2023 (10) TMI 31 - AT - Income Tax

Tribunal overturns penalty for alleged loan violation based on tax audit report, emphasizing penalties should be fact-based.

The Tribunal overturned the penalty imposed by the Assessing Officer under section 271D of the Income-tax Act for alleged violation of section 269SS. It ... Penalty u/s. 271D - AO found the assessee to have indulged in receipt of loans/deposits through modes other than banking channels as reflected in Sl.No.31(1) of Form 3CD, being, the Tax Audit Report of the assessee, violating the provisions of section 269SS - HELD THAT:- Since section 269SS is attracted when a person takes or accepts any loan or deposit in a mode otherwise than the banking channel etc,. it has no application in the instant case of the assessee when no loan was taken or accepted by the assessee from Ms. Ritu Sanghavi. The credit amount is a transfer entry from her account to that of her husband, which again does not call for imposition of any penalty. On an examination of the account of Mr. Deepak Sanghavi first amount is debited to his account. The assessee paid this amount on his behalf and debited his account. Similar is the position regarding the second and third amounts which have been debited to the account of Mr. Deepak Sanghavi. These amounts are in the nature of payments made by the assessee on behalf of Mr. Deepak Sanghavi. Thus, the provisions of section 269SS are not attracted, which apply only on taking or accepting loan and deposit. Also minor amounts items of crediting his account with rent etc., which do not violate section 269SS - We, therefore, hold that the assessee did not take or accept any loan either from Ms. Ritu Sanghavi or Mr. Deepak Sanghavi in violation of provisions of section 269SS of the Act, which could have magnetized penalty u/s. 271D of the Act. The impugned order is, therefore, overturned to this extent. Assessee appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271D is leviable where the Assessing Officer imputes receipt of loans/deposits in contravention of section 269SS based on qualifications in the tax audit report without establishing that the assessee actually took or accepted loans/deposits by modes other than banking channels. 2. Whether debit and credit entries in the assessee's books reflecting payments made on behalf of third parties, rent credits, salary credits, inter-account transfers and provision for interest constitute 'taking or accepting' a loan or deposit within the meaning of section 269SS thereby attracting penalty under section 271D. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Liability for penalty under section 271D based on tax-audit qualification Legal framework: Section 269SS prohibits taking/accepting loans or deposits of Rs. 20,000 or more otherwise than by specified banking modes (account payee cheque, bank draft, etc.). Section 271D prescribes penalty equal to the amount of loan or deposit taken/accepted in contravention of section 269SS. Precedent Treatment: The Tribunal's order does not rely on or cite any case law; no prior decisions were expressly followed, distinguished or overruled in the present judgment. Interpretation and reasoning: The Tribunal held that the imposition of penalty must be founded on actual facts establishing that the assessee 'took or accepted' the relevant sum in contravention of section 269SS. A mere sweeping qualification in a tax-audit report cannot be the sole trigger for penalty where the assessee has produced uncontroverted explanations and underlying ledger entries detailing the true nature of transactions. The proper approach is to examine books and documentary evidence to determine whether transactions are loans/deposits accepted from others by non-banking modes or are instead other types of entries (payments made on behalf of others, transfers, salary, rent, provisions, etc.). Ratio vs. Obiter: Ratio - Penalty under section 271D cannot be imposed solely on the basis of an auditor's qualification; the AO must determine on the basis of actual facts and documentary evidence whether section 269SS is attracted. Obiter - Observations criticizing the 'sweeping manner' of the auditor's qualification as a practice are ancillary but support the ratio. Conclusions: The Tribunal concluded that the AO erred in relying on the audit qualification without examining and accepting the assessee's documentary explanations; therefore penalty under section 271D could not be sustained on that basis. Issue 2 - Characterisation of specific ledger entries as loans/deposits vis-à-vis section 269SS Legal framework: As above - the legal test is whether the relevant entries amount to 'taking or accepting' a loan or deposit in contravention of section 269SS (i.e., receipt from another person of Rs.20,000 or more by non-banking modes). Precedent Treatment: No authorities cited; treatment is fact-driven and applied to the ledger particulars produced by the assessee. Interpretation and reasoning: The Tribunal examined the ledger extract and transaction particulars. Entries identified and considered included: (a) payments made by the assessee on behalf of third parties (self-assessment tax paid for another), (b) transfers from one related person's account to another, (c) rent credited to a party's account, (d) salary credited to a party, (e) provision/credit entries for interest payable, and (f) inter-account transfers. The Tribunal reasoned that these entries represent reimbursements, payments on behalf of others, operating items (rent/salary), or accounting provisions - none of which constitute the assessee 'taking or accepting' a loan or deposit from those persons in the statutory sense. The entry that was a transfer from one related account to another was addressed in context and treated as not amounting to acceptance of loan/deposit by the assessee from that person. Ratio vs. Obiter: Ratio - Specific factual entries that are payments on behalf of another, accounting provisions for interest, rent and salary credits, or transfers between related accounts are not, without more, loans/deposits that attract section 269SS; therefore corresponding penalty under section 271D cannot be levied. Obiter - General observations on types of ledger entries that may or may not constitute loans are illustrative and fact-specific. Conclusions: On the facts, the Tribunal held that none of the ledger items amount to acceptance of loans/deposits from the two persons alleged by the AO. Consequently, section 269SS was not attracted and penalty under section 271D was not sustainable. Cross-reference The conclusion on Issue 2 is dispositive of Issue 1: because the examined ledger entries did not constitute loans/deposits for the purposes of section 269SS, the foundational requirement for imposing penalty under section 271D was absent; reliance on the tax-audit qualification alone was insufficient (see Issue 1 reasoning).