Acknowledgement of debt by journal entry not treated as loan under section 269SS, penalty under section 271D avoided

Statutory prohibition on acceptance of loans otherwise than by account payee cheque or draft requires an actual loan or deposit; mere acknowledgement by journal or book entry without transfer of money, repayment terms, interest, or other loan conditions does not constitute a loan or deposit for the statutory prohibition. Prior authorities treat book-entry acknowledgements as outside the scope of the prohibition, and penal provisions are construed strictly; where transactions are bona fide and lack mens rea or tax-evasion motive, discretion exists against imposing penalty. Consequence: penalty imposition for such book-entry acknowledgements is not justified.

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Issues: (i) Whether mere acknowledgement of debt by a journal/book entry in the assessee's books attracts the prohibition in section 269SS and thereby justifies imposition of penalty under section 271D of the Income-tax Act, 1961.

Analysis: The statutory scheme of section 269SS requires acceptance of a loan or deposit of money otherwise than by account payee cheque or draft to attract the prohibition; the Explanation to the section defines 'loan or deposit' as loan or deposit of money. The nature of the transactions under scrutiny consisted of payments made by the managing director on behalf of the company and subsequent book entries acknowledging liability, with no actual transfer of money to the company by the creditors and no evidence of conditions typical of loans or deposits (such as stipulation as to repayment, interest, period). Prior authorities treat acknowledgement by journal entry as not constituting acceptance of loan or deposit within the meaning of sections 269SS/269T. Penal provisions must be construed strictly and, where transactions are bona fide and lack mens rea or tax-evasion motive, discretion exists against imposing penalty (recognising principles applicable under section 273B and settled jurisprudence on imposition of quasi-criminal penalties).

Conclusion: The transaction acknowledged by book entries does not fall within the words 'loan or deposit' for the purposes of section 269SS and, accordingly, imposition of penalty under section 271D is not justified; outcome is in favour of the assessee.

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