Issue For Consideration
Section
269SS of the Income-tax Act provides that no person shall take or accept
any loan or deposit otherwise than by an account payee cheque or bank
draft or by use of ECS through a bank account if the amount or the
aggregate of amounts of loan or deposit is twenty thousand rupees or
more. Likewise, section 269T provides that any loan or deposit shall be
repaid by an account payee cheque or bank draft drawn in the name of the
person who has made the loan or deposit or by use of ECS through a bank
account, if the amount of loan or deposit together with interest is Rs.
20,000 or more.
A violation of the provisions of section 269SS
attracts the penalty u/s. 271D and of section 269T attracts the penalty
u/s. 271E of an amount that is equivalent to the amount of loan or
deposit taken or repaid. No penalty however, is leviable where the
person is found to be prevented by a reasonable cause for the failure to
comply with the provisions of section 269Ss or section 269T in terms of
section 273B of the Act.
These sections list certain exceptions
wherein the specified transactions shall not be regarded as in
violation of the provisions. None of the exceptions specifically exclude
the transactions that are settled by an accounting entry or adjustment
of accounts. This has led to a controversy in a case where a transaction
of a loan or a deposit is executed or settled by a journal entry not
involving any movement of cash or funds. The Bombay High Court has held
that repayment of a loan by settlement of account through a journal
entry violated the provisions of section 269T while the Delhi High Court
has held otherwise.
Triumph International Finance(I) Ltd .’s case
In
CIT vs. Triumph International Finance (I) Limited, 345 ITR 270(Bom),
the High Court was asked by the Revenue to consider the following
question;
“Whether, on the facts and in the circumstances of the
case, the Tribunal was justified in law in holding that transactions
effected through journal entries in the books of the assessee would not
amount to repayment of any loan or deposit otherwise than by account
payee cheque or account payee bank draft within the meaning of section
269T to attract levy of penalty u/s. 271E of the Income-tax Act, 1961?”
The
assessee, a Public Limited Company, a member of the NSE and a Category I
Merchant Banker, registered with SEBI, which was engaged in the
business of shares, stock broking, investment and trading in shares and
securities had accepted a sum of Rs. 4,29,04,722/- as and by way of
loan/inter-corporate deposit from the Investment Trust of India before
1st April, 2002, which was repayable during the assessment year
2003-2004. On 3rd October, 2002, it had transferred 1,99,300 shares of
Rashal Agrotech Limited, held by it, to the Investment Trust of India
for an aggregate consideration of Rs.4,28,99,325/-. As a result, the
assessee, on one hand, was liable to repay the loan/ inter-corporate
deposit amounting to Rs. 4,29,04,722/- to the Investment Trust of India
and on the other hand, to receive Rs. 4,28,99,325/- from the Investment
Trust of India towards sale price of the shares of Rashal Agrotech
Limited sold to the Investment Trust of India.
Instead of
repaying the loan/inter-corporate deposit to the Investment Trust of
India and separately receiving the sale price of the shares from the
Investment Trust of India, both the parties agreed that the amounts
payable/ receivable be set-off in the respective books of account by
making journal entries and the balance be paid by account payee cheque.
Accordingly, after setting off of the mutual claims through journal
entries, the balance amount of Rs. 5,397/- due and payable by the
assessee to the Investment Trust of India was paid by a crossed cheque
dated 19th February, 2003 drawn on Citibank.
It had filed its
return of income declaring loss of Rs. 17,27,21,815/- for the assessment
year 2003-2004. The assessment was completed u/s. 143(3) determining
the loss at Rs. 9,84,92,500/-.
Relying on the comments in the Tax
Audit Report regarding repayment of loan/inter-corporate deposit,
otherwise than by an account payee cheque or draft, the AO issued a
show-cause notice u/s. 271E, calling upon the assessee to show cause as
to why action should not be taken against the assessee for violating the
provisions of section 269T of the Act.
The detailed reply
however, was ignored by the AO who by an order dated 21st March, 2006
passed under section 271E of the Act, on the basis of the report of the
Joint Parliamentary Committee of Lok Sabha and Rajya Sabha on the Stock
Market Scam, imposed penalty amounting to Rs. 4,28,99,325/- on the
ground that the assessee had repaid the loan/inter-corporate deposit to
the extent of Rs. 4,28,99,325/- in contravention of the provisions of
section 269T of the Act.
