2015 (2) TMI 987 - AT - Income Tax

ITAT Upholds CIT(A)'s Decisions on Penalty Deletion for Section Violations

Assistant Commissioner of Income Tax Circle-33 (1), New Delhi Versus M/s. Vardaan Fashion, Shri Inderpal Singh Wadhawan

The ITAT upheld the CIT(A)'s decisions to delete penalties under Sections 271D and 271E for violations of Sections 269SS and 269T. The Tribunal ruled that ... Penalty u/s 271D - violation of provisions of section 269SS - CIT(A) deleted penalty levy - Held that:- The CIT(A) has clearly recorded the finding that there was the business transaction between the assessee firm and M/s Rups Craft Inc. and all the transactions with the said party were business transactions only and there was no transaction of loan or deposit. It was also observed that in fact there was no cash payment. On the other hand, the payment of ₹ 15,45,000/- was made by account payee cheque No.57308 to M/s Rups Craft Inc. by Shri Inderpal Singh Wadhawan, partner of the firm and consequently, the entry was passed in the assessee’s books of account. Therefore, there was no cash transaction. Both these findings recorded by the CIT(A) remained uncontroverted before us. We, therefore, find no justification to interfere with the order of learned CIT(A) in this regard. The same is sustained and the appeal of the Revenue is dismissed. - Decided in favour of assessee. Penalty u/s 271E - violation of provisions of section 269T - CIT(A) deleted penalty as partner and partnership firm is one and the same person in the eyes of law and provision of section 269T are not applicable on the transaction entered by the partner with the firm - Held that:- All the payments were made by M/s Vardaan Fashion, a partnership firm in which assessee is a partner. All the payments were made by account payee cheque and in the assessee’s books of account, there was only a journal entry (book entry), thus, the provisions of Section 269SS/269T cannot be said to have been violated. The factual finding recorded by the CIT(A) that the payment was for share application money has not been controverted by the Revenue before us. Therefore, the same is accepted and we have no hesitation in holding that payment for allotment of shares as share application money cannot be said to be repayment of loan or advance so as to violate provisions of Section 269T. - Decided in favour of assessee. Penalty u/s 271D - violation of provisions of section 269SS - Held that:- The acceptance of the cash by the husband from his wife cannot be said to be taking of the loan or advance in strict sense of Section 269SS. We, therefore, find no infirmity in the order of learned CIT(A) wherein he cancelled the penalty levied under Section 271D for the acceptance of cash by the assessee from his wife. We, therefore, uphold the order of learned CIT(A) and dismiss the appeal filed by the Revenue. - Decided in favour of assessee. Issues Involved:1. Deletion of Penalty under Section 271D for Violation of Section 269SS.2. Deletion of Penalty under Section 271E for Violation of Section 269T.3. Applicability of Section 269SS and Section 269T to Journal Entries.4. Transactions between Partners and Partnership Firm.5. Transactions involving Pay Orders.6. Transactions between Family Members.Detailed Analysis:1. Deletion of Penalty under Section 271D for Violation of Section 269SS:The Revenue appealed against the deletion of penalties levied under Section 271D for violations of Section 269SS, which mandates that loans or deposits must be accepted by account payee cheque or bank draft. The Assessing Officer (AO) had noted that the assessee accepted loans or deposits amounting to Rs. 5,85,70,875/- otherwise than by account payee cheque or draft. The CIT(A) deleted the penalty, and the ITAT upheld this decision, noting that the credit entries in the assessee's books were journal entries and not actual monetary transactions. The Tribunal cited various judicial precedents, including CIT Vs. Worldwide Township Projects Ltd. and CIT Vs. National Clothing Co., which held that Section 269SS does not apply to journal entries.2. Deletion of Penalty under Section 271E for Violation of Section 269T:The Revenue also appealed against the deletion of penalties under Section 271E for violations of Section 269T, which mandates that loans or deposits must be repaid by account payee cheque or bank draft. The AO had levied penalties for repayments amounting to Rs. 3,26,97,283/-. The CIT(A) deleted the penalties, and the ITAT upheld this decision, noting that many of the repayments were made through journal entries or pay orders marked as 'only,' making them non-negotiable and equivalent to account payee instruments. The Tribunal cited the case of M/s Devlok Hatcheries Vs. ITO to support its decision.3. Applicability of Section 269SS and Section 269T to Journal Entries:The Tribunal extensively discussed whether journal entries constitute a violation of Sections 269SS and 269T. It concluded that journal entries do not involve actual receipt or repayment of money and thus do not fall under the purview of these sections. This position was supported by the Hon'ble Delhi High Court in Noida Toll Bridge Co. Ltd. and Worldwide Township Projects Ltd., which held that journal entries are outside the ambit of Sections 269SS and 269T.4. Transactions between Partners and Partnership Firm:The Tribunal addressed whether transactions between a partner and a partnership firm could be considered loans or deposits under Sections 269SS and 269T. Citing CIT Vs. Lokhpat Film Exchange (Cinema) and Shrepak Enterprises Vs. DCIT, the Tribunal held that a firm and its partners are not distinct persons under general law, and thus, contributions by a partner to a firm cannot be considered loans or deposits. Consequently, penalties under Sections 271D and 271E were not applicable.5. Transactions involving Pay Orders:The Tribunal examined whether payments made through pay orders marked as 'only' (non-negotiable) could be considered as violations of Sections 269SS and 269T. It concluded that such pay orders are equivalent to account payee cheques or drafts. This was supported by the ITAT, Lucknow Bench in M/s Devlok Hatcheries Vs. ITO, which held that pay orders marked as 'only' serve the same purpose as account payee cheques.6. Transactions between Family Members:The Tribunal considered whether transactions between family members, specifically between the assessee and his wife, could attract penalties under Sections 269SS and 269T. It referred to ITO Vs. Tarlochan Singh and CIT Vs. Sunil Kumar Goel, which held that family transactions, especially those disclosed in accounts and without tax implications, establish 'reasonable cause' under Section 273B, thereby exempting them from penalties. The Tribunal upheld the CIT(A)'s decision to delete the penalties, noting the bona fide intention behind the transactions.Conclusion:The ITAT upheld the CIT(A)'s decisions to delete the penalties levied under Sections 271D and 271E, finding no violations of Sections 269SS and 269T in the context of journal entries, transactions between partners and firms, transactions involving non-negotiable pay orders, and family transactions. The appeals by the Revenue were dismissed.