TaxTMI 
TaxTMI 
2018 (10) TMI 52
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.... made by the appellant. 2) The Ld. CIT(A) erred in holding that the allotment of shares against share application money amounted to a "repayment" of "loan" otherwise than by account payee cheque. The Id. CIT(A) erred in not appreciating that the relevant amounts were received by the assessee through banking channels towards share application money. In law, share application money is not a "loan" or a "deposit" for the purposes of s. 269T. Consequently, the question of repayment of any "loan" or "deposit" does not at all arise, and the provisions of s. 269T are wholly inapplicable. 3) The Ld. CIT(A) erred in failing to appreciate that (a) share application money was received through banking channels, (b) shares were duly allotted at par and without any premium, (c) all reporting requirements were complied with, (d) and the authorities under the Companies Act had not raised any objection on the transaction. Accordingly, the case was not »ne which at all involved any loan or advance. The lower authorities erred in failing to consider relevant materials, and considered irrelevant materials; and thereby reached a conclusion which no reasonable person properly ins....
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.... factually no money which was disbursed by the appellant at all. Shares were in fact allotted. If at all there was any breach of s. 269T, it would only be of a technical nature. Inter alia for these reasons, the Ld. CIT(A) ought to have held that if at all there was any breach, the same was due to a reasonable cause, and levy of penalty would not be justified. 9) The appellant craves leave to add/alter the above grounds, each of which are without prejudice to one another." The above grounds indicate that Ground Nos. 1 to 6 relates to the merits of the levy of penalty u/s.271E of the Act. Further, Ground No.7 relates to the proper year for levy of said penalty qua the year of book entries. Finally, Ground No.8 relates to the reasonable cause for such book entries and subsequent allotment of 9% Redeemable Preference Shares. 4. Briefly stated relevant facts relating to the levy of said penalty includes that the assessee is engaged in the real estate business and had plan to develop an integrated township in Pune and Mumbai. The assessee company was originally incorporated on 02.07.2008 in the name of M/s.Padmaji Realcon Pvt. Ltd., The same was rechristened as M/s.Radha ....
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....hile converting loans and advances into share application money and then in turn, finally into the preferential shares till the time the shares actually allotted in the year under consideration. The fact of non conversion of loan to share application money in the same year in the books of VSK was also discussed. The VSK converted the loans into share application money/preference shares in the year under consideration only unlike the assessee. 4.2 Further, the Assessing Officer analyzed the provisions of section 269T of the Act and also the decisions cited by the assessee i.e. in the case of CIT Vs. Noida Toll Bridge Co. Ltd. 263 ITR 260 (Delhi), CIT Vs. Triumph International Finance (I) Ltd. 345 ITR 270 (Bom.) and Lodha Builders Pvt. Ltd. & Others Vs. ACIT in ITA No.476/M/2014 and held that the amount received by the assessee from VSK constitutes the loans or advances. Thus, the Assessing Officer held that repayment of loan by resorting to Journal entries, constitutes the contravention of provisions of section 269T of the Act. Accordingly, AO applied the ratio laid down by the jurisdictional High Court in the case of CIT Vs. Triumph International Finance (I) Ltd. (supra). Eve....
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....her than the mode prescribed under Section 269T. To cater to the needs of such exigencies, the legislature has enacted Section 273B which provides that no penalty under Section 271 E shall be imposed for contravention of Section 269T if, reasonable cause for such contravention is shown. As already discussed in the present case there are no genuine business exigencies that have forced them to issue preference shares at an inflated value compared to the actual market value of the shares of RM. Further as observed by the Hon'ble High court in the case of Triumph International Finance (I) Ltd, if allotment of shares(equity or preferential) represents only a empty formality to repay the loan/deposit amount by account-payee cheque/draft and receive back almost the same amount towards the sale price of the shares, then such cases are saved by reasonable cause. In the instant case, allotment of preference shares does not represent an empty formality. On the contrary, Shares of RM are overvalued arbitrarily 'without any basis and the same are issued to square off the deposits received. 13. Based on the above discussion it is clear that, RM is not saved by 'reasonable cause'....
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....e task as the money so received by the assessee from VSK was already found way into the others by way of advances for appropriation for purchase of lands, which is the core activity of the assessee company. Receiving the said advances from them only for returning to VSK and in turn to receive the same from VSK through banking channels towards the share application money, constitutes an Empty Formality. Further, assessee submitted that this kind of empty formality can constitute reasonable case within the meaning of section 273B of the Act and relied on the judgment of jurisdictional High Court in the case of CIT Vs. Triumph International Finance (I) Ltd. (supra). He also analyzed that the Assessing Officer failed to understand the reasonable cause and the argument of the assessee in this regard. 5.2 On considering all the arguments and the case of the AO; the CIT(A) examined the facts of the case; analyzed the funds flow of loans which are received by the assessee from VSK; CIT(A) analyzed the application of funds through Directors of the company; CIT(A) noted that the Directors never invested the same by buying the land nor returned the money to the company; the loans and advan....
