1 ITA No.4062/Del/2011
Asstt.Year: 2007-08
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `E' NEW DELHI
BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER
AND
SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER
ITA No. 4062/Del/2011
Assessment Year: 2007-08
NJP Hospitality Pvt. Ltd., vs Income Tax Officer,
SF 202, 2nd Floor, Ward 13(1),
V3S Mall, Laxmi Nagar C.R. Building,
District Centre, New Delhi. New Delhi.
(PAN: AACCN4544K)
(Appellant) (Respondent)
Appellant by: None
Respondent by: Shri R.S. Negi, Sr.DR
ORDER
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER
This appeal has been preferred by the assessee against the order of the
CIT(A)-XVI, New Delhi dated 28.04.2011 for AY 2007-08 confirming the
levy of penalty by the AO u/s 271E of the Income Tax Act(hereinafter
referred to as the Act).
2. The grounds of appeal read as under:-
"1. The ld. ACIT erred in confirming order of the ld.
ITO imposing a penalty of Rs.2,00,000/- under section
271E of the Income Tax Act and thereby dismissing the
appeal of the appellant.
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Asstt.Year: 2007-08
2. That the penalty of Rs.2,00,000/- imposed under sec.
271E of the Act is wholly illegal, unjustified and bad in
the eyes of law and liable to be deleted."
3. Briefly stated the facts of the case giving rise to this appeal are that
the assessee filed a return declaring loss of Rs.3,95,706/- and his assessment
was finalized u/s 143(3) of the Act at an income of Rs.3,84,698. During the
assessment, the AO observed that the assessee company has made a
repayment of loan of Rs.2 lakh in cash to one of the directors of assessee
company Shri Varun Agarwal, in contravention of the provisions of Section
269T of the Act. Consequently, the AO initiated penalty proceedings u/s
271E of the Act. A show cause notice was issued to the assessee by the AO
to furnish explanation regarding cash payment of Rs.2 lakh and the assessee
furnished its reply and submitted that:
"There is no loan given by the Company to Varun Sarup
Agarwal. During the year repayment of unsecured loan
to Sh. Varun Agarwal for RS.2 lacs in cash. There is
Current A/c in the name of Shri Varun Agarwal who from
time to time made payment for and behalf of the assessee
company as the assessee did not have its Bank Alc which
was opened on February 2007. Payment of RS.2 lacs was
part reimbursement of expenses incurred by Shri Varun
Agarwal for and on behalf of the Company. It was
submitted that the same cannot be treated as loan with
the meaning of Section 269SS and 269T. The assessing
Officer erred in treating reimbursement of Expenses
incurred by the Director of the company for and on
behalf of the Company paid in cash as repayment of loan
3 ITA No.4062/Del/2011
Asstt.Year: 2007-08
in contravention of the provision of Section 269T of the
Income Tax Act 1961."
4. After consideration of submissions and explanation offered by the
assessee, the AO noted that the assessee company was having substantial
funds in the form of sales of approximately Rs. 10 lakh right from
October 2006 to January 2007 and the same could be deposited in its
bank account, then repayment/reimbursement could be made by cheque
of Shri Varun Sarup Agarwal. The AO further noted that any amount
spent by any director on behalf of the assessee company is an unsecured
loan in the hands of assessee company and its repayment in cash is a
clear violation of the provisions of Section 269T of the Act. The AO
held that merely because a transaction is genuine (as contended by the
assessee), it cannot be taken out of the ambit of Section 271E. The AO
relying on the judgment of ITAT, Visak in the case of ACIT vs
Vinman Finance & Leasing Ltd. (ITAT,Visak-TM) 115 ITD 115 held
that the assessee company violated Section 269T of the Act and imposed
a penalty of Rs. 2 lakh on the assessee u/s 271E of the Act.
5. The aggrieved assessee filed an appeal before the CIT(A) which
was dismissed through impugned order. The operative part of impugned
order is being reproduced below:-
4 ITA No.4062/Del/2011
Asstt.Year: 2007-08
"In view of above facts and judicial pronouncements, the
AR of the appellant company prayed that no penalty u/s
271E is leviable and the penalty of Rs. 2 lacs levied u/s
271E of the Act deserves to be deleted.
