2 Section 271D – Penalty – Accepting/ repaying loans/ advances via journal entries contravenes section 269SS & 269T – Penalty cannot be levied if the transactions are bona fide, genuine & reasonable cause u/s. 273B

The assessee who belongs to the Lodha group , was engaged in the business of land development and construction of real estate properties. Assessee filed the return of income declaring the total income at Rs. NIL and the same was subsequently revised to adjust carry forward losses. Assessment was completed determining the total income of Rs. 26,69,084/- under the special provisions of section 115JB of the Act. In the assessment, vide para 6, the AO, mentioned about “Accepting / repayment of loans other than account payee cheques / draft”. Eventually, AO mentioned that such accepting / repayment of loans other than account payee cheques / drafts (through journal entries) amounts to violation of the provisions of section 269SS and 269T of the Act.

The assessee submitted that the loans received are by way of “journal entries? and there is no acceptance of cash by any method other than the one prescribed in the statute. The core transactions were undertaken by way of cheque only and however, the assessee resorted to the journal entries for transfer / assignment of loan among the group companies for business consideration. In case of journal entries, as per the assessee, the liabilities are transferred / assigned by the group companies to the assessee or to take effect of actionable claims /payments/ received by group companies on behalf of the company. The journal entries were also passed in the books of accounts for reimbursement of expenses and for sharing of the expenses within the group.

The assessee further submitted during the period when journal entries were passed, the assessee company was under the bona fide belief that there is no breach of provisions of income tax Act considering recognized method of assigning credit / debit balance by passing journal entries.

In such cases, the provisions of section 269SS of the Act have no application and for this, the assesse relied on the judgement of the Honble Madras High Court in the case of CIT vs. Idhayam Publications Ltd [2007] 163 Taxman 265 (Mad.) which is relevant for the proposition that the deposit and the withdrawal of the money from the current account could not be considered as a loan or advance. It is the contention of the assessee that there is no cash transactions involved and relied on the contents of the CBDT Circular No.387, dated 6th July, 1984 and mentioned that the purpose of introducing section 269SS of the Act is to curb cash transactions only and the same is not aimed at transfer of money by transfer / assignment of loans of other group companies.

Addl. CIT  mentioned that even bona fide and genuineness of the transactions, if carried out in violation of provisions of section 269SS of the Act, the same would attract the provisions of section 271D of the Act .

The ld. CIT(A)  confirmed the findings recorded by the A.O.

The Tribunal held  that there is no finding  in the order of the AO that during the assessment proceedings the impugned transactions constitutes unaccounted money and are not bona fide or not genuine. As such, there is no information or material before the AO to suggest or demonstrate the same. In the language of the Hon’ble High Court in the case of Triumph International (I) Ltd, 345 ITR 370 (Bom), 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 has been doubted in the regular assessment. Admittedly, the transactions by way of journal entries are aimed at the extinguishment of the mutual liabilities between the assessees and the sister concerns of the group and such reasons constitute a reasonable cause.

In the present case, the causes shown by the assessee for receiving or repayment of the loan/deposit otherwise than by account-payee cheque/bank draft, was on account of the following, namely: alternate mode of raising funds; assignment of receivables; squaring up transactions; operational efficiencies/MIS purpose; consolidation of family member debts; correction of errors; and loans taken in case. In our opinion, all these reasons are, prima facie, commercial in nature and they cannot be described as non-business by any means. Further, it was observed that why should the assessee under consideration take up issuing number of account payee cheques / bank drafts which can be accounted by the journal entries.

Further, there is no dispute that the impugned journal entries in the respective books were done with the view to raise funds from the sister concerns, to assign the receivable among the sister concerns, to adjust or transfer the balances, to consolidate the debts, to correct the clerical errors etc. In the language of the Hon?ble High court, the said “journal entries? constitutes one of the recognised modes of recording the loan/deposit. The commercial nature and occurrence of these transactions by way of journal entries is in the normal course of business operation of the group concerns. In this regard, there is no adverse finding by the AO in the regular assessment. AO has not made out in the assessment that any of the impugned transactions is aimed at non commercial reasons and outside the normal business operations. Accordingly, the appeal of the assessee was allowed.

The Hon. High Court observed  that the Tribunal has on application of the test laid down for establishment of reasonable cause, for breach of section 269SS of the Act by this Court in Triumph International Finance (supra) found that there is a reasonable cause in the present facts to have made journal entries reflecting deposits.

In the above circumstances, the view taken by the Tribunal in the impugned order holding that no penalty can be imposed upon by the Revenue as there was a reasonable cause in terms of section 271B of the Act for having received loans / deposits through journal entries is at the very least is a possible view in the facts of the case. Accordingly appeal of dept was dismissed.