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Penalty issue in repayment of loans by cash
September, 23rd 2006
The same amount cannot represent both a loan and undisclosed income -------------------------------------------------------------------------------- The ITO should decide before hand whether the amount represented a loan or undisclosed income. If it is a loan, it is easier to levy penalty. -------------------------------------------------------------------------------- The tax law prohibits taking loans or deposits in cash if the amount exceeds Rs 20,000. Section 269SS and Sections 271 D and 271E were introduced in the Income-Tax Act, 1961 to curb the circulation of black money. Such payments or repayments of loans and deposits had to be by an account-payee cheque or account-payee bank draft drawn in the name of the person who made the loan or deposits. The courts had earlier held that there was a distinction between a loan and a deposit and the section did not apply to the repayment of a loan, but covered only the repayment of a deposit. The lacuna in the law was made good by the Finance Act 2003, which amended the Section to make it applicable to both loan and deposit. Earlier, failure to repay a deposit in the manner required by the law was punishable under Section 276E. From April 1, 1989, onwards, such contravention attracted penalty under Section 271E read with Section 273B. The provision for prosecution was done away with. Section 273B gives the income-tax officer (ITO) the discretion not to levy a penalty if he is satisfied that there was a reasonable cause for not complying with the legal provision. In most cases, the judiciary has inferred the reasonable cause in favour of the taxpayer and penalties levied for such violations have been few and far between. The constitutional validity of the provision was upheld by Supreme Court in a number of cases. Treatment of cash receipt Is it open to the I-T Department to treat the receipt of cash as undisclosed income and still go on with proceedings under Section 269SS read with Section 271D for the levy of penalty? The Delhi High Court examined this question in CIT vs Standard Brands Ltd (285 ITR 195). The company, Standard Brands Ltd, had received Rs 3 lakh in cash from D. S. Imports. According to the assessing officer (AO), the amount represented undisclosed income in the hands of the assessee, but the assessee contended it was a deposit made by D. S. Imports. Despite the Revenue taking the view that the amount was undisclosed income, penalty proceedings were initiated against the assessee for violation of Section 269SS, which provides that loans or deposits in excess of Rs 20,000 should not be received in cash. On appeal, it was held by the Income-Tax Appellate Tribunal (ITAT) that the addition of Rs 3 lakh as undisclosed income cannot be sustained under Chapter XIVB of the Act. It was open to the Department to take action for reopening the assessments under Section 147 of the Act. Penalty proceedings under Section 271D were pending. The Revenue took up the matter in appeal to the High Court. Dismissing the appeal, the Delhi High Court pointed out that the Revenue could not, on the one hand, contend that the Rs 3 lakh is undisclosed income in the hands of the assessee and, at the same time, seek to initiate proceedings against the assessee for violation of Section 269SS which deals with cash deposits or loans in excess of Rs 20,000. Having taken the stand that the income was undisclosed income in the hands of the assessee, the Revenue cannot resort to proceedings under Section 269SS read with Section 271D. Since the block assessment was not sustained, penal action under Section 271D may be permissible (if at all) only after regular assessments are made. Similar views It is strange that the Revenue chose to blow hot and cold on the same facts. The ITO should decide before hand whether the amount represented a loan or undisclosed income. If it is a loan, it is easier to levy penalty. The same amount cannot represent both a loan and undisclosed income. Several Benches of the ITAT have taken the same view. This is basic common sense. There is this case of a Chennai-based film star who claimed that she had taken a loan from a political bigwig running into lakhs of rupees. The Supreme Court ruling went against the film star (ADIT vs Shanthi 255 ITR 258 SC). It pointed out that the undue hardship of Section 271D providing for a penalty is substantially mitigated by the inclusion of Section 273B providing that if there was a genuine and bona fide transaction and the taxpayer could not get a loan or deposit by account-payee cheque or demand draft for some bona fide reason, the authority vested with the power to impose penalty has a discretionary power not to levy the penalty. T. C. A. Ramanujam (The author is a former Chief Commissioner of Income-Tax.)
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