S/s. 269T, 271E – Amount given or taken from the firm by the partners cannot be treated as giving or taken of loan. Therefore, penalty u/s. 271E cannot be levied even if such amounts are given or taken in cash.
Facts:
In the course of assessment proceedings the Assessing Officer noticed that the assessee had repaid loans, aggregating to Rs. 33,26,960 (Rs. 2,00,000 + 31,26,960), in cash, to the two firms where he was a partner. Such repayment of loan in cash was also reflected in the tax audit report. The amounts borrowed from the firm were reflected in the balance sheet as unsecured loans. The AO considered these payments to be in violation of section 269T of the Act and proceedings for levy of penalty u/s. 271E of the Act. He levied penalty of Rs. 33,26,960 u/s. 71E of the Act.
Aggrieved, the assessee preferred an appeal to the CIT(A) who deleted the penalty levied by the AO.
Aggrieved, the revenue preferred an appeal to the Tribunal.
Held:
The transactions between the firm and the assessee were treated by the AO as repayment of loan in cash. It held that there is no independent legal entity opf the firm apart from the rights and liability of the partners constituting it and if any amount is given or taken from the firm by the partners that cannot be treated as giving or taking of the loan. In the instant case, the assessee being a partner gave the money to the partnership firm when it was in need of business exigencies, later on the amount was received back. If the said amount had been routed through the capital account, there could have been no disallowance by the department because a partner can deposit cash in his capital account and he also has a right to receive it in cash. The Tribunal held that the AO was not justified in levying the penalty and CIT(A) has rightly deleted it.
It noted that on a similar issue, the Madras High Court has in the case of CIT vs. V. Sivakumar (354 ITR 9) (Mad) held as under:
“that there was no separate identity for the firm and the partner is entitled to use the funds of the firm. The assessee acted bona fide and there was a reasonable cause within the meaning of section 273B. Penalty could not be imposed.
It also noted that the Rajasthan High Court has in the case of CIT vs. Lokhpat Film Exchange (Cinema) (304 ITR 172)(Raj) held as under:
“the assessee had acted bona fide and its plea that inter se transactions between the partners and the firm were not governed by the provisions of sections 269SS and 269T was a reasonable explanation. Penalty could not be imposed.”
Considering the facts of the case and also the ratio of the above stated decisions the Tribunal held that the CIT(A) was justified in deleting the penalty levied by the AO u/s. 271E of the Act.
The appeal filed by the revenue was dismissed.