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....scussion in the orders that out of Rs. 49.02 crores given to the Directors in assessment year 2011-12 and the same was already utilized in procuring the land for the company and leaving no balance either refundable to the assessee or to be invested in acquiring further lands for the company. Assessee had to use the names of the Directors for buying the lands for assessee as there are some restrictions in Maharashtra for the company to hold the Agricultural lands in the name of the assessee. Normally, it is the assessee which gives cheques and money through the Directors. Learned Counsel also mentioned that the VSK was under Investment Agreement with the assessee for supply of loans in exceeding around Rs. 100 crores for the business purposes and the payment of Rs. 51.74 crores to the assessee is part of compliance to the said agreement. There was discussion in the orders about how the VSK received funds from Hong Kong based company i.e. Citi Reliance Ltd. The contents of CIT(A)'s order in para 6.2.4 describes these facts. Relying on the financial statement of assessee, learned Counsel submitted that the assessee reflected the amount as loans and advances before they are immediately....
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.... India Ltd. (suupra), learned Counsel submitted that the assessee got relief from levy of penalty on the ground of "reasonable cause (in short 'RC') mentioned in section 273B of the Act. Thus, the Ld. Counsel argued that the penalty needs to be deleted. 7.3 Analyzing the RC, i.e., the reasonable cause for the assessee, learned Counsel submitted that loans received from VSK/utilized for business purposes. Ld. Counsel mentioned that when the loans are used for business purpose, it is impossible for the assessee to repay the loans as the same are invested in stock-in-trade through Shri Digambar D Patil, Director of the company. Obtaining share holding of the assessee is the main object of VSK The funding should have been shown in the books as the share application money only from the beginning. Now assessee is divested of adequate funds for repayment by way of Account payee cheque or demand draft. To issue the cheques to VSK for repayment of loans in order to comply with the provisions of section 269T of the Act, the assessee would have to raise the funds to repay and the same should be returned from VSK towards 9% RCP shares or share application money. This transaction of issuing ....
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....re application money happened in the preceding assessment year 2012-13. 7.5 Written Submissions : Further, learned Counsel filed written submissions in this regard explaining the reasonable cause issue and others and the relevant paras from the said submissions are extracted hereunder: "1.2 In Para No. 2 of these submissions, it is admitted that the appellant has received loan from VSK Technologies Pvt. Ltd. during F.Y. 2009-10 & 2010-11 and that these amounts appear in the Balance Sheet of appellant as on 31.03.2010, 31.10.2011 and 31.03.2012 as share application money. The true nature of this transaction, conversion of loans into share application money is being challenged by the department on the pretext of what is apparent is not real by arguing that the true nature of the transaction has to be ascertained ONLY by knowing the purpose and intention of VSK Technologies Pvt. Ltd. Further in Para No. 4, they are referring to lifting veil of corporate entity to understand the true nature. It has been further argued that in the Balance Sheet of VSK Technologies Pvt. Ltd., the amount under consideration is being reflected under the head "Loans and Advances" and, it is only....
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....r by the department itself or by ROC. 1.5 Moreover an issue of imposition of penalty has to be decided by facts relevant on record of appellant assessee and not any third party. What entries have been made in books of account of a third party are of no direct significance for the purpose at hand. 1.6 It is therefore prayed that the contentions raised by the department in their submissions made on 27.06.2018 be dismissed as not relevant for the purpose at hand. 2. In the course of proceedings on 27.06.2018, the appellant was directed to file written submissions on the issue of reasonable cause in the facts of the case. In this connection, it is submitted as under: 2.2 Hon'ble Bombay High Court have dealt with the issue of reasonable cause in their judgment in the case of Triumph International Finance (I) Ltd. reported in 345 ITR 270. They have laid down parameters and circumstances as to when the benefit of reasonable cause can be denied in situations where transactions are effected through JV entries to the violation of Section 269 T of the Act. These are summarized in following paragraphs: Para No. 23: "The expression "reas....