On appeal filed by the assessee, the
Commissioner (Appeals) confirmed the penalty levied by the AO. On
further appeal filed by the assessee, the Tribunal allowed the appeal by
following its decisions in some of the group cases, and held that the
payment through journal entries did not fall within the ambit of section
269SS or 269T of the Act and consequently no penalty could be levied
either u/s. 271D or 271E of the Act.
The Revenue, in its appeal
to the High Court, submitted that the assessee belonged to the Ketan
Parekh Group, which was involved in the securities scam. It submitted
that the Ketan Parekh Group was found to be indulging in large scale
manipulation of prices of select scrips through fraudulent use of bank
and other public funds and had flouted all the norms of risk management
by making transactions through a large number of entities so as to hide
the nexus between the sources of funds and their ultimate use with the
sole motive of evading tax. It was further submitted that since the
language of section 269T of the Act was clear and unambiguous, the
tribunal ought to have held that repayment of the loan/inter-corporate
deposit otherwise than by account payee cheque or demand draft was in
violation of the provisions of section 269T of the Act and, hence, the
penalty imposed u/s. 271E of the Act was justified.
The
assessee, on the other hand, submitted that section 269T of the Act was
enacted to curb the menace of giving false explanation of the
unaccounted money found during the course of search and seizure; that
the bonafide transaction of repayment of loan or deposit by way of
adjustment through book entries carried out in the ordinary course of
business would not come within the mischief of the provisions of section
269T of the Act; the legislative history as also the circulars issued
by the CBDT confirmed that the provisions were not meant to hit genuine
transactions and the legislative intent was to mitigate any unintended
hardships caused by the provisions to genuine transactions; that in the
present case, genuineness of the transactions entered into by the
assessee with the Investment Trust of India was not in doubt; that no
additions on account of the transactions had been made in the regular
assessment; section 269T postulated that if a loan or deposit was repaid
by an outflow of funds, the same had to be by an account payee cheque
or demand draft and that discharge of the debt in the nature of loan or
deposit in a manner otherwise than by an outflow of funds would not be
hit by the provisions of section 269T.
The assessee further submitted that instead of repaying the amount by account payee cheque/demand draft and receiving back the amount by way of demand draft/cheque, the parties, as and by way of commercial prudence, had settled the account by netting off the accounts and paid the balance by account payee cheque. relying on a decision of the apex Court in the case of J.
B. Boda and Company P. Limited, 223 ITR 271(SC), it was submitted that the two-way traffic of forwarding bank draft and receiving back more or less same amount by way of bank draft was unnecessary and, therefore, in the facts of the present case, no fault could be found with the repayment of loan through journal entries. it was also submitted that the plain reading of section 269t, that each and every loan or deposit had to be repaid only by an account payee cheque or draft if accepted, would lead to absurdity because, by such interpretation not only mala fide transactions, but even genuine transactions would be affected.
Relying on the judgments of the apex Court in the cases of Kum. A. B. Shanti, 255 ITR 258 (SC) and J. H. Gotla, 156 ITR 323, the assessee submitted that if a strict and literal construction of a statute led to an absurd result, a result not intended to be subserved by the object of the legislation as ascertained from the scheme of the legislation and, if
another construction was possible apart from the strict and literal construction, then, that construction should be preferred to strict literal construction.
Inviting the attention of the court to the provisions of the Code of Civil Procedure and the books on accountancy, the assessee submitted that set-off of the claim/counter- claim otherwise than by account-payee cheque or bank draft was legally permissible in commercial transactions as also in the accounting practice. therefore, it must be held that genuine transactions like the transaction in the present case involving repayment of loan through journal entries did not violate section 269t of the act.
In any event, it was contended that having regard to the commercial dealings between the parties it must be held that there was reasonable cause for repaying the loan through journal entries. in view of section 273B of the act, penalty was not imposable u/s. 271 e of the act. In support of the above contention, reliance was placed on the decisions of the high Courts in the cases of Noida Toll Bridge Company Limited, 262 ITR 260 (Del.), Shree Ambica Flour Mills Corporation) 6 DTR 169 (Guj.) and Motta Constructions P. Limited, 338 ITR 66 (Bom.).
On careful consideration of the rival submissions, the court observed that the basic question to be considered in the appeal was whether repayment of loan of Rs. 4,28,99,325/- by making journal entries in the books of account maintained by the assessee was in contravention of section 269t of the act, and, if so, for failure to comply with the provisions of Section 269T, the assessee was liable for penalty u/s. 271e of the act.
