NEW DELHI, JAN 07, 2013: THE issues before the Bench are - Whether no penalty u/s 271E is warranted when the assessee reimburses money in cash to its Director who has issued cheque from his account to pay rental for the company's premises and Whether deposit of cash in Director's account to save cheque from being dishonoured as it would have hurt assessee's goodwill constitutes 'reasonable cause' u/s 273B not to invite imposition of penalty. And the verdict goes in favour of the assessee.

Facts of the case

AO observed that assessee-company made a repayment of loan of Rs. 2 lakh in cash to one of the Directors of assessee company, in contravention of the provisions of Section 269T. Assessee contended that there was no loan given by the Director. There was a current account in the name of Director who from time to time made payment for and on behalf of assessee as assessee did not have its bank account. Payment of Rs. 2.00 lacs was towards part reimbursement of expenses. It could not be treated as loan within the meaning of Section 269SS and 269T.

AO observed that assessee was having substantial funds in the form of sales of Rs. 10 lacs and could not be deposited in its bank account then repayment/reimbursement could be made by cheque of the director. Any amount spent by any director on behalf of the assessee company was an unsecured loan in the hands of assessee-company and its repayment in cash was a clear violation of the provisions of Section 269T. Merely because a transaction was genuine, it cannot be taken out of the ambit of Section 271E. The AO held that the assessee company violated Section 269T of the Act and imposed a penalty of Rs 2 lakh on the assessee u/s 271E of the Act.

CIT (A) confirmed the disallowance stating that any amount paid by one person on behalf of another person would be a loan from the former to the latter because a loan or deposit had been defined inthe explanation to section 269T to mean any loan or deposit of money which is repayable after notice or repayable after a period and the expenses incurred by the director on behalf of the assessee company were repayable/ had to be reimbursed by the assessee. When the assessee company returned this amount to its director, the return would constitute return of loan given by the director to the assessee company. The expenses incurred by the director on behalf of the assessee cannot be termed as transactions in the current account of the assessee with the director. Company was incorporated in September, 2006 and it took five months to open its bank account in February, 2007. Once the account of the company was opened on 7th February,2007, cash was not deposited in this account and cheque for rent issued from the account of the company, instead of giving cash to the director who then made payment on behalf of the assessee company. Therefore, it would not be correct to say that the payment of cash was necessitated by any urgent requirement.

Assessee contended that if the amount was not to be deposited in cash in the account of director, the cheque issued by director on behalf of assessee would have bounced and therefore the payment was made in cash to ensure clearance of cheque and to save the goodwill of the company. Penalty cannot be imposed unless the party under obligation acted deliberately in defiance of law or was guilty of conduct or acted dishonestly, or acted in conscious disregard of its obligation.

After hearing both the parties, the ITAT held that,

++ it is not in dispute that director of assessee company made payment of rent through cheque from his bank account. As per his bank statement cash of Rs. 2 lacs was deposited in cash on the day before the date on which the cheque was issued. It was necessary to withdraw cash from sales proceeds and to deposit it in the bank account of director as the transfer of money by cheque could take time and if cheque was issued to director in this regard, definitely some time may be consumed for banking transaction for routing money from the assessee’s bank account to director’s bank account and this would have resulted in dishonoring of cheque issued;

++ it is doubtful whether the amount received by director with an intention to deposit it to the bank account with a bona fide belief that this would save the prestige of the company can be characterized as a loan or a deposit within the meaning of Section 269T of the Act. Although Section 269T of the Act does not expressly confer any exemption from transaction between connected parties or sister concern but a perusal of the decided cases on this point shows that there is a cleavage of judicial opinion. The assessee company gave Rs. 2 lakh to its director with a bona fide belief that an urgency to ensure honoring of the cheque issued to the landlord constitutes a reasonable cause u/s 273B where no penalty shall be imposable on the assessee for any failure referred to in the said provisions inter alia Section 269T. There was a current account between the assessee company and its director and no interest was being charged for the transactions and the same could not be termed either as a loan or a deposit with the assessee company. Accordingly, penalty levied u/s 269T r/w Section 271E cannot be sustained and impugned order in this regard deserves to be set aside.

(See 2013-TIOL-21-ITAT-DEL)