2.2 I have considered the facts of the case and the
submissions of the AR of the appellant. It is an admitted
fact that Rs.2,00,000/- paid by the appellant to its
director in cash in February,2007 represented return of
the amount paid by the director on behalf of the
appellant company towards its expenses. Clearly, any
amount paid by one person on behalf of another person
would be a loan from the former to the latter because a
loan or deposit has been defined in explanation to section
269T to mean any loan or deposit of money which is
repayable after notice or repayable after a period and
the expenses incurred by the director on behalf of the
appellant company were repayable/had to be reimbursed
by the appellant. When the appellant company returned
this amount to its director, the return would constitute
return of loan given by the director to the appellant
company. The expenses incurred by the director on
behalf of the appellant cannot be termed as transactions
in the current account of the appellant with the director,
as contended. It is also observed that the appellant
company was incorporated in September,2006 and it
took five months to open its bank account in
February,2007. Not only this, it has been submitted that
the bank account was opened on February,2007 with
HDFC Bank while cash was deposited in the bank
account of Shri Yarun Agarwal, Director on 9th
February,2007 to enable cheque towards rent payable by
the appellant company to be cleared on l0th
February,2007. It is not clear as to why, once the
account of the company was opened on 7th
Feburary,2007, cash was not deposited in this account
and cheque for rent issued from the account of the
company, instead of giving cash to the director who then
made payment on behalf of the appellant company.
5 ITA No.4062/Del/2011
Asstt.Year: 2007-08
Therefore, it would not be correct to say that the payment
of cash of Rs.2,00,000/- by the appellant company to its
director was necessitated by any urgent requirement. The
case laws relied upon by the AR of the appellant are not
applicable to the facts of the appellant's case. For
instance in the cases of Canara Housing Development
Company vs. Addl. CIT, CIT vs. Idhayam Publications
Ltd., CIT vs. Shri Ambica Flour Mills Corporation & CIT
vs. Sriniwas Joshi (supra), the issue was whether current
account transactions with sister concerns/urgent
payments to sister concerns would fall within the
meaning of loans or advances for the purpose of section
269SS/269T. As already discussed above, in the case of
the appellant the expenses incurred by the director on
behalf of the appellant company were loan by the
director to the appellant and not current account
transactions. Neither was there any urgency to return the
amount in cash to the director. In the case of Narayan
Ram Chhaba vs. ITO (supra), the assessee was an
agriculturist who took cash loans from his wife and HUF
and in the case of CIT vs Kasi Corporation &
Anr.(supra), the assessee was in the business of
accepting deposits from the public and in some of the
cases repaid them in cash on account of closure of
banking hours, payments to lady members who did not
have bank accounts, etc. The appellant is not an
agriculturist and has not made the repayment of loan in
cash for any such urgent reasons and so the facts of the
appellant's case are totally different. As per the other
judicial pronouncements relied upon the appellant,
penalty u/s 2710/271 E is not attracted when there is
reasonable cause for giving or returning loans in cash or
the appellant holds a bona-fide belief that such payments
can be made. In the case of the appellant it cannot be
said that there was any reasonable cause for return of
the loan in cash, since as discussed earlier, the bank
account of the appellant had already opened by the time
the return of loan was made. The Addl. CIT has
discussed in the penalty order that merely because a
transaction is genuine (as contended by an assessee) it
6 ITA No.4062/Del/2011
Asstt.Year: 2007-08
cannot be taken out of the ambit of Section 271 E as held
in ACIT vs. Vinman Finance & Leasing Ltd. (IT AT,
Visak - JM) 115 ITD 115. I am, therefore, of the view that
there was no reasonable cause for the appellant to return
the loan of Rs.2,OO,OOO/- taken by it from its director
in cash and accordingly the penalty ofRs.2,OO,OOO/-
levied by the Addl. CIT u/s 271E is upheld. Grounds Nos.
1 to 3 of the appeal are dismissed."
Hence, this second appeal by the assessee before this Tribunal.
6. We have heard rival submissions of both the parties in the light of
material on record before us and carefully considered the same.