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....esented the unaccounted money of the Investment Trust of India or the assessee." 2.6 In the present case also, the adjustment made in the books of account through book entries carried out in ordinary course of business has been doubted in regular assessment. Also there is nothing on record, not even an iota of doubt raised by the authorities to the effect that the amounts advanced by VSK Technologies Pvt Ltd represented the unaccounted money of VSK Technologies Pvt Ltd or that of the appellant. 2.7 Further in the same paragraph no. 24 it has been held as under: "It is not in dispute that settling the claims by making journal entries in the respective books is also one of the recognized modes of repaying loan/deposit. Therefore, in the facts of the present case, in our opinion, though the assessee has violated the provisions of Section 269 T, the assessee has shown reasonable cause and, therefore, the decision of the Tribunal to delete the penalty imposed under Section 271E of the Act deserves acceptance" 2.8 In the present case also, the transaction has been completed by passing journal entries in the books of account of the appellant and VSK Tec....
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....assing JV entries and transferring amounts from share application money to shares. This mode is legally permissible in commercial transactions as also in accounting practice. Therefore it must be held that genuine transactions like the transaction in the present case deserve the benefit of reasonable cause enshrined in Section 273 B of the Act. It is prayed accordingly that the penalty imposed be cancelled." 8. Per Contra, Ld. DR for the Revenue relied heavily on the orders of Assessing Officer and CIT(A). Learned DR analyzed the adverse consequences drawn by the CIT(A) in his order. He submitted that the funds from Hong Kong were transferred to VSK before they are finally received by the assessee. The said funds were further transferred to Shri Digambar D Patil for the purpose of acquiring the land and questioned the way Shri Digambar D Patil had received the funds from the company which is not usual method of investment in stock-in-trade. Mentioning that it is a case of colourable transaction, learned DR submitted for confirming penalty under section 271E of the Act. Highlighting the fact that the book entries in the accounts of assessee as well as VSK are not in sync qua the ....
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.... other person shall repay any loan or deposit made with it [ or any specified advance received by it] otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or deposit [ or paid the specified advance] [or by use of electronic clearing system through a bank account] if- (a ) the amount of the loan or deposit [or specified advance] together with the interest, if any, payable thereon, or (b ) the aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-operative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits, [or] (c) the aggregate amount of the specified advances received by such person either in his own case or jointly with any other person on the date of such repayment together with the interest, if any, payable on such specified advances.] is twenty thousand rupees or more: Provided that where the repayment is by a branch o....
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.... FLOW OF FUNDS - TAKEN AS LOAN - BOOK ENTRIES Lender Lonee 10.2 Undisputedly, the assessee received loan from VSK amounting to Rs. 51.74 crores over the years. In the beginning, the transactions are recorded in the books of both lender as well as the loanee on the loans only. These loans were converted into share application money in the preceding year in the books of the assessee. However, corresponding entries in the books of the VSK are not in sync with that of the assessee. In the books of VSK, they continue to be loans till the shares are allotted in A.Y. 2013-14. Assessee converted the loans to share application money and then finally allotted 9% Redeemable Cumulative Preference Shares to VSK in A.Y. 2013-14. On these facts, Ld. Counsel for the assessee claims that the funds given by the VSK being part of the original commitment, were always meant for investment in company and the intention of VSK is not for giving loans to assessee expecting repayment. However, there are no answers to various relevant questions from the assessee and they are (1) why the agreements do not specify that the funds are redeemable subject to allotment of shares; (2) why they are shown as lo....
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.... 4. Sharad Holding Leasing (P) Ltd. Vs. ACIT 95 TTJ 0336 (Pune ITAT) 5. ACIT Vs. Vardaan Fashion 38 ITR 0247 (Delhi ITAT) 6.1.4 The appellant relied that the penalty is not leviable for A.Y.13-14, as the amounts received have been transferred as share application money in the F.Y. 09-10 & 10-11 itself. Therefore, it is claimed that there is repayment of loan by any stretch of imagination for A.Y.13-14. 6.1.5 The identify and the source of the funds received from VSK are duly explained as that company had filed the required returns of income and it sources of income is from IT and IT enable services and BOP services. 6.2 The submissions made are gone through. A close look at the ledger extracts and the bank accounts indicate that initially, an amount of Rs. 23 lakhs on 19-12-2009 and Rs. 42 lakhs and Rs. 50 lakhs on 30- 12-2009 were paid directly by VSK Technologies to Digambar D. Patil prior to the investment agreement dtd.2-2-2010 mentioned above. Subsequent to the investment agreement, these amounts were returned back to the VSK Technologies Pvt. Ltd. by Digambar Patil on 22-2-2010. These returned amounts were immediately advanced by VSK t....
