Nilons Enterprises Pvt. Ltd. Vs ITO (ITAT Pune)

Conclusion: Penalty under Section 271E was not leviable as there was a reasonable cause for adjustment of security deposits against outstanding’s receivable on the part of the assessee for violation, of sections 269SS and 269T.

Held: Assessee-company was engaged in the business of manufacturing and selling food products had filed its income tax returns (ITR) for the for the AY 2016-17, declaring the income as nil. During the assessment proceedings, AO observed that assessee made repayment of loans/deposits through a mode other than account payee cheques/drafts, for which AO referred the matter to the JCIT for the initiation of penalty proceedings for violating the provisions of Sec. 269T. During the penalty proceedings, it was submitted by assessee that provisions of Sections 269SS and 269T could not be invoked merely on the basis of journal entities. JCIT levied a penalty of Rs. 57,27,410 under Section 271E for violation of provisions of Section 269T. Although, assessee appealed before CIT(A), the latter upheld action of the JCIT by noting that no evidence was filed by  assessee to show that there was any bonafide reasonable cause due to which the repayment was not made through the modes provided in Section 269T. Assessee contended that there was no violation of provisions of sec.269T since the security deposits were obtained through banking channels and were only adjusted towards the outstanding dues. It was held that although it has been held that receipts/deposits/loans received through journal entries was in breach of sec.269SS, however, the adjustment of such security deposits against outstanding’s receivable would constitute a ‘reasonable cause’ so as not to attract levy of penalty u/sec.269T. Similar was the case with the transactions with related parties.

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal filed by the assessee is directed against the order dated 07.05.2024 of the Ld. CIT(A)-National Faceless Appellate Centre [in short “NFAC”], relating to assessment year 2016-2017.

2. Although a number of grounds have been raised by the assessee, however, these all relate to the order of the Ld. CIT(A) in confirming the penalty of Rs.57,27,410/- levied by the Assessing Officer u/sec.271E of the of the Income Tax Act, 1961 (in short “the Act”).

3. Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing and selling of food products. It filed it’s return of income on 04.05.2017 declaring Rs.NIL income. The case of the assessee was selected for scrutiny and statutory notices were served on the assessee, in response to which, the assessee’s Authorised Representative appeared before the Assessing Officer from time to time and filed the requisite details.

3.1. The Assessing Officer completed the assessment u/sec. 143(3) on 29.11.2018 determining the total income of the assessee at Rs.NIL. During the course of assessment proceedings, the Assessing Officer noted that assessee made repayment of loans/deposits through the mode other than account payee cheques/drafts, for which, the Assessing Officer referred the matter to the concerned JCIT for initiation of penalty proceedings for violating the provisions of sec.269T, for which, the JCIT issued notice to the assessee asking it to explain as to why an order imposing penalty should not be made u/sec.271E of the Act.

3.2. During such penalty proceedings, the assessee apart from making various other submissions, drew the attention of the Bench to the submissions made before the JCIT which reads as under :

“4. Company supplies its products through Customer Sales Agents (CSA) after taking security deposit from them. Security Deposit is taken for ensuring genuineness of the party and timely recovery of dues of the company. The Security Deposit of the concerned party is adjusted or transferred to customer ledger of the same party during course of business. Security deposit is taken through Bank account only. In some cases, when customer doesn’t make payment of its dues for sales made, the Assessee utilizes the security deposit to recover its dues by adjusting the credit against the customer ledger Accordingly, it is a knocking off of debit balance in one account of a person with credit balance in another account of same person i.e., merger of two accounts of one person in the same books of accounts. It would not be appropriate to first repay the security deposit and then recover the dues as it may lead to non-recovery of dues and bad debts, which is detrimental not only to the assessee but also to the Tax Authorities. This does not result in any evasion of tax as the sales accounted against the said customer is duly reflected in Profit and Loss and unwanted bad debts and as result loss not only to the Assessee but also to the Government is avoided.

5. During relevant year, assessee has incurred transactions which are related to its directors and related party of the company such as payment of income tax, wealth fax, service tax, on behalf payment etc. All the said transactions are through Bank i.e., account payee cheque, NEFT or RTGS which are settled/transferred through Journal Entries. The underlying principle for incurring such transactions is ease of compliance of various laws and not evasion of taxes as said payment of taxes are made to government.”

3.3. It was submitted that these are mere journal entries and, therefore, provisions of secs.269SS and 269T are not applicable. However, the JCIT was not satisfied with the arguments advanced by the assessee. Distinguishing the various decisions cited before him and relying on various other decisions, the JCIT levied penalty of Rs.57,27,410/- u/sec.271E of the Act for violation of provisions of sec.269T of the Act.