7. The assessee's representative submitted that the company did not have
a bank account till 7.2.2007 and on 1.2.2007 the director of the company
Shri Varun Sarup Agarwal issued cheque of Rs.1,50,000 for payment of rent
to M/s Gahoi Buildwell on behalf of assessee company from his bank
account with ICICI Bank but there was not sufficient balance in the account,
therefore, the appellant company withdrew cash of Rs.2 lakh out of cash in
hand and deposited in the bank account of Shri Varun Sarup Agarwal on
9.2.2007. After that, the cheque of Rs.1,50,000 dated 1.2.2007 issued for
payment of rent to M/s Gahoi Buildwell Ltd. was cleared on 1.2.2007 and
then the remaining amount of Rs.50,000 was transferred to company's bank
account on 10.2.2007. He further submitted that the payment of rent was
made by Shri Varun Sarup Agarwal (director of the assessee company) by
issuing a cheque from his bank account and if cash amount could not be
7 ITA No.4062/Del/2011
Asstt.Year: 2007-08
deposited, the cheque could be dishonored. Therefore, in these
circumstances, cash payment of Rs. 2 lakh was made to Shri Varun Sarup
Agarwal enabling him to ensure clearance of cheque pertaining to payment
of rent to the landlord M/s M/s Gahoi Buildwell Ltd.
8. The asessee's representative relying on the judgment of Hon'ble
Supreme Court in the case of Hindustan Steel Ltd. Vs State of Orissa
reported as (1972) 83 ITR 26(SC) submitted that the penalty will not be
imposed merely because it is lawful to do so because an order of imposing
penalty for failure to carry out statutory obligation is the result of a quasi-
criminal proceeding and penalty should not be imposed unless the party
under obligation acted deliberately in defiance of law or was guilty of
conduct or acted dishonestly, or acted in conscious disregard of its
obligation. Relying on the submissions made before the CIT(A), the AR
contended that the authorities below decided the issue in a mechanical
manner without considering the fact that the cash payment was made by the
assessee company to its director who used his personal resources to save the
goodwill of the assessee company. The authorities below also ignored the
fact that the assessee company and its director Shri Varun Sarup Agarwal
acted in good conscience, honestly and without any intention to violate the
statutory provisions of the Act.
8 ITA No.4062/Del/2011
Asstt.Year: 2007-08
9. The ld. DR supported the impugned order, inter alia the order of the
AO passed u/s 271E of the Act and submitted that the assessee company
made payment of Rs.2 lakh on 9th February, 2007 as
repayment/reimbursement of rent and other expenses incurred by the
director Shri Varun Sarup Agarwal on behalf of the assessee company. As
the assessee company opened its bank account on 7.2.2007, there is no
reasonable cause to make cash payment of Rs. 2 lakh to its director on
9.2.2007. Therefore, the assessee company clearly violated the provisions of
Section 269 of the Act. Accordingly, penalty levied u/s 271E of the Act was
proper and justified in the facts and circumstances of the case.
10. On perusal of paper book and citations relied by the authorities
below, we observe that in the case of Hindustan Steel Ltd. Vs State of
Orissa reported as 83 ITR 26, the Hon'ble Apex Court provided a
guideline to the courts and quasi-judicial authorities which is being
reproduced as under:-
"An order imposing penalty for failure to carry out
a statutory obligation is the result of a quasi-criminal
proceeding, and penalty will not ordinarily be imposed
unless the party obliged, either acted deliberately in
defiance of law or was guilty of conduct contumacious or
dishonest, or acted in conscious disregard of its
obligation. Penalty will not also be imposed merely
because it is lawful to do so. Whether penalty should be
imposed for failure to perform a statutory obligation is a
matter of discretion of the authority to be exercised
9 ITA No.4062/Del/2011
Asstt.Year: 2007-08
judicially and on a consideration of all the relevant
circumstances. Even if a minimum penalty is prescribed,
the authority competent to impose the penalty will be
justified in refusing to impose penalty, when there is a
technical or venial breach of the provisions of the Act or
where the breach flows from a bona fide belief that the
offender is not liable to act in the manner prescribed by
the statute."
