Penalty u/s 271E deleted for repayment in cash unsecured loan taken from founder director to meet expenses when bona-fide of transaction was not disputed.
In a recent judgment, the ITAT Rajkot has deleted penalty u/s 271E of the Income Tax Act, 1961 (the Act) because due to bank holiday, the company repaid in cash unsecured loan taken from founder director to meet expenses when the bona-fide of the transaction had not been disputed by the Assessing Officer (AO). The transaction was only a current account in nature and did not fall within the meaning of loan or advance.
ABCAUS Case Law Citation:
4422 (2025) (02) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming order passed by the Assessing Officer imposing penalty under section 271E of the Act for violation of section 269T of the Act.
The assessee company had repaid a loan to its director in cash, that is, otherwise than by account payee cheque or account payee bank draft, in contravention of the provisions u/s 269T r.w. section 271E of the Act.
During the penalty proceedings, the assessee replying to the show cause issued stated that during the relevant Assessment Year, the company received the unsecured loan form one of its directors in cash on different dates. The same had been repaid in cash on different dates to the said director during the relevant financial itself.
It was stated that the said unsecured loan was availed in order to meet the monthly regular business expenses particularly salary expenses. Further, the same had been taken from its founder director, who was a closely related party.
It was submitted that no penalty liable as it is transaction between closely related party. In support this contention, the assessee relied upon the decision of the jurisdictional Hon’ble Gujarat High Court.
However, the AO rejected the contention of the assessee and held that the assessee had committed default within the meaning of section 269T of the Act by repaying loan otherwise than by account payee cheque or account payee bank draft. Therefore, assessing officer imposed penalty under section 271E of the Act to an amount equal to the amount of the loan repaid.
Before the Tribunal, the Income Tax Department contended that nowadays there is a facility to pay the amount by RTGS or by way of banking transfer, therefore, the assessee could transfer the amount by way of banking channel. Therefore, the plea of the assessee that due to bank- holiday, that banks were not functioning, should not be accepted.
The Tribunal noted that as relied upon by the assessee, Hon’ble High Court while considering similar issue of imposition of penalty u/s. 271D and 271E of the Act observed that the transactions between sister concerns are not covered by either provision of section 269SS or 269T of the Act. The Hon’ble High Court also taking into note the object behind bringing section 26SS and section 269T for curbing black money, held that when there is no such allegation then the violation of provisions under section 269SS and 269T are of venial nature and penalty cannot be imposed.
Further, the Tribunal observed that the assessee company had proved its bona fides by disclosing the loan transactions in the in the audited financial statement and Tax Audit Report for the relevant FY.
Besides, the Tribunal noted that the identity of the payee, i.e. the founder director was not under doubt. Further, it was also to be taken note of that he had also accounted for the said transactions of payment and receipt of loan in his books of account for the relevant FY. Therefore, basically it was a current account transaction for business purposes.
The Tribunal further observed that the bona -fide of the transaction had also not been disputed by the assessing officer in the order passed u/s. 143(3) of the Act. Moreover, the founder director was having sufficient cash on hand available with him and this fact had also not been disputed by the assessing officer in the impugned scrutiny assessment order. Further, there was no allegation of tax evasion on account of the impugned transaction of acceptance and repayment in cash.
The Tribunal opined that the transaction between two independent assessees based on an act of casualness and specifically the disclosure of such transactions is contained in the audited books of account of the assessee -company, which had no tax effect, had established the “reasonable cause” u/s, 273B of the Act. The provisions of section 273B of the Act, states that no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure.
Therefore, the Tribunal held that the deposits and the withdrawals of the money from the current account could not be considered as a loan or advance. Therefore, the transaction between the appellant and the director-cum shareholder was not a loan or deposit and it was only a current account in nature and no interest is being charged for the above transaction. Thus, since the said transaction does not fall within the meaning of loan or advance, there was no violation of provisions of section 269SS/269T of the Act.
The Tribunal relied upon the decision of Hon’ble High Court of Gujarat, ITAT, Ahmedabad and ITAT Indore Bench wherein tt was held that levy of penalty u/s 271D, for violation of provisions of section 269SS of the Act, is unwarranted as the loan was advanced by the Executive Directors to the company in cash to meet the urgent requirements of the company.
Accordingly, Tribunal deleted the penalty.
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