4. In appeal, the Ld. CIT(A) upheld the action of the Assessing Officer. While doing so, he held that journal entry is not a mode prescribed in sec.269T of the Act. The assessee has not filed any evidence to show that there was any bonafide reasonable cause due to which the repayment was not made through the modes provided in sec.269T of the Act either before the JCIT or during the appellate proceedings. He accordingly, upheld the action of the JCIT.

5. Aggrieved with such order of the Ld. CIT(A), the assessee is in appeal before the Tribunal.

6. Learned Counsel for the Assessee, at the outset, strongly challenged the order of the Ld. CIT(A) in confirming the penalty levied by the Assessing Officer u/sec.271E of the Act. He submitted that the transactions in respect of which penalty has been levied can be bifurcated in two parts i.e., (i) transaction with related party viz., Shri Deepak Sanghavi of Rs.13,06,040/-, Mrs. Ritu Sanghavi Rs.8,21,370/- totalling to Rs.2 1,27,410/- and (ii) transactions with Customer Sales Agents [in short “CSAs”] amounting to Rs.36 lakhs, the details of which are as under :

3.4. So far as the transactions with the related parties are concerned, he submitted that it had made certain payments on behalf of the above referred persons which are settled through journal entries. So far as the transaction with CSAs are concerned, he submitted that the deposits have been repaid by way of journal entries. He submitted that the assessee-company is engaged primarily in manufacturing of food products like pickles, jam, papad, instant mix, etc. The assessee-company has wide network of customers and distributors across India. The assessee sells it’s products through CSAs. Initially, the assessee takes security deposit from the CSAs in order to ensure genuineness of the party and timely recovery of dues. In certain occasions, the security deposits so obtained from the concerned parties were adjusted or transferred to the sales ledger of the same party in the course of carrying on the business. The security deposit has been taken through proper banking channels. When the CSAs do not make the payments of the dues for the sales made to them, the assessee utilises the security deposits to recover the dues from the CSAs. Therefore, in a way there is no violation of provisions of sec.269T since the security deposits were obtained through banking channels and were only adjusted towards the outstanding dues.

6.2. Referring to various decisions, he submitted that there exists a reasonable cause on the part of the assessee for making payment of tax on behalf of the Directors and related parties which are settled/transferred through banking channel or journal vouchers. Referring to the decision of Hon’ble Supreme Court in the case of CIT vs. Adinath Builders (P.) Ltd., [2019] 102 taxmann.com 57 (SC), he submitted that the Hon’ble Supreme Court dismissed the SLP filed by the Revenue and upheld the order of the Hon’ble High Court who decided the issue in favour of the assessee that although the receipt of cash deposits/loans received through journal entries is in breach of sec.269SS, however, penalty u/sec.271D cannot be levied since there exists a ‘reasonable cause’. It has further been held that journal entries constitute a recognised mode of recording of transactions and in absence of any adverse findings by the authorities that these were made with a view to achieve purpose outside normal business operations or there was any involvement of money, there was a reasonable cause for not complying with sec.269SS and penalty levied u/sec.271D was not to be imposed.

6.3. Referring to the decision of Mumbai Bench of the Tribunal in the case of Lodha Builders Pvt. Ltd., vs., ACIT vide ITA.No.476/Mum./2014, he submitted that the Tribunal in the said decision has held that accepting/repaying loans/ advances via journal entries contravenes Section 269SS and

269T provisions but penalty cannot be levied u/sec.271D and u/sec.271E of the Income Tax Act, if transactions are “bonafide and genuine”. It has further been held that so long as the transactions are for business purposes and do not involve unaccounted money, they are genuine. He accordingly submitted that penalty so levied by the Assessing Officer and sustained by the Ld. CIT(A) is not justified and should be deleted.

7. The Learned DR, on the other hand, while supporting the order of the JCIT/AO and CIT(A) referred to the decision of Hon’ble Supreme Court in the case of CIT (Central)- IV vs. Adinath Builders (P.) Ltd., [2019] 102 com 57 (SC) and submitted that the receipt of deposits/loans through journal entries is in breach of sec.269SS. He accordingly submitted that the order of the Ld. CIT(A) sustaining the penalty levied by the JCIT/AO should be upheld.