11. In the case in hand, it is not in dispute that Shri Varun Sarup
Agarwal is a director of assessee company who made payment of rent
through cheque from his bank account with ICICI Bank. His bank
statement from 1.10.2006 to 1.3.2007 available on paper book page nos.
23 and 24 reveals that cash of Rs. 2 lakh was deposited on 9.2.2007 and a
cheque of Rs.1,50,000 was cleared to Gahoi Buildwell Ltd. on 10.2.2007
and remaining amount of Rs.50,000 was returned back to the assessee
company through cheque no. 217337 which was credited to the
assessee's account on 17.2.2007.
12. In view of above, we observe that it was necessary to withdraw
cash from sales proceeds and to deposit it in the bank account of Shri
Varun Sarup Agarwal as the transfer of money by cheque could take time
and if cheque was issued to Shri Varun Sarup Agarwal in this regard,
definitely some time may be consumed for banking transaction for
routing money from the assessee's bank account to Shri Varun Sarup
10 ITA No.4062/Del/2011
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Agarwal's bank account and this would have resulted in dishonoring of
cheque issued by Shri Varun Sarup Agarwal on behalf of the assessee
company for payment of rent.
13. We have observed that the Assessing Officer relied on the judgment
of ITAT, Visac, Third Member Bench in the case of Vinman Finance
(supra) wherein it was held that:-
"10. However, cancellation of penalty on technical
grounds is not justified. In my considered opinion,
penalty proceedings under section 271E of the Act need
not be initiated during the course of assessment
proceedings as could be seen from the plain language of
the provisions of section 275(1)( c) of the Act. Similar
view taken in the case of Dr. D. Siva Sankara Rao
(supra). Similarly, by taking analogy from the
observations of the Apex Court in the case of Similarly,
by taking analogy from the observations of the apex
Court in the case of Attar Singh Gurmukh Singh vs. ITO
(1991) 97 CTR (SC) 251 : (1991) 191 ITR 667 (SC), the
provisions of ss. 269SS and 269T of the Act having been
intended to regulate business transactions and to prevent
the use of unaccounted monies or to reduce chances of
use of black money for business transactions, even
genuine transactions cannot be taken out of the sweep of
the provisions of the Act if the payments are not routed
through the specified channels unless and until
exceptional circumstances are proved. While considering
the provisions of s. 40A(3), the Court observed as under :
"...The terms of s. 40A(3) are not absolute.
Considerations of business expediency and other relevant
factors are not excluded. Genuine and bona fide
transactions are not taken out of the sweep of the section.
It is open to the assessee to furnish to the satisfaction of
the AO the circumstances under which the payment in the
11 ITA No.4062/Del/2011
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manner prescribed in s. 40A(3) was not practicable or
would have caused genuine difficulty to the payee."
(Emphasis, italicized in print, supplied)
In the light of the principle laid down by the apex Court
supra, merely because the transaction is genuine, it
cannot be taken out of the sweep of s. 269T/271E of the
Act."
14. In the case of Vinman Finance (supra), the facts were that the
assessee was a financial leasing company. During the relevant
assessment year, it accepted certain deposits in cash and also repaid
certain amounts in cash in excess of Rs.20,000. The Assessing Officer
opined that out of total repayments, a part of amount could be said to
have been paid in cash due to exceptional circumstances with but regard
to the balance amount, the Assessing Officer viewed that the depositors
resided in urban areas where banking facilities were available and
therefore there was no reasonable cause for violation of the provisions of
Section 269T of the Act. Accordingly, the Assessing Officer levied
penalty u/s 271E of the Act.
15. In this case, on appeal, the Commissioner of Income Tax(A)
observed that all the depositors were with village and agricultural
background, who lacked banking facility and, thus, assessee, could not
forcibly repay the amount by cheques Accordingly, the Commissioner of
12 ITA No.4062/Del/2011
Asstt.Year: 2007-08
Income Tax(A) taking the view that payments made by cash were
supported by reasonable cause, cancelled the penalty levied by the
Assessing Officer. On revenue's appeal before ITAT, Vizac in view of
difference of opinion between the Judicial Member and the Accountant
Member, the matter was referred to the Third Member, who decided the
issued in favour of the assessee with the following observations:-
"Under the circumstances, I agree with the
conclusions of the learned Judicial Member that in view
of the claim of ignorance of provisions of law coupled
with the bona fide reasons for making payment in cash,
no case was made out for levy of penalty since the
explanation constitutes a reasonable cause within the
meaning of s. 273B of the Act. In other words, the penalty
imposed under s. 271E is not justified and the cross-
objections filed by the assessee deserve to be allowed."