The court observed that 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 could not be accepted, because, the section did not make any distinction between the bonafide and non-bonafide transactions and required 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, exceeded the limits prescribed therein. Similarly, the argument that only in cases where any loan or deposit was repaid by an outflow of funds, section 269t provided for repayment by an account payee cheque/draft, could not be accepted because section 269t neither referred to the repayment of loan/deposit by outflow of funds nor referred to any of other permissible modes of repayment of loan/deposit, but merely provided for an embargo on repayment of loan/deposit except by the modes specified therein. Therefore, in the case before it, where loan/deposit had been repaid by debiting the account through journal entries, it must be held that the assessee had contravened the provisions of section 269t of the act.
The court found that the reliance on the decision of the apex court in the case of J. B. Boda & Company P. Limited (supra) was misplaced as the aforesaid decision had no relevance to the facts of the present case, because, section 80-o and section 269t operated in completely different fields. The object of section 80-O was to encourage Indian Companies to develop technical knowhow and make it available to foreign companies and foreign enterprises so as to augment the foreign exchange earnings, whereas, the object of section 269t was to counteract evasion of tax. for section 80-o, receiving income in convertible foreign exchange is the basic requirement, where as, for section 269t, compliance of the conditions set out therein is the basic requirement. Section 80-O does not prescribe any particular mode for receiving the convertible foreign exchange, whereas, section 269t bars repayment of loan or deposit by any mode other than the mode stipulated under that section and for contravention of section 269t penalty is imposable u/s. 271e of the act. In these circumstances, the decision of the apex Court rendered in the context of section 80-o cannot be applied while interpreting the provisions of section 269t of the act.
The high Court further noted that on reading section 269t, 271e and 273B together, it became clear that u/s. 269T it was mandatory for the persons specified therein to repay loan/deposit only by account payee cheque/draft if the amount of loan/deposit together with interest, if any, exceeded the limits prescribed therein; non-compliance of the provisions of section 269t rendered the person liable for penalty u/s. 271e in the absence of the reasonable cause for failure to comply with the provisions of section 269t of the act.
The court refused to accept the argument advanced on behalf of the assessee that if section 269t was construed literally, it would lead to absurdity, because, repayment of loan/deposit by account payee cheque/bank draft was the most common mode of repaying the loan/deposit and making such common method as mandatory did not lead to any absurdity. Having held so, the court however observed that, in some cases, genuine business constraints necessitated repayment of loan/deposit by a mode other than the mode prescribed u/s. 269t and to cater to the needs of such exigencies, the legislature had enacted section 273B which provided that no penalty u/s. 271e should be imposed for contravention of section 269t if reasonable cause for such contravention was shown. the court noted that in the present case, the cause shown by the assessee for repayment of the loan/deposit otherwise than by account-payee cheque/bank draft was reasonable, as it was on account of the fact that the assessee was liable to receive amount towards the sale price of the shares sold by the assessee to the person from whom loan/deposit was received by the assessee, in as much as it would have been an 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.
Neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business had been doubted in the regular assessment and there was nothing on record to suggest that the amounts advanced by investment trust of india to the assessee represented the unaccounted money of the investment trust of india or the assessee. The fact that the assessee company belonged to the Ketan Parekh Group which was involved in the securities scam could not be a ground for sustaining penalty and it was not in dispute that settling the claims by making journal entries in the respective books was also one of the recognised modes of repaying loan/deposit.
In the result, the court held that the tribunal was not justified in holding that repayment of loan/deposit through journal entries did not violate the provisions of section 269T of the Act. However, in the absence of any finding recorded in the assessment order or in the penalty order to the effect that the repayment of loan/deposit was not a bonafide transaction and was made with a view to evade tax, it was held that the cause shown by the assessee was a reasonable cause and, therefore, in view of section 273B of the act, no penalty u/s. 271e could be imposed for contravening the provisions of section 269t of the act.
Worldwide Township projects lTD.’s case
The issue inter alia recently arose for consideration of the delhi high Court in the case of CIT vs. Worldwide Townships Projects Ltd., 269 CTR 444, wherein the revenue challenged the order of the tribunal holding that the penalty order passed by the ao u/s. 271d of the act was unsustainable in law.
In this case, the assessee filed its return of income for the assessment year 2007-08 on 30-10-2007, which return was taken up for scrutiny. the ao found that during the year in question, the assessee had shown purchases of land worth rs. 14.22 crore, which had remained to be paid at the end of the year. This was accordingly reflected as Sundry Creditors in the name of one PACL India Ltd., which had purchased lands on behalf of the assessee from several land owners on payments made by it through demand drafts to various land owners on behalf of the assessee.