8. We have heard the rival arguments made by both the sides and perused the material available on record. We find the Assessing Officer in the instant case levied penalty of 57,27,410/- u/sec.271E of the Act on account of violation of provisions of sec.269T of the Act holding that assessee has violated the said provisions by repaying certain loans/ advances in mode other than by way of account payee cheque RTGS/Demand Draft etc., We find the Ld. CIT(A) upheld the action of the Assessing Officer on the ground that repayment of loans/advances through journal entries is not a prescribed mode of repayment of loans/advances under the provisions of sec.269T of the Act and, therefore, the assessee is liable for penalty u/sec.271E of the Act. It is the submissions of the Learned Counsel for the Assessee that an amount of Rs.2 1,27,410/- relates to transactions entered into with related parties and an amount of Rs.36 lakhs relates to transactions with CSAs.

8.1. So far as the transaction with CSAs are concerned, we find it is the submission of the Learned Counsel for the Assessee that assessee has taken security deposit from these CSAs through account payee/RTGS/ Demand drafts etc., which were subsequently adjusted against the outstandings due from them towards sales. Therefore, strictly speaking there is no violation of provisions of sec.269T of the Act and in case such entries are treated as violation of provisions of sec.269T, then, in view of provisions of section 273B there exists a ‘reasonable cause’ on the part of the assessee for such adjustments. So is the case with respect to the transactions with related parties.

8.2 We find some force in the above arguments of the . Learned Counsel for the Assessee. We find from the missions made before the Assessing Officer as well as the Ld. CIT(A) that since the dues are to be recovered from the CSAs on account of sales made to them, the assessee has adjusted the amount of recovery against the security deposits obtained from the said parties through journal entries. Although it has been held that receipts/deposits/loans received through journal entries is in breach of sec.269SS, however, the adjustment of such security deposits against outstandings receivable, in our opinion, will constitute a ‘reasonable cause’ so as not to attract levy of penalty u/sec.269T of the Act. Similar is the case with the transactions with related parties.

8.3. We find the provisions of sec.273B read as under :

“Notwithstanding anything contained in the provisions of [clause (b) of sub-section (1) of] [section 271, section 271- A] [section 271AA] section 271-B, [section 271BA] [section 271-BB], section 271C, [section 271CA] section 271D, section 271E, [section 271F, [section 271FA,] [section 271FA] [section 271FAA.] [section 271FAB,] [section 271FB] [section 271G,] [section 271 GA,] (section 271 GB,] [section 271GC,] [section 271H,] [section 271-1,] [section 271J,] clause (c) or clause (d) of sub-section (1) or sub­section (2) of section 272A, sub-section (1) of section 272AA] or [section 272B or] [sub-section (1) [or sub- section (1A)] of section 272BB or] [sub-section (1) of section272BBB or] clause (b) of sub-section (1) or clause (b) or clause (c) of sub-section (2) of section 273, 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.]”

8.4. We find the Hon’ble Bombay High Court in the case of CIT (Central)-IV vs. Ajitnath Hi-Tech Builders (P.) Ltd., (supra) while holding that receipt/deposit/loans received through journal entries is in breach of sec.269SS, however, has upheld the decision of the Tribunal cancelling the penalty levied on account of ‘reasonable cause’. The relevant observations of the Hon’ble High Court reads as under :

1. These Appeals under Section 260-A of the Income Tax Act, 1961 (the Act) challenges a common order dated 27th June, 2014 passed by the Income Tax Appellate Tribunal (the Tribunal). The common impugned order is in respect ofAssessment Year 2009-10.

2. 1revnue has urged the following identical questions of law in all these appeals for our consideration :-

(i) Whether on the facts and in the circumstance of the case and in law, the Tribunal is justified in deleting the penalty u/s.271D holding that there was reasonable cause u/s.273B for entering into such transactions through journal entries.

(ii) Whether on the facts and in the circumstance of the case and in law, the Tribunal is justified in holding that the penalty order is barred by limitation under Section 275(1) of the Income Tax Act, 1961 (the Act) ?

(iii)Whether on the facts and in the circumstance of the case and in law, the Tribunal is justified in holding that the Assessing Officer’s decision to refer the matter of penalty u/s.271D to the Addl. Commissioner of Income Tax constitute “action for imposition of penalty” and, therefore, period of limitation would be counted with reference to the date of assessment order instead of the date of issue of penalty notice by the Addl. CIT ?

(iv) Whether on the facts and in the circumstance of the case and in law, the Tribunal is justified in holding that the journal entries should enjoy equal immunity on par with account payee cheques and bank drafts?