16. The facts and circumstances of this case are not identical with the
present case as the appeal in hand is related to the cash transaction of a
company with its director.
17. The assessee's representative relied on the judgment of ITAT
Bangalore Bench in the case of Canara Housing Development Co. vs
ACIT (2010) 127 TTJ (Bang) 446 wherein it was held as under:-
"13. Much of the arguments advanced before were on
the question whether transactions between sister
concerns in cash are hit by s. 269T. The section does not
expressly confer any exemption for transactions between
connected parties or sister concerns. A perusal of the
13 ITA No.4062/Del/2011
Asstt.Year: 2007-08
decided cases on this point shows that there is a cleavage
of judicial opinion. The assessee has relied on the order
of the Cochin Bench of the Tribunal in the case of
Muthoot M. George Brothers (supra) in which it was
held that cash transactions between sister concerns are
not affected by the section. However, the Mumbai Bench
of the Tribunal in the case of Karnataka Ginning &
Pressing Factory vs Jt.d Commissioner of Income
Tax(2001) 72 TTJ (Mumbai) 307: (2001) 77 ITD 478
(Mumbai) to which one of us was party (the Vice
President), has held that there is no exemption from s.
269T even if the parties are connected with each other or
they are sister concerns. In the case of Supreme
Investments vs Jt.CIT in ITA NO.76/Bang/2006 dt. 3rd
Aug. 2007, for the asstt.yr. 2001-02, the Bangalore
Bench did not record a definite conclusion that
transactions between sister concerns are not hit by s.
269T, though the penalty was cancelled on other
grounds. For the limited purpose of imposing penalty
under s. 271E, it is perhaps enough to see whether the
assessee could have bona fide belief that transactions
with sister concerns involving cash were not hit by s.
269T. Since there is a difference of opinion on this point
between two orders of the Tribunal, the assessee was
perhaps justified in believing that it is stated that the
assessee's bona fide belief constitutes reasonable cause
for the violation of s. 269T r/w s. 273B. Similarly, if the
assessee had bona fide belief that cash transactions in a
current account are not hit by s. 269T, which belief is
vindicated by the judgment of the Madras High Court,
cited supra, even that can be considered as reasonable
cause under s. 273B and on that ground also the penalty
is liable to be cancelled. The judgment of the Hon'ble
Karnataka High Court in H.S. Ananthasubbaraya
(supra) also supports the plea of the assessee. In this
connection, we may refer to the judgment of the
Allahabad High Court in Chaubey Overseas Corpn. vs
Commissioner of Income Tax (2008) 218 CTR (All) 494:
(2008) 303 ITR 9(All), in which it was held that even a
trade deposit was included within the purview of the
14 ITA No.4062/Del/2011
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definition of the deposit in s. 269T. This decision was
cited by the ld. Commissioner of Income Tax-DR. In the
present case, however, we have already referred to the
term in the MoU dt. 5th Oct. 2004 that the arrangement
entered into between the assessee and Assessing Officer
shall not be construed as resulting in any business
arrangement between them. Thus, the monies cannot be
said to represent any business or trade deposits so that
they can be included in the definition of "loans or
deposits" in the section. Thus, this judgment is of no
assistance to the Department on the facts of the present
case.
14. So far as AE is concerned, Satish Pai who is a
partner in the assessee firm is also a partner in AE. In
the assessee's reply dt. 23rd May 2008 to the ACIT, it was
explained that the amount of Rs. 12 lakh was drawn by
Satish Pai in cash for making investment in a property in
the name of AE and thus it was nothing but drawings by
a partner. The ledger account of AE in the assessee's
books is at p. 85 of the paper book. The assessee's claim
has not been specifically refuted in the orders of the
Departmental authorities. In fact, it appears to us that
the cash repayment relating to AE has not been
specifically considered at all in their orders. Since the
assessee's claim that it represents drawings by a partner.