The AO held that the transactions amounted to extending of a loan to the assessee by PACL India Ltd and that the said transaction fell foul of the provisions of sections 269SS and 269T of the Act, since no funds had passed through the bank accounts of the assessee for acquisition of the lands. The ao levied a penalty u/s. 271d holding the assesssee responsible for violation of the provisions of section 269SS for sums aggregating Rs.14,25,74,302/- that, in his view, were transferred to the loan account in the form of book entries, otherwise than through an account payee cheque or a account payee draft.
In the appeal by the assessee, the Cit (appeals), relying on the decision of the delhi high Court in the case of Noida Toll Bridge Co. Ltd,: 262 itr 260, disagreed with the findings of the AO and deleted the penalty in the given circumstances of the case. The tribunal held that the order passed by the ao was beyond the time permissible u/s. 275(1)(a) and was not tenable in law.
On a further appeal to the high Court by the revenue, the delhi high Court was unable to appreciate as to how, in the given circumstances of the case, there was an offence u/s. 269SS of the Act. The High Court observed that a plain reading of the provision indicated that the import of the above provision was limited and it applied only to a transaction where a deposit or a loan was accepted by an assessee, otherwise than by an account payee cheque or an account payee draft. the ambit of the section was clearly restricted to transactions involving acceptance of money and was not intended to affect cases where a debt or a liability arose on account of book entries. the object of the section was to prevent transactions in currency, which fact was also clearly explicit from Clause (iii) of the explanation to section 269SS of the Act, which defined a loan or deposit to mean “loan or deposit of money.” The liability recorded in the books of account by way of journal entries, i.e., crediting the account of a party to whom monies were payable or debiting the account of a party from whom monies were receivable in the books of account, was clearly outside the ambit of the provision of section 269SS of the Act, because passing such entries did not involve acceptance of any loan or deposit of money. in the present case, admittedly no money was transacted other than through banking channels in as much as PACL India Ltd. made certain payments through banking channels to land owners on behalf of the assessee, which were recorded by the assessee in its books by crediting the account of PACL India Ltd, and in view of that admitted position, no infringement of section 269SS of the Act was made out.
The delhi high Court noted that the court, in the case of Noida Toll Bridge Co. Ltd. (supra), had considered a similar case where a company had paid money to the Government of Delhi for acquisition of a land on behalf of the assessee therein. It noted that, in the said case, the ao had levied a penalty for alleged violation of the provisions of section 269SS, which was confirmed by the Commissioner(appeals), but was deleted by the tribunal. In an appeal by the Revenue, the High Court held as under:-
“While holding that the provisions of section 269SS of the Act were not attracted, the Tribunal has noticed that: (i) in the instant case, the transaction was by an account payee cheque, (ii) no payment on account was made in cash either by the assessee or on its behalf, (iii) no loan was accepted by the assessee in cash, and (iv) the payment of Rs. 4.85 crore made by the assessee through IL & FS, which holds more than 30% of the paid-up capital of the assessee, by journal entry in the books of account of the assessee by crediting the account of IL & FS. Having regard to the aforenoted findings, which are essentially findings of fact, we are in complete agreement with the Tribunal that the provisions of section 269SS were not attracted on the facts of the case. Admittedly, neither the assessee nor IL & FS had made any payment in cash. The order of the Tribunal does not give rise to any question of law, much less a substantial question of law.”
The high Court accordingly held that there was no violation of the provisions of section 269SS on passing of the journal entries for accepting a liability that arose on account of the payment made by a person on behalf of the assessee.
Observations.
Chapter XXB containing sections 269SS to section 269TT were introduced by the Income-tax (Second Amendment) act, 1981 with effect from 11th july, 1981 with a view to counter the evasion of tax. the object of the provisions are explained by the CBDT in its Circular no. 345 dated 28-06-1982 stating that the proliferation of black money posed a serious threat to the national economy and to counter that major economic evil, Chapter XXB was introduced.
It is apparent that the provisions were introduced to control the transactions in cash and where found to be without reasonable cause, to punish the persons executing such transactions. any interpretation placed on these provisions shall have to factor in the objective behind the insertion of these provisions, a fact which has been the guiding factor for the judiciary, in case after case, while deciding the issues that routinely arise in applying the provisions. this aspect has been appreciated by the Bombay high Court when it stated that settling the claims by making journal entries in the respective books was also one of the recognised modes of repaying loan/ deposit and once such settlement is found to be genuine, the question of levy of penalty does not arise. With this finding, in our opinion, the court accepted the principle that the non cash transactions were outside the scope of the set of the provisions, collectively read.
