Liability of company paid by Director in cash is cash loan u/s 269SS liable to penalty us/ 271D

Liability of company paid by Director in cash is cash loan u/s 269SS liable to Penalty u/s 271D of the Income Tax Act, 1961.

ABCAUS Case Law Citation
ABCAUS 3640 (2023) (01) ITAT

Important Case Laws relied upon:
CIT v. Dimple Yadav, reported in (2015) 280 CTR (All) 309

CIT v. Panchsheel Owners Association , reported in (2017) 395 ITR 380(Guj.)
Dr. Rajaram L. Akhani v. ITO, reported in (2017) 395 ITR 497(Guj.).
CIT v. Hissaria Brothers, reported in (2016) 386 ITR 719(SC).
CIT v. Jai Laxmi Rice Mills, reported in (2015) 379 ITR 521(SC).
Chawla Chemtech Private Limited v. JCIT (2016) 158 ITD 48 (Chd.-trib.)
Assistant Director of Inspection v. Kum. A B Shanthi (2002) 122 Taxman 574 (SC)
Abdul Hamid Sahib v. Rahmat Bi (AIR 1965 Mad 427)
Sunil Kumar v. Addl. CIT (2019) 33 NYPTTJ 26(JP)
CIT v. Speedways Rubber Private Limited (2010) 326 ITR 31(P&H HC)
Smt. Meera Devi Kumawat v. JCIT (2022) 193 ITD 250(JP-trib.)
Surendra Engineering Corporation v. JCIT (2020) 180 ITD 708(Mum-trib.)
ITO v. Sunder Synthetics Private Limited (2015) 41 ITR(Trib.) 618(Hyd.-trib.)
Chaubey Overseas Corporation v. CIT, reported in (2008) 303 ITR 9 (All. HC)
CIT v. Sunil Goyal, reported in (2005) 274 ITR 53(P&H HC).
Ajay Goel v. ACIT (2010) 126 ITD 89
ITO v. Sunil M Kasliwal, (2005) 94 ITD 281
Mehak Singh v. ITO (2010) 127 ITD 1(Del-trib.)
Bhalotia Engineering Works Private Limited v. CIT (2005) 275 ITR 399(Jharkhand- HC)

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming penalty u/s 271D of the the Income Tax Act, 1961 (the Act) levied by the Assessing Officer (AO).

There was search and seizure operations u/s 132 at residential premises of partners, directors and proprietors of a business group.

During the course of assessment  proceedings, it was observed by  AO  from bank  statement  of  the assessee and ledger account of Director of the assessee company that the assessee on several occasions had taken cash loans in contravention of provisions of Section 269SS of the Act.

During the penalty proceedings, the assessee claimed that no cash loan was taken by assessee company from Director and the amount was actually deposited by the Director in cash in the bank account of the assessee  while  other amount  was paid by Director in cash for purchase of stamp papers.

The assessee claimed that no cash was increased in the cash book of the company on account of these transactions, and hence provisions of Section 269SS were not applicable.

The AO observed that there was no such exemption to the Director u/s 269SS that payments in cash may be made by Director, on behalf of the company from his own cash. The AO also rejected the argument that cash was not increased in cash book of the assessee, as it was against the principles of accountancy. The AO further observed that similarly the liability of the assessee company, paid by the Director in cash from own sources also amounts to cash loan accepted/taken by the assessee company.

Accordingly, the AO imposed the penalty u/s 271D of the Act for contravention of provisions of Section 269SS.

Before the CIT(A), the assessee made submissions that the transactions between the Company and the Director does not fall under the category of ‘loan or deposit’ and there is no element of any interest. It was also submitted that the urgency about the business necessity or commercial exigencies are solely within the domain of the trade and hence the transaction of cash directly deposited by the Director in company’s bank account cannot be called “loan or deposit” as such there was no violation of the provision of Section 269SS of the Act.

The assessee also referred to provision of Rule 2(b)(ix) of the company (acceptance of deposit) Rule 1975 which provides that “Deposit” does not include any amount received from a Director or Shareholder of a Private Limited Company.

However, the CIT(A)  rejected  the contentions of the assessee and   dismissed the appeal filed by the assessee.

The Tribunal observed that the assessee had shown in its books of accounts, the amount paid by the Director as loan payable to him while the Director had shown the said amount as ‘Advances’ outstanding to be recoverable from assessee company.

The Tribunal further observed that CBDT vide Circular No. 387 dated 06.07.1984 had explained the “unaccounted cash” as the reason behind brining the provisions of Section 269SS which was brought to counter check evasion of taxes.

It was further noted by the ITAT that the said Director had surrendered large amount during search and the assessment u/s 153A read with Section 143(2) was framed by AO for the impugned year in wherein income assessed was  Rs. 20 crores which was twenty times of income declared by the Director.

With reference to Companies Act and Regulations, the ITAT observed that both the legislations operate in different filed. The ITAT opined that the Private Limited companies are those companies which do not have broad public participation, and mostly funds are  deployed by promoters/directors, and that too most of them are  family governed entities. Thus, these Private Limited Companies were allowed to raise deposits from their directors without any regulatory controls. Whereas the purpose and purport of Section 269SS is an anti tax evasion devise.

The Tribunal observed that if the contention that cash was  deposited in bank account of the assesse company and hence Section 269SS accepted, the whole purpose and purport of Section 269SS shall be lost, because Section 269SS was introduced as anti tax evasion measure to see that transactions exceeding threshold monetary limits are routed through the banking channel so that there is no camouflaging of the undisclosed income to give colour to it as legitimate money.

The Tribunal observed that both the company and the director were in the same city with necessary requisite banking facilities and could have easily carried out the property transactions by complying with the modes prescribed u/s 269SS and there was no such urgency shown by the assessee.

Accordingly, the Tribunal held that the assessee was not able to show reasonable cause as is contemplated u/s 273B. As a result, the penalty u/s 271D as upheld by CIT(A) was confirmed dismissing the appeal filed by the assessee.

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