque or demand draft for some bona fide reasons, the authority vested with the power to impose penalty has got discretionary power. The existence of a genuine or bona fide transaction is not sufficient to attract the relief under section 273B of the said Act. It must also be established that for some bona fide reasons the assessee could not get a loan or deposit by an account payee cheque or account payee bank draft;

++ in the present case, the Tribunal has not returned any finding as to the second aspect. Without a clear finding on both the aspects referred to in the said Supreme Court decision, the Tribunal, in law, could not have concluded that the assessee had “reasonable cause” for its failure to accept the said amounts in compliance with section 269SS of the said Act. There is nothing on record to show that there were bona fide reasons for not accepting the said amounts through account payee cheques or account payee bank drafts. And, unless that is established, the shelter of section 273B is not available.