3. Regarding Question No. (i) :-

(a) The common impugned order of the Tribunal arises from the orders passed by the Addl. Commissioner of Income Tax imposing penalty upon the respondents under Section 271D of the Act for breach of Section 269SS of the Act. This penalty was imposed inasmuch as during the previous year relevant to the subject assessment year, the respondents had accepted loans/deposits by way of passing journal entries in its books of accounts, in breach of Section 269SS of the Act. In terms Section 269SS of the Act prohibits a person from taking/accepting any loan/deposit or specified sum, otherwise by an account payee cheque or by an account payee bank draft or by use of electronic clearing system of a bank if the amount involved is in excess of Rs.20,000/-. This imposition of penalty under Section 271D of the Act, was upheld by a common order dated 31^st December, 2013 passed by the Commissioner of Income Tax (Appeals). On further appeal, the impugned order dated 27^th June, 2014 of the Tribunal, inter alia held that penalty under Section 271D of the Act is not imposable in view of Section 273B of the Act. This for the reason that there was a reasonable cause for the failure to comply with Section 269SS of the Act.

(b) On merits of the issue, the parties before us are agreed that the Tribunal was correct in holding that receipt of any advance/loan by way of journal entries is in breach of Section 269SS of the Act as the decision of this Court in CIT v. Triumph International Finance (I) Ltd. [2012] 22 taxmann.com 138/208 Taxman 299/345 ITR 270 (Bom.) is binding upon it. However, the Revenue’s grievance is with the impugned order dated 27^th June, 2014 of the Tribunal further holding no penalty under Section 271D of the Act is imposable in view of Section 273B of the Act in the present facts. This is so as the Tribunal holds that the failure to comply with Section 269SS of the Act was on account of reasonable cause on the part of the respondents. This finding of reasonable cause was on the application of parameters laid down by this Court in Triumph International Finance (supra) to determine reasonable cause for not complying with the provisions of Section 269SS of the Act.

(c) Mr. Mohanty, the learned Counsel for the Revenue seeks to challenge the impugned order of the Tribunal on the ground that Section 273B of the Act will have no application as the test of reasonable cause is not satisfied :in the present facts for the following reasons :-

(i) the decision of this Court in Triumph International Finance (supra) will have no application as that was of the case of only one transaction while in this case, there arenumerous transactions reflected through the passing of journal entries;

(ii)the reasons set out for taking advances/ deposits by way of journal entry would not satisfy the test of reasonable cause; and

(iii) the non-satisfaction of showing reasonable cause as required under Section 273B of the Act gives rise to a question of law as it is a legal inference to be drawn from primary facts as held by the Apex Court in Premier Breweries v. CIT [2015] 56 taxmann.com 351/230 Taxman 575/372 ITR 180. Thus, it is submitted this question requires admission as it gives rise to a substantial question of law;

(d) We find that the impugned order of 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. The Tribunal while relying upon the order of this Court in Triumph International Finance (supra) has held that in the present facts, neither the genuineness of receipt of loans/deposits by way of an adjustment through journal entries carried out in the ordinary course of business has been doubted in the regular assessment proceedings. It held in the present facts the transaction by way of journal entries was undisputedly done to raise funds from sister concerns, to adjust or transfer balances to consolidate debts, to correct clerical errors etc. Further, the Tribunal records that as observed by this Court in Triumph International Finance (supra) that journal entries constituted a recognized modes of recording of transactions and in the absence of any adverse finding by the authorities that the journal entries were made with a view to achieve purposes out side the normal business operations or there was any involvement of money, then, in these facts there was a reasonable cause for not complying with Section 269SS of the Act.

(e) Mr. Mohanty’s submission that the test laid down in Triumph International Finance ( supra) will have no application in the present facts in view of the large number of entries in this case as compared to only one entry in the case beforethis Court. The test of reasonable cause can not, in the present facts be determined on the basis of the number of entries. If there was a reasonable cause for making the journal entries, then, the number of entries made, will not make any difference. Besides, on facts, the Tribunal was satisfied with the reasons given by the Assessee for reasonable cause and this finding is not shown to be perverse. Finally, the issue of there being a reasonable cause or not is an issue of fact. No inference of law and/or issue of interpretation is to be made. The decision relied upon by the Revenue in case of Premier Breweries Ltd. (supra) concerned itself with the issue of a claim for deduction under Section 37 of the Act on the basis of the Agreements entered into between the parties. The inference of law in that case was whether on the facts, it could be inferred that the claim for deduction is in respect of expenditure incurred wholly and exclusively for the purposes of the business. Thus, it would involve a question of interpretation of the agreements etc. from which an inference is to be drawn. Further, it also involves application of principles of law to thefacts for the purposes of deductions and, therefore, it would lead to a question of law. Therefore, the Court held in the facts of that case that a question of law does arise.

