2008 (4) TMI 360 - AT - Income Tax

Tribunal Cancels Penalties Due to Time-Bar, Accepts Urgent Need as Reasonable Cause in Family Loan Case.

The Tribunal allowed the appeals, canceling the penalties under section 271D of the Income-tax Act, 1961. It found that the second proviso to section ... Penalty levied u/s 271D - Violation of section 269SS - amount was received otherwise than by account payee cheque - cash loans taken exceeding ₹ 20,000 from the both of person have a agriculture income - Another show-cause notice issued is time-barred as per provisions of s. 275(1)(c) - Failure to prove reasonable cause u/s 273B - Amount taken by the assessee from the grandfather was not loan or deposit but was a financial help - HELD THAT:- It is clear from Second proviso to s. 269SS, that if the person from whom the loan is taken or accepted and the person by whom the loan is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act, s. 269SS does not apply to them. Sec. 269SS is a transaction specific and not related to any assessment year. Thus, the provision is attracted if say only on the date of taking or accepting the loan, the subsequent events do not govern the applicability of s. 269SS. Thus, on the date of acceptance of loan, if both the persons, namely, lender and borrower are having agricultural income and do not have income chargeable to tax under the IT Act, s. 269SS is not applicable. There is logic behind this. Penalty under s. 271D is attracted under IT Act for alleged violation of certain provision contained in IT Act. According to s. 2(7), assessee means a person by whom any tax or any other sum of money is payable under this Act. Thus, if no tax is payable by a person, he cannot be treated as an assessee so as to subject him to the rigors of ss. 269SS and 271D. Admittedly, in the present case, the lender, namely, Shri Rodhu Singh, grandfather of appellants herein, has only income from agricultural operations. All the three assessees prior to taking up of the loan did not have any income chargeable to tax under this Act. Only after the loan was received and invested in a partnership firm, income in the form of remuneration and interest accrued to them. However, before setting up of said business and on date of taking the loan, they did not have any other income. We accordingly hold that as per second proviso to s. 269SS, the provisions of s. 269SS shall not apply. In that view of the situation, s. 271D cannot be invoked to levy penalty for alleged default of s. 269SS. Time Limitation - Another show-cause notice - Since the action for imposition of penalty has been initiated on 10th Jan., 2003, as per s. 275(1)(c). the limitation period will expire on 31st July, 2003. Thus, the order passed under s. 271D by Addl. CIT dt. 29th Dec., 2003/15th Jan., 2004 is beyond the limitation and hence, not sustainable in law. Similar view has been adopted by Tribunal in the case of Hissaria Bros.[2001 (8) TMI 295 - ITAT JODHPUR] and in the case of Dillu Cine Enterprises (P) Ltd. [2001 (9) TMI 248 - ITAT HYDERABAD-A]. Hon'ble Bombay High Court in the case of Chhajer Packaging & Plastics (P) Ltd. [2007 (9) TMI 213 - BOMBAY HIGH COURT], we hold that the order imposing penalty is beyond the limitation period prescribed and hence, penalty under s. 271D is cancelled. We also find that the assessees were required to purchase land and factory premises along with machinery, etc. as per sale deed dt. 24th Sept., 1996. Since they did not have their own funds, the assessees received the financial assistance from their grandfather and paid the sale consideration in cash. Though the amount was received by way of bearer cheque, this shows the urgency of funds and hence, were unable to route such transaction through bank. In a way, it can be considered as a reasonable cause within the meaning of s. 273B of the Act. Since the assessee has demonstrated reasonable cause in view of s. 273B, penalty under s. 271D is not attracted. After all, the transaction between the assessees and their grandfather is to be viewed as a financial help coming from elders in the family. Assessees cannot be presumed to have knowledge of the intricacies of the tax laws. For them it is a technical breach, if any, and hence, in view of the authoritative pronouncement of Hon'ble Supreme Court in the case of Hindustan Steel Ltd. [1969 (8) TMI 31 - SUPREME COURT], penalty cannot be levied for such technical or venial breach. We, therefore, cancel the penalty under s. 271D on this count also. In the result, all the appeals are allowed. Issues Involved:1. Levy of penalty under section 271D of the Income-tax Act, 1961.2. Validity of the show-cause notice under section 271D.3. Applicability of the second proviso to section 269SS.4. Limitation period for imposing penalty under section 271D.5. Reasonable cause for accepting the loan otherwise than by account payee cheque.Issue-wise Detailed Analysis:1. Levy of penalty under section 271D of the Income-tax Act, 1961:The appeals challenge the levy of penalty under section 271D for accepting loans otherwise than by account payee cheque, in violation of section 269SS. The assessees, who are partners in a firm, introduced capital received from their grandfather through bearer cheques. The Assessing Officer found this to be a violation of section 269SS and initiated penalty proceedings under section 271D.2. Validity of the show-cause notice under section 271D:The assessees argued that the show-cause notice dated October 8, 2003, was time-barred as per section 275(1)(c). The Additional Commissioner of Income-tax held that penalty under section 271D could not be imposed by the Income-tax Officer, and the notice issued on October 8, 2003, was within the limitation period. The Commissioner of Income-tax (Appeals) upheld this view, stating that the competent authority's notice starts the time limit for penalty.3. Applicability of the second proviso to section 269SS:The assessees contended that both they and their grandfather had only agricultural income and no income chargeable to tax, thus falling under the exception in the second proviso to section 269SS. The Commissioner of Income-tax (Appeals) rejected this, stating that the assessees had other income in the form of salary and interest. However, the Tribunal found that on the date of the loan, neither the assessees nor their grandfather had taxable income, thus section 269SS did not apply.4. Limitation period for imposing penalty under section 271D:The Tribunal examined section 275(1)(c), which prescribes the limitation period for imposing penalties. The penalty proceedings were initiated on January 10, 2003, as recorded in the assessment order. The Tribunal held that the limitation period expired on July 31, 2003, making the penalty order dated January 15, 2004, time-barred. This view was supported by decisions from the Income-tax Appellate Tribunal and the Bombay High Court.5. Reasonable cause for accepting the loan otherwise than by account payee cheque:The Tribunal also considered whether there was a reasonable cause under section 273B for the assessees' actions. The assessees argued that they needed the funds urgently to purchase factory premises and machinery, justifying the use of bearer cheques. The Tribunal accepted this as a reasonable cause, stating that the transactions were financial help from a family elder and constituted a technical breach. Citing the Supreme Court's decision in Hindustan Steel Ltd., the Tribunal held that penalty should not be levied for such technical breaches.Conclusion:The Tribunal allowed the appeals, canceling the penalties under section 271D on the grounds of applicability of the second proviso to section 269SS, expiration of the limitation period, and the existence of reasonable cause. The judgment emphasized that the transactions were family financial assistance and the assessees' lack of knowledge of tax law intricacies.