By TIOL News Service

CHENNAI, NOV 14, 2014: THE issues before the Bench are - Whether in case a loan was taken from friend and repayment of the same was made in cash within the same financial year, it can be assumed that such taking of loan is for business exigency and it is not a case of undisclosed income and Whether the genuineness of the transaction to meet the immediate necessity can be accepted by the Tribunal in the quantum appeal and that would amount to reasonable cause in terms of Section 273B. And the verdict goes in favour of the assessee.

Facts of the case

The assessee, an individual, is engaged in the business of civil construction. It had filed its return of income for AY 2006-07, in which the assessee had debited various expenses like, payment of accounting charges, etc. According to AO, the assessee had to deduct TDS u/s 194J before making payment to the payee. It was claimed by the assessee that he was a labour supervisor and consequent to the sincere and dedicated work, he was awarded labour contract by his clients. He had no resources to finance the construction and hence he resorted to take loans from friends at time of emergency, particularly on Saturdays when labour payments had to be made. He also made certain payments in cash with regard to purchase of civil construction material and for accounting purposes without deducting TDS. AO disallowed the accounting charges paid u/s 40(a)(ia) and added the entire amount u/s 68 and imposed penalty u/s 271D and 271E. On appeal, CIT(A) confirmed the order of AO.

On further appeal, Tribunal allowed the appeals filed by the assessee - both in respect of quantum as well as penalty. Tribunal decided the quantum appeal holding that the payment made towards accounting charges to the site accountants was wrongly disallowed under Section 40a(ia) and it was not covered under Section 194J. The Tribunal held that the explanation of the assessee that Section 40a(ia) was introduced during the assessment year in question and the assesse's plea of bona fide mistake and impression that it will apply only for the next assessment year was accepted primarily on the ground that the assessee has admitted this amount as income and paid tax thereon and there is no loss to the Revenue and further more, the confusion in the mind of the assessee was justified on account of the fact that the provision was introduced from 01.04.2006. Hence, the Tribunal ordered deletion of this addition in the income. Insofar as the payment made to the Hardware company in cash, the Tribunal noticed that out of the total payment of Rs.41,53,008/-, a sum of Rs.74,647/- alone stands paid in cash and consequently, the Tribunal ordered deletion of the addition of Rs.14,647/- made u/s 40A(3). Insofar as taking loans from friends were concerned, the Tribunal reversed the findings of AO and that of CIT(A) that it should be added as an undisclosed income and concluded that the evidence given by the assessee in support of such short term loan within the assessment year was supported by individual affidavits of the persons from whom the amount was borrowed. The Tribunal observed that AO declined to look into those affidavits for paucity of time and summarily rejected the evidence, as not acceptable. The Tribunal found that AO did not deal with the explanation given by the assessee, which was based on individual affidavit of the persons from whom the money was borrowed, duly notarised. The Tribunal, however, gave credence to those statements made on oath and held that it was the duty of the Officer to examine the same before any decision is taken on the correctness or otherwise of the deposition made in the affidavit. Placing reliance on the decision reported in the case of Mehta Parikh & Co., reported in 30 ITR 181, the Tribunal decided the quantum appeal in favour of the assessee. Against which, the Revenue has not chosen to file any appeal. Tribunal also allowed the appeals filed by the assessee with regard to the penalty levied under Section 271D and 271E of the Income Tax Act.

Held that,

++ Tribunal, in both the cases, has taken note of the explanation given by the assessee before the authorities below that he has engaged in the construction business and he has started from scratch; that he did not have the financial capacity to undertake huge projects and therefore he had to go for short term cash borrowings from friends and known persons, which were repaid within the same assessment year and therefore, there was no need to reflect the same in the books of accounts; nevertheless the cause for taking this loan was on account of the need to pay the workers on weekends, namely, on Saturdays and Sundays on which date, there was no possibility of immediately accessing the bank. The exigency which forces the assessee to make such payment has been accepted and extracted in the order of the Tribunal. We find much force in such explanation, considering the nature of business and also taking note of the fact that the assessee is not a big time civil construction contractor. The Tribunal primarily was of the view that the loans taken in these cases were genuine and the exigency that arose out of the business was a cause for taking such loan. Since in the quantum appeal, the Tribunal found that the assessee was bona fide in such transaction, the Tribunal in exercise of power u/s 273B, considering the reasonable cause submitted by the assessee, thought it fit to set aside the entire penalty by accepting the explanation given by the assessee. No doubt, the decisions relied upon by the Tribunal reported in CIT Vs. Standard Brands ltd.2006-TIOL-217-HC-DEL-IT and 246 ITR 571 (Diwan Enterprises Vs. CIT) may not be applicable to the facts of the present case, as we are not concerned with the case falling u/s 68 where initiation of proceedings u/s 269SS would become meaningless. Here is a case where the loan taken from friends and repayment of the same in cash. The reason that taking of loan is found to be genuine and the same is for business exigency, it is not a case of undisclosed income. If the assessee had not given a reasonable cause, then certainly the initiation of proceedings for violation of 269SS and 269T would be justified. We find in the present case the reasonable cause for not levying penalty exists and the Tribunal was justified in allowing the assesse's appeal. On facts, the Tribunal has clearly held in the quantum appeal there was a bona fide on the part of the assessee and as a consequence finding reasonable cause, thought it fit to delete the entire penalty. We find no ground to interfere with the order of the Tribunal. The assessee has shown the receipt of cash and repayment of the same due to business exigency and that would amount to reasonable cause. The genuineness of the transaction to meet the immediate necessity was accepted by the Tribunal in the quantum appeal and that would amount to reasonable cause in terms of Section 273B. Hence, we find no question of law much less any substantial question of law arises for consideration in the above appeals. In the result, both the Tax Case (Appeals) stand dismissed. No costs. Consequently, M.P.No.1 of 2014 is also dismissed.

(See 2014-TIOL-1947-HC-MAD-IT)