By TIOL News Service

ALLAHABAD, AUG 26, 2015: THE issue before the Bench is - Whether genuinity of a loan transaction can be doubted merely on ground of its acceptance in cash, when the cash given by the lender is duly reflected in their books of account and is routed through proper banking channel. NO is the answer.

Facts of the case

The assessee, an individual, is the wife of the Chief Minister of Uttar Pradesh. Her case was selected for scrutiny and, accordingly, notice u/s 143(2) was issued. The AO thereafter passed an assessment order u/s 143(3) however, the AO during assessment noticed that the assessee had acquired leasehold rights over a nazul land along with her husband vide assignment-cum-sale deed. The said nazul land was subsequently, converted into freehold in favour of the assessee and her husband after paying a certain amount. The AO noticed that 50% of such amount was taken in cash as an unsecured loan from Samajwadi Party for the purpose of converting lease hold land into free hold land. This cash was however, deposited in the joint account of the assessee along with her husband. The amount was subsequently, paid back to the Samajwadi Party at a later date. The assessee received a notice u/s 274 to show cause as to why an order of penalty should not be passed u/s 271D for violating the provisions of Section 269SS. The assessee replied that the lon was taken because funds were urgently required and she did not have the requisite funds at that point of time. However, penalty was imposed because the Department was of the opinion that the assessee's case did not fall under the exceptional clause u/s 269SS nor she provided any evidence to prove the urgency of taking a loan in cash. The Tribunal ruled in favour of the assessee, and the Revenue appealed.

Having heard the parties, the High Court held that,

++ the object of introducing Section 269SS was to ensure that a tax payer was not allowed to give false explanation for his unaccounted money or if the tax payer made some false entries, he would not escape by giving false explanation for the same. Section 269SS consequently, required that no person shall take or accept any loan or deposit, if it exceeds more than Rs.20,000/- in cash. Section 271D