2010 (2) TMI 708 - AT - Income Tax

Cooperative bank wins appeal, penalties deleted for Sections 271D and 271E violations.

The Citizen Co-operative Society Ltd. Versus Addl. CIT

The Tribunal allowed all four appeals of the assessee, concluding that penalties under Sections 271D and 271E for the assessment years 2006-07 and 2007-08 ... Application of Section 269SS or 269T to the co-operative society - Penalty for contravention - reasonable cause - assessee is a multi state Co-operative Society engaged in the activity of accepting deposits from its members and redeploying the funds by way of advancing loans to the members and investing surplus funds - Held that:- provisions of section 269SS and 269T are applicable to co-operative society. Penalty u/s 271D and 271E - reasonable cause - Held that: - In levying the penalty, u/s 271D or 271E one has to see the existence of reasonable causes. The word 'reasonable cause' has not been defined under the Act, but they could receive the same interpretation which is given to the expression 'sufficient cause'. Therefore, in the context of penalty provisions, the words 'reasonable cause' could mean a cause which beyond the control of the assessee. - there should be findings in the assessment order that the transactions made by the assessee in breach of provisions of Sec.269SS or 269T were not a genuine transaction.The expression 'reasonable cause' has to be considered pragmatically and as it is transactions are openly done, to meet the exigencies of business, it can be said to constitute 'reasonable cause'. The bona fide business of transaction cannot be considered for levying the penalty u/s 271D or 271E. More so, the assessee has been carrying on the banking business and it is having bona fide belief that provision of sec.269SS/269T is not applicable to the assessee case and same is coupled with genuineness of the transaction constitute a reasonable cause and in such case the default on the part of the assessee is merely of a technical or venial nature and no penalty be levied. Issues Involved:1. Erroneous Order of CIT(A)2. Applicability of Sections 269SS and 269T of the IT Act3. Allegation of Facilitating Unaccounted Money4. Cooperative Bank Status and Banking Regulation Act Applicability5. Levy of Penalty under Sections 271D and 271E6. Mutuality Principle and Business Activity of Assessee7. Reasonable Cause for Violation of Sections 269SS and 269TDetailed Analysis:1. Erroneous Order of CIT(A):The assessee contended that the CIT(A) erred both on facts and in law. The Tribunal examined the grounds and concluded that the CIT(A) did not consider the assessee's status as a cooperative bank under the Multi-State Cooperative Societies Act, 2002, and the Banking Regulation Act.2. Applicability of Sections 269SS and 269T of the IT Act:The Tribunal analyzed whether Sections 269SS and 269T, which prohibit cash transactions above Rs. 20,000, applied to the assessee. The assessee argued that it was a cooperative bank and thus exempt under these sections. The Tribunal noted that the assessee was registered under the Multi-State Cooperative Societies Act and engaged in banking activities, accepting deposits from and making loans to its members.3. Allegation of Facilitating Unaccounted Money:The CIT(A) upheld the assessing officer's view that the assessee facilitated deposits and repayments of unaccounted money. The Tribunal found that the assessee recorded every receipt and payment, and the assessing officer did not find any omissions. The Tribunal emphasized that the assessee was under the bona fide belief that it was exempt from Sections 269SS and 269T due to its cooperative bank status.4. Cooperative Bank Status and Banking Regulation Act Applicability:The Tribunal examined the assessee's claim of being a cooperative bank under the Banking Regulation Act. The assessee argued that it was governed by the Banking Regulation Act and thus exempt from Sections 269SS and 269T. The Tribunal noted that the assessee had applied for a banking license from the Reserve Bank of India (RBI) and was awaiting approval. The Tribunal also considered the Marathe Committee report, which allowed primary credit societies to carry on banking business until a license was granted or refused by the RBI.5. Levy of Penalty under Sections 271D and 271E:The Tribunal analyzed the penalties levied under Sections 271D and 271E for violating Sections 269SS and 269T. The Tribunal found that the assessee had a bona fide belief that it was not subject to these sections due to its cooperative bank status. The Tribunal emphasized that the transactions were genuine and recorded in the assessee's books, and there was no intention to evade tax.6. Mutuality Principle and Business Activity of Assessee:The Tribunal examined the principle of mutuality, where contributors to a common fund are also the beneficiaries. The Tribunal found that the assessee's activities were for the mutual benefit of its members, who deposited money and received loans. The Tribunal cited several judgments supporting the mutuality principle, concluding that the assessee's transactions did not constitute loans or deposits under Sections 269SS and 269T.7. Reasonable Cause for Violation of Sections 269SS and 269T:The Tribunal considered whether there was a reasonable cause for the assessee's violation of Sections 269SS and 269T. The Tribunal found that the assessee had a bona fide belief that it was exempt due to its cooperative bank status and that the transactions were genuine and recorded. The Tribunal concluded that the breach was technical and venial, and the penalties should not be imposed.Conclusion:The Tribunal deleted the penalties levied under Sections 271D and 271E for the assessment years 2006-07 and 2007-08, concluding that the assessee had a reasonable cause for the violations and that the transactions were genuine and for the mutual benefit of its members. All four appeals of the assessee were allowed.