A literal interpretation of these provisions, also, in our respectful opinion, does not lead to bringing an accounting entry within the ambit of these provisions. a loan or deposit has to be ‘taken’ or ‘accepted’ or ‘repaid’ for attracting the provisions. there has to a receipt or a payment; has to be received or paid. taking, accepting or repaying is a sine qua non of these provisions, failing which the provisions shall not apply. It is essential that this fact is established by the revenue before applying these provisions. these terms, when understood in common parlance, cannot by any stretch of imagination include the act of passing an accounting entry. In ordinary course, one does not take a loan by passing an accounting entry and so it is, in the case of a repayment. An accounting entry can pave a way for settlement or settling a transaction and may consequently result in creation of a debt or extinguishing a debt but cannot be construed as an acceptance or repayment which, in the ordinary meaning of the terms, are acts that require transfer of funds, which, in the case under consideration, is cash. In the absence of any movement of cash, the provisions have no role to play. Any other interpretation would rope in all those transactions wherein a debt is converted into a loan or a deposit.
Any doubt remaining in the matter of interpretation of these provisions is further dispelled by Clause (iii) of the Explanation to both the provisions, section 269 SS and 269T which defines a ‘loan or deposit’ to mean loan or deposit of money. unless a transaction involves money changing hands, the provisions have no role to play. We respectfully submit that it is this aspect of the provisions that the court failed to appreciate; may be due to the fact, recorded in the order, that the assessee admitted that the provisions of s.269t were applicable to its case.
The attention of the Bombay high Court was drawn by the assessee, not with success, to impress that the provisions were not applicable to the cases involving accounting entries, by relying on the decisions in the cases of noida Toll Bridge Company Limited, 262 ITR 260 (Del), Shree Ambica Flour Mills Corporation, 6 DTR 169 (Guj) and Motta Constructions P. Limited, 338 ITR 66 (Bom).
In Motta Constructions P. Limited, 338 ITR 66 (Bom), the same high Court was asked to examine the applicability of section 269 SS to the case of the journal entry passed by the company for acknowledging the debt in favour of a director, who had incurred some expenditure on behalf of the company. the court, in the circumstances, held that the said provisions had no application to the case where a debt was created by a journal entry, in as much as no loan or deposit could be said to have been received by the assessee company.
In Noida Toll Bridge Company Limited, 262 itr 260 (Del.), the High Court held that the provisions of s. 269SS were not applicable to a case of the company crediting the account of one IL & FS on payments made by IL & FS on behalf of the company, where none of the parties had made payment in cash. in Shree Ambica Flour Mills Corporation(2008, ) 6 DTR 169 (Guj) it was held that the payments made by sister concerns for each other were not in violation of section 269SS or section 269T of the Act.
The allahabad high Court also, in the case of CIT vs. Saurabh Enterprises 269 CTR 451, has taken a view that where no cash was involved, but merely adjusting book entries, there was no violation of sections 269SS or 269T. the income-tax appellate tribunal has, through its various decisions, taken a consistent stand that the provisions of section 269SS and section 269T do not apply to the case of a debt created or extinguished by accounting entries. Please see, Bombay Conductors & Electrical Ltd. 56 TTJ (Ahd) 580, Muthoot M. George, 47 TTJ (Coch) 434, Sunflower Builders (P.) Ltd. 61 ITD 227 (Pune). the decision of the ahmedabad tribunal was later on confirmed by the Gujarat High Court reported in 301 itr 328.
Significantly, it is required to be appreciated that even otherwise, an accounting entry may not be and cannot be said to have the effect of resulting in a loan or a deposit. The Supreme Court, in the case of Bombay Steam Navigation Co., 56 ITR 52, observed as under; “An agreement to pay the balance of consideration, due by the purchaser, does not in truth give rise to a loan. A loan of money results in a debt but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources . Every creditor who is entitled to receive a debt cannot be a lender.”
While it is true that the provisions do not expressly exclude journal entries from the application of section 269SS and section 269T, it is also true that the entries, by themselves, cannot be said to have resulted in receiving a loan or repaying a loan, and without doubt, not in money. the decision of the Bombay high Court, on this limited aspect, needs to be reviewed.