(f) in this case, the issue of reasonable cause is an inference of fact from facts and, therefore, a question of fact. The Supreme Court decision in Sree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28 had laid down the tests to determine a question of law and/or fact. In the above context, the Court observed that when the finding is one of fact, the fact that it itself is an inference from other basic facts, will not alter its character as one of fact. Therefore, the issue of there being reasonable cause or not, is a question of fact and unless it is shown to be perverse, we would normally not interfere.

(g) In the above circumstances, the view taken by the Tribunal on the facts before it, is a possible view and does not give rise to any substantial question of law.

(h) In any event, as rightly pointed out by Mr. Sridharan, learned Senior Counsel for the respondents assesses, the order of this Court inTriumph International Finance (supra) was rendered on 12 ^th June, 2012. This, was in an appeal filed by the Revenue from the order of the Tribunal dated 29^th January, 2008, which had held that deposits/loans received through journal entries do not fall with the mischief of Section 269SS of the Act, so as to invite penalty under Section 271D of the Act. This, the Tribunal did by following its earlier orders in the case of V.N. Parekh Ltd. and Ketan Parekh as indicated in the order of this Court in Triumph International Finance (supra). Our attention was also invited to numerous reported decisions of the Tribunal in the cases of Sunflower Builders v. Dy. CIT [1997] 61 ITD 227 (Pune), Asstt. CIT v. Ruchika Chemicals & Investment (P.) Ltd. [2004] 88 TTJ 85 (Delhi) and Asstt. CIT v. Lala Murari Lal & Sons [2004] 2 SOT 543 (Luck) wherein it has been held journal entries in the book of accounts indicating deposit/loans will not fall foul of Section 269SS of the Act. Besides, the Delhi High Court in CIT v. Noida Toll Bridge Co. Ltd. [2004] 139 Taxman 115/ [2003] 262 ITR 260 inter alia held that payment of Rs. 4.85 crores made by the assesses by ajournal entry in its books of account by crediting the account of ILFS, would not fall foul of Section 269SS of the Act. This particularly in the absence of any payment being made in cash.

(i) In the present facts, the period during which the journal entries were made by the respondents was in the previous year relevant to the Assessment Year 2009-10 i.e. Financial Year 2008-09. At that time, the decisions of the Tribunal in the cases of Triumph International (supra) and decision of V.H. Parekh (P.) Ltd., Ketan V. Parekh, Sunflower Builders (supra), Ruchika Chemicals (supra), Lala Murari Lal (supra) and the decision of the Delhi High Court in Noida Toll Bridge Co. Ltd. (supra) were holding the field. Thus, not in breach of Section 269SS of the Act. In the above view, while agreeing with the submission of Mr. Mohanty, learned Counsel for the appellant that the decision of this Court in Triumph International Finance (supra) has only clarified/stated the position as always existing in law, the receiving of deposits/loans through journal entries would certainly be hit by Section 269SS of the Act. Nevertheless, prior to the decision of this Courtin Triumph International Finance (supra), there was reasonable cause for respondents to receive deposit/loan through journal entries. This non-compliance with Section 269SS of the Act would certainly be a reasonable cause under Section 273B of the Act for non-imposition of penalty under Section 271D of the Act.

(j) In the above circumstances, the view taken by the Tribunal in the impugned order holding that no penalty can be imposed upon the respondents 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.

(k) therefore, the question as posed does not give rise to any substantial question of law. Thus, not entertained. Regarding question nos. (ii), (iii) and (iv) :-

4. In view of our answer to question no. (i), question nos. (ii), (iii) and (iv) in the present facts have been rendered academic. Thus, we are not dealing with them.

(a) In the above view, question (ii), (iii) and (iv) do not give rise to any substantial question of law in the present facts. Thus, not entertained.

5. Accordingly, all six appeals are dismissed. No order as to costs.”

8.5. We find when the Revenue challenged the above order before the Hon’ble Supreme Court, the Hon’ble Supreme Court dismissed the SLP filed by the Revenue as reported in [2019] 102 taxmann.com 57 (SC). Since the facts of the instant case are identical to the facts of the case decided by the Hon’ble jurisdictional High Court and SLP has been dismissed by the Hon’ble Supreme Court, therefore, respectfully following the same, we are of the considered opinion that there is a ‘reasonable cause’ on the part of the assessee for such violation. We, therefore, set aside the order of the Ld. CIT(A) and direct the Assessing Officer to delete the penalty levied u/sec.271E of the Act. Grounds raised by the assessee are accordingly allowed.

9. In the result, appeal of the Assessee is allowed.

Order pronounced in the open Court on 15.01.2025.