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....e than its authorized share capital under the cover of share application money. It is also seen that the appellant had passed the general entry on 31-3-2012 treating the amount of Rs. 49 crore as share application money. Even the appellant himself had considered the amounts received as loans before converting them into share application money after increasing the authorized share capital. The share application money was finally converted to 9% non cumulative redeemable preference shares @100/- per each on 3-10-2012. The VSK Technologies was issued 51,50,000 preference shares on this date. There is a considerable delay in issuing the preference shares and as per the Companies Act 2013, a company must allot shares against share application money within 60 days from the date of its receipt failing which they should refund the same within 15 days after expiry of said 60 day period to avoid being classified as deposit u/s.73 of the 2013 Act. The courts in various cases have also held that any undue delay in issue of shares, the amount has to be refunded even under the Companies Act, 1956. There has been a failure on the appellant in refunding the amounts. M/s. VSK who provided the funds....
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....ternational Finance (I) Ltd. (supra). Relevant para No. 19 is extracted as under: "19. In the present case, it is not in dispute that the assessee has repaid loan / deposit by debiting the account through journal entries. The question is, whether such repayment of loan / deposit is in contravention of the modes of repayment set out in Section 269T ? The argument advanced by the counsel for the assessee that the bonafide transaction of repayment of loan / deposit by way of adjustment through book entries carried out in the ordinary course of business would not come within the mischief of Section 269T cannot be accepted, because, the section does not make any distinction between the bonafide and non-bonafide transactions and requires the entities specified therein not to make repayment of any loan / deposit together with the interest, if any otherwise than by an account payee cheque / bank draft if the amount of loan / deposit with interest if any exceeds the limits prescribed therein. Similarly, the argument that only in cases where any loan or deposit is repaid by an outflow of funds, Section 269T provides for repayment by an account payee cheque / draft cannot be accepted....
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....e, the paucity of funds for complying with the said provisions of section 269T of the Act, constitutes a reasonable cause within the meaning of section 273B of the Act. In addition, making the repayment by issue of account payee cheque/demand draft to VSK and receiving the same towards the share application money through the same mode, constitutes an "empty formality". Thus, the said 'empty formality' is also part of the said reasonable cause. As per Ld. AR for the assessee, making repayment of loans and receiving back said sum again constitute an 'empty formality'. On similar facts, as per the Ld. AR, the jurisdictional High Court of Bombay granted relief to the assessee on the ground of similar reasonable cause. Ld. AR relied on the judgment in the case of CIT VS. Triumph International Finance (I) Ltd., (supra). 15.1 Per Contra, from the Revenue emphasising the need for literal interpretation of the statute, Ld. DR for the Revenue is of the opinion that the provisions of section 269T of the Act relating to 'Mode of repayment of certain loans or Deposits' specifies the methods of repayment of loan and it is the duty of every citizen to comply with the same. Regarding the core a....
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....er words, to decide what can be construed as a reasonable cause for avoiding penalty one has to keep in mind that the law itself requires that the default should have occurred without reasonable cause to merit penalty and that the issue must be decided on the available facts and the nature of default in a judicious manner. Before a cause can be said to be reasonable or not, it must be found as a fact that a particular cause operated upon the mind of the assessee which prevented him from doing the required act under normal circumstances. It is true that the word "reasonable cause" is not defined under the IT Act but it could receive same meaning and interpretation which is given to the expression "sufficient cause". Therefore, in the context of the penalty provisions, the word "reasonable cause" would mean a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bona fides, from doing the act of which he, called on to act reasonably, knows or ought to know." Although the said interpretation was given in the context of levy of penalty u/s.271F of the Act, the meaning of reasonable cause holds relevant....
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....ng funds through the aforesaid option only to receive the same back against the share allotment, is a meaningless exercise. In the language of binding judgment in the case of Triumph International Finance (I) Ltd. (supra.). The same constitutes an 'empty formality'. Why should assessee do repay when the said money is only to return to the assessee's account for allotment of shares? The answer lies in the concept of empty formality profounded by the High Court in the case of CIT Vs. Triumph International Finance (I) Ltd. (supra). It is the decision of the Hon'ble High Court that repaying the loans to VSK through account payee cheques/demand drafts and receiving the same towards the share application money constitutes the empty formality. We proceed to extract the relevant lines from the said judgment and the same is placed here as under : "22. The argument advanced on behalf of the assessee that if Section 269T is construed literally, it would lead to absurdity cannot be accepted, because, repayment of loan / deposit by account payee cheque / bank draft is the most common mode of repaying the loan / deposit and making such common method as mandatory does not lead to any abs....