The ledger account of AE in the assessee's books is at p.
85 of the paper book. The assessee's claim has not been
specifically refuted in the orders of the Departmental
authorities. In fact, it appears to us that the cash
repayment relating to AE has not been specifically
considered at all in their orders. Since the assessee's
claim that it represents drawings by a partner for making
investment in a property in the name of AE has not been
found incorrect, there is no justification for levy of any
penalty for violation of s. 269T."
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In view of above, we hold that the director of assessee company Mr. Varun
Sarup Agarwal issued a cheque on 1.2.2007 on behalf of the assessee
company for payment of rent and assessee company opened its account after
issuance of this cheque. The amount of Rs. 2 lakh was deposited in the bank
account of Mr. Varun Sarup Agarwal with a bona fide intention to prevent
dishonoring of the cheque issued to the landlord of the assessee company
and the remaining amount was returned back to the assessee company's
bank account. In the facts and circumstances of the case, it is doubtful
whether the amount received by director with an intention to deposit it to the
bank account with a bona fide belief that this would save the prestige of the
company can be characterized as a loan or a deposit within the meaning of
Section 269T of the Act. Although Section 269T of the Act does not
expressly confer any exemption from transaction between connected parties
or sister concern but a perusal of the decided cases on this point shows that
there is a cleavage of judicial opinion. For the limited purpose of imposing
penalty u/s 271E of the Act, it is perhaps enough to see whether the assessee
could have bona fide belief that the transaction with connected parties or
sister concerns involving cash of more than Rs.20,000 would not hit by
Section 269T of the Act. The assessee company was perhaps justified in
believing that it is entitled to rely on the position which was in its favour.
16 ITA No.4062/Del/2011
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Thus, it may be stated that the assessee company gave Rs. 2 lakh to its
director with a bona fide belief that an urgency to ensure honoring of the
cheque issued to the landlord constitutes a reasonable cause u/s 273B of the
Act where no penalty shall be imposable on the assessee for any failure
referred to in the said provisions inter alia Section 269T of the Act.
18. In the case of Commissioner of Income Tax vs Idhayam
Publications Ltd. (2006) 285 ITR 221 (Madras), their lordships
dismissing the appeal of the revenue held that the transaction between the
assessee and the director was not a loan or deposit and it was only a current
account in nature and no interest was being charged for the transactions
made under the account, the Hon'ble High Court confirmed the order of the
Tribunal which deleted the penalty.
19. In view of above case, if we evaluate the impugned transaction in this
case, then from the ledger account of Shri Varun Sarup Agarwal with the
assessee company available at page 17 of the paper book, it reveals that
there was a current account between the assessee company and its director
and no interest was being charged for the transactions and the same could
not be termed either as a loan or a deposit with the assessee company.
20. Accordingly, we finally hold that the penalty levied by the Assessing
Officer and confirmed by the Commissioner of Income Tax(A) was not
17 ITA No.4062/Del/2011
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based on justified and reasonable grounds. The Assessing Officer
misinterpreted the ratio of the judgment of the ITAT, Visac in the case of
Vinman Finance (supra) and in the peculiar facts and circumstances of the
case wherein the impugned cash payment was made to the director was
under bona fide belief that it was a transaction under a current account
between the company and its director which was bearing no interest on the
transactions. Therefore, the penalty levied u/s 269T r/w Section 271E of the
Act cannot be sustained and impugned order in this regard deserves to be set
aside and we set aside the same.
21. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 19.9.2012.
Sd/- Sd/-
(J.SUDHAKAR REDDY) (CHANDRAMOHAN GARG)
ACCOUNTANT MEMBER JUDICIAL MEMBER
DT. 19th SEPTEMBER, 2012
`GS'
Copy forwarded to:-
1. Appellant
2. Respondent
3. Commissioner of Income Tax(A)
4. CIT. 5. DR
By Order
Asstt. Registrar
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