2007 (1) TMI 165 - HC - Income Tax

Court rules firm-partner transactions not subject to penalties under Sections 271D & 271E.

COMMISSIONER OF INCOME-TAX Versus LOKHPAT FILM EXCHANGE (CINEMA)

The court held that transactions between an assessee firm and its partners, characterized as deposits, were not subject to penalties under Sections 271 D ... Deposits from partners - violation of Sections 269SS and 269T - penalty u/s 271D & 271E respectively for receiving the deposit in cash and payment in cash – assessee plea is that firm is accepting cash from partners in belief that firm is not different from them - assessee has acted bona fide and his plea that inter se transactions between the partners and the firm are not governed by the provisions of Section 269 SS and 269T was reasonable explanation – penalty not justified Issues:Penalty under Section 271-B and 271-E for transactions between the assessee firm and its partners described as deposits from the partners.Analysis:The judgment addresses two separate orders passed by the Assessing Officer levying penalties under Sections 271-B and 271-E. These penalties were imposed concerning transactions between the assessee firm and its partners, specifically deposits from the partners. The Assessing Officer considered these transactions to be intra-party transactions of deposit not made by cheque or bank draft, thus invoking the provisions of Sections 266 SS and 267 T. Penalties were imposed under Sections 271 D and 271 E for receiving the deposit in cash and making payments in cash, respectively.The assessee contended that since the partners and the firm are not independent of each other and the firm is not a juristic person, the transactions should not be considered intra-personal but rather for the purpose of conducting the partners' business. Despite this argument, the Assessing Officer rejected the explanation and imposed penalties under Sections 271 D and 271 E. However, the CIT (Appeals) did not sustain these penalties.The Tribunal, drawing on a precedent in CIT, Madras Vs. R.M. Chidambaram Pillai, held that for the purpose of Sections 269 SS and 269 T, the firm and partners cannot be viewed as separate entities. Based on this reasoning, the penalties were deleted by the Tribunal. The judgment further discusses the mitigating provision under Section 273B, which exempts penalties if the assessee can establish a reasonable cause for non-compliance with Sections 269 SS and 269 T.Considering the Supreme Court's decision and the general provisions of the Partnership Act, which do not recognize a partnership firm as a juristic person, the court found that the assessee had acted bona fide. It was concluded that the inter-se transactions between the partners and the firm were not governed by Sections 269 SS and 269 T. Therefore, the court held that the assessee was not liable to be penalized based on the facts presented by the Assessing Officer and the Tribunal. Consequently, the court upheld the Tribunal's decision to set aside the penalties under Sections 271 D and 271 E, leading to the dismissal of the appeals with no order as to costs.