Whether when assessee settles inter-corporate loan through journal entries and pays us balance sum by account payee cheque, such netting of accounts violates provisions of Sec 269T and thus attracts penalty u/s 271E - NO: HC

THE issue before the Bench is - Whether when assessee settles inter-corporate loan through journal entries and pays us balance sum by account payee cheque, such netting of accounts violates provisions of Sec 269T and thus attracts penalty u/s 271E. And the verdict goes against the Revenue.

Facts of the case

Assessee is a member of the National Stock Exchange and a Merchant Banker, registered with SEBI. Prior to 1st April 2002, the assessee had accepted a sum of Rs.4,29,04,722/- as and by way of loan/inter-corporate deposit from ‘ITI’ which was repayable during AY 2003-2004. Assessee transferred 1,99,300 shares of ‘R’ held by it to ‘ITI’ for an aggregate consideration of Rs.4,28,99,325/. Instead of repaying the loan / inter-corporate deposit to ‘ITI’ and receiving the sale price of the shares from ‘ITI’, both the parties agreed that the amount payable / receivable be setoff in the respective books of account by making journal entries and pay the balance by account payee cheque. Accordingly, after setting off of the mutual claim through journal entries, the balance amount was paid by the assessee.

In view of the objections raised in the Audit Report regarding repayment of loan / inter-corporate deposit otherwise than by an account payee cheque or draft, AO issued show cause notice as to why action should not be taken for violating provisions of section 269T. AO imposed penalty under section 271E on the ground that the assessee had repaid the loan / inter-corporate deposit to the extent of Rs.4,28,99,325/-in contravention of the provisions of Section 269T.

The CIT (A) confirmed the penalty but ITAT deleted the same following the decision of V N Parekh Securities Private Limited and Ketan V Parekh and held that the payment through journal entries did not fall within the ambit of Section 269SS or 269T of the Act and consequently no penalty could be levied either under Section 271D or Section 271E of the Act.

Revenue contended that since the language of Section 269T of the Act was clear and unambiguous, the Tribunal ought to have held that repayment of the loan / intercorporate deposit otherwise than by account payee cheque or demand draft was in violation of the provisions of Section 269T of the Act and, hence, the penalty imposed under Section 271E of the Act was justified.

Assessee contended that Section 269T of the Act had been enacted to curb the menace of giving false explanation of the unaccounted money found during the course of search and seizure. The bona fide transaction of repayment of loan or deposit by way of adjustment through book entries carried out in the ordinary course of business would not come within the mischief of the provisions of Section 269T of the Act. In the present case genuineness of the transactions entered into by the assessee with ‘ITI’ was not in doubt. No additions on account of the impugned transactions had been made in the regular assessment made u/s 143(3). Discharge of the debt in the nature of loan or deposit in a manner otherwise than by an outflow of funds would not be hit by the provisions of Section 269T. Instead of repaying the amount by account payee cheque / demand draft and receiving back the amount by way of demand draft / cheque, the parties as and by way of commercial prudence had settled the account by netting off the accounts and paid the balance by account payee cheque. If the contention of the Revenue was accepted, it would lead to absurdity because, by such interpretation not only mala fide transactions but even the genuine transactions would be affected. Set off of the claim / counterclaim otherwise than by account payee cheque or bank draft were legally permissible in commercial transactions as also in the accounting practice.

After hearing both the parties, the High Court held that,

++ Chapter XXB containing Sections 269SS to Section 269TT were introduced by the Income Tax (Second Amendment) Act 1981 with effect from 11th July 1981 with a view to counter the evasion of tax. The object is that the proliferation of black money poses a serious threat to the national economy and to counter that major economic evil, Chapter XXB has been introduced;

++ the obligation to repay the deposit by account payee cheque / bank draft for the entities specified in Section 269T would have to be construed as mandatory in view of the negative language used in the Section. Section 269T provides that none of the entities specified therein shall repay deposit otherwise than by the modes set out therein. The mandatory requirement of Section 269T is further fortified by Section 276E inserted along with Section 269T which provides that if a person referred to in Section 269T of the Act repays any deposit in contravention of Section 269T then such person shall be punishable with imprisonment for a period upto two years and also liable to fine equal to the amount of deposit. Thus, the negative language used in Section 269T as also the penal consequences provided in Section 276E for noncompliance of the procedure prescribed under Section 269T leave no manner of doubt that repayment of deposit in the manner prescribed under Section 269T is mandatory;

++ with effect from 1st April 1989, Section 276E dealing with the consequences on failure to comply with Section 269T has been omitted and Section 271E has been inserted which provides penalty for failure to comply with Section 269T of the Act. Section 269T has been substituted by Finance Act 2002 with effect from 1st June 2002 wherein the provision relating to repayment of deposit exceeding the prescribed limit by account payee cheque / draft has been extended to repayment of loans as well. Thus, with effect from 1st June 2002, it is mandatory u/s 269T of the Act for the persons specified therein to repay any loan / deposit together with interest, if any, exceeding the limits prescribed therein, by account payee cheque / bank draft and failure to do so is made liable for penalty under Section 271E of the Act;

++ the contention of bonafide transaction of repayment of loan / deposit by way of adjustment through book entries carried out in the ordinary course of business would not come within the mischief of Section 269T cannot be accepted, because, the section does not make any distinction between the bonafide and nonbonafide transactions and requires the entities specified therein not to make repayment of any loan / deposit together with the interest, if any otherwise than by an account payee cheque / bank draft if the amount of loan / deposit with interest if any exceeds the limits prescribed therein. The argument that only in cases where any loan or deposit is repaid by an outflow of funds, Section 269T provides for repayment by an account payee cheque / draft cannot be accepted because Section 269T neither refers to the repayment of loan / deposit by outflow of funds nor refers any of other permissible modes of repayment of loan / deposit, but merely puts an embargo on repayment of loan / deposit except by the modes specified therein. Therefore, where loan / deposit has been repaid by debiting the account through journal entries, it must be held that the assessee has contravened the provisions of Section 269T of the Act;

++ Under Section 269T it is mandatory for the persons specified therein to repay loan / deposit only by account payee cheque / draft if the amount of loan / deposit together with interest, if any, exceeds the limits prescribed therein. Noncompliance of the provisions of Section 269T renders the person liable for penalty under Section 271E and Section 273B provides that no penalty under Section 271E shall be imposed if reasonable cause is shown by the concerned person for failure to comply with the provisions of Section 269T of the Act. The argument that if Section 269T is construed literally, it would lead to absurdity cannot be accepted, because, repayment of loan / deposit by account payee cheque / bank draft is the most common mode of repaying the loan / deposit and making such common method as mandatory does not lead to any absurdity. No doubt, that in some cases genuine business constraints may necessitate repayment of loan / deposit by a mode other than the mode prescribed under Section 269T. To cater to the needs of exigencies in some genuine business constraints, the legislature has enacted Section 273B which provides that no penalty under Section 271E shall be imposed for contravention of Section 269T if reasonable cause for such contravention is shown;

++ the expression 'reasonable cause' used in Section 273B is not defined under the Act. Unlike the expression 'sufficient cause' used in Section 249(3), 253(5) and 260A(2A) of the Act, the legislature has used the expression 'reasonable cause' in Section 273B of the Act. A cause which is reasonable may not be a sufficient cause. Thus, the expression 'reasonable cause' would have wider connotation than the expression 'sufficient cause'. Therefore, the expression 'reasonable cause' in Section 273B for nonimposition of penalty under Section 271E would have to be construed liberally depending upon the facts of each case;

++ in the present case, the cause shown by the assessee for repayment of the loan / deposit otherwise than by accountpayee cheque / bank draft was on account of the fact that the assessee was liable to receive amount towards the sale price of the shares sold by the assessee to the person from whom loan / deposit was received by the assessee. It would have been an empty formality to repay the loan / deposit amount by accountpayee cheque / draft and receive back almost the same amount towards the sale price of the shares. 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. There is nothing on record to suggest that the amounts advanced by ‘ITI’ to the assessee represented the unaccounted money of the ‘ITI’ or the assessee. The fact that the assessee company belongs to the ‘K’ Group which is involved in the securities scam cannot be a ground for sustaining penalty imposed under Section 271E of the Act if reasonable cause is shown by the assessee for failing to comply with the provisions of Section 269T. It is not in dispute that settling the claims by making journal entries in the respective books is also one of the recognized modes of repaying loan / deposit. Therefore, in the facts of the present case, though the assessee has violated the provisions of Section 269T, the assessee has shown reasonable cause and, therefore, the decision of the Tribunal to delete the penalty imposed under Section 271E of the Act deserves acceptance. In the absence of any finding recorded in the assessment order or in the penalty order to the effect that the repayment of loan / deposit was not a bonafide transaction and was made with a view to evade tax, the cause shown by the assessee was a reasonable cause and, therefore, in view of Section 273B, no penalty u/s 271E could be imposed.