2023 (9) TMI 1018 - AT - Income Tax

Tribunal quashes enhanced penalty for loan conversion, citing jurisdictional limits.

The Tribunal held that the CIT(A) exceeded jurisdiction by enhancing the penalty under Section 271E based on the genuineness of loans from earlier years. ... Penalty proceedings u/s. 271E - loan take by erstwhile amalgamating company as accommodation entries - conversion of loan into redeemable convertible bonds and therefore, it was observed that the repayment of loan is other than the modes prescribed u/s. 269T - edifice for levy of penalty is based on reasoning that earlier loan take by erstwhile amalgamating company who had taken loan from very same lender companies which was found to be involved in some kind of accommodation entries are bogus or non-genuine - As per revenue since these loans were bogus, therefore, conversion of this loan into convertible debentures in this year should be subjected to levy of penalty HELD THAT:- It is not a case that any violation on account of section 269T has been found in the cases of those erstwhile companies has been found. What is being sought to be added in the hands of the assessee company is addition of cash credit u/s 68 on account of loans taken in the earlier years by the erstwhile amalgamating companies, in the garb of penalty u/s. 271E for converting bogus loan into redeemable bonds in this year. If loan taken in earlier years itself is being treated as bogus or non-genuine, which according to CIT (A) was liable to be taxed as non-genuine, then how penalty is leviable u/s. 271E in this year when it is being treated as repaid in the opinion of CIT (A). Again the question is how a loan taken in earlier years by erstwhile companies which have been amalgamated in the assessee after this assessment year, can a conversion of bond / debenture be treated as repayment of loan. This is completely outlandish and inexplicable reason beyond any legal parlance or any binding judicial precedence. All those observations made by CIT (A) on basis of some search or enquiry in the case of Crest Topworth Group where it was alleged that certain lending companies controlled by it has given loans to erstwhile companies, i.e., amalgamating companies is wholly irrelevant while dealing with the issue of levy of penalty u/s. 271E which is very specific to the conditions given in Section 269T which envisages that repayment of loan otherwise than banking channels. The amalgamation by the Hon’ble Calcutta High Court from 31/03/2014; all the four legal entities have filed the return of income and assessments were completed in their hands. Therefore, the assessment which already stand completed and loans wherein it has been accepted in their hands prior to the amalgamation, then we do not find any reason or occasion as to why such loans are to be doubted in the hands of the amalgamated company and specifically in the proceedings u/s. 271E. Decided in favour of assessee. Issues Involved:1. Levy of penalty under Section 271E.2. Enhancement of penalty by the CIT(A).Summary:Levy of Penalty under Section 271E:The assessee challenged the penalty of Rs. 125,10,00,000/- levied under Section 271E, which was initially Rs. 61,12,35,000/-. The penalty was imposed because the Assessing Officer (AO) interpreted the conversion of loans into bonds as repayment of loans in modes other than those prescribed under Section 269T. The assessee contended that the bonds issued were a form of debt and not a repayment, thus not violating Section 269T. The CIT(A) observed that the transactions were genuine and commercial, thus deleting the penalty levied by the AO.Enhancement of Penalty by the CIT(A):The CIT(A) enhanced the penalty to Rs. 125,10,00,000/-, considering the loans received by the amalgamating companies prior to their amalgamation with the assessee. The CIT(A) referred to the case of Triumph International Finance (I) Ltd., which held that penalty under Section 271E is not leviable if loans are squared up by journal entries in bona fide transactions. However, the CIT(A) found irregularities in the books of certain lender companies, part of the Crest Topworth Group, which were subjected to search actions revealing discrepancies and non-genuine transactions. The CIT(A) issued a notice of enhancement and concluded that the transactions were not bona fide, thus justifying the enhanced penalty. The assessee argued that the transactions were genuine and provided confirmations for some lenders, but the CIT(A) found the explanations insufficient for others, particularly those involved in the Crest Topworth Group.Decision:The Tribunal held that the CIT(A) exceeded his jurisdiction by delving into the genuineness of loans taken in earlier years during penalty proceedings under Section 271E. It was noted that the loans in question were not subject to any assessment proceedings or actions under Sections 263 or 148, and their genuineness was not doubted in the assessment proceedings. The Tribunal found the reasoning for the penalty, based on the conversion of loans into bonds, to be unfounded as it did not constitute a repayment but a continuation of liability.The Tribunal quashed the enhanced penalty of Rs. 125,10,00,000/- levied by the CIT(A), stating that the penalty levied by the AO was already deleted and no appeal was filed by the department against the deletion. The Tribunal allowed the appeal of the assessee, deleting the enhanced penalty.Order Pronounced on 20th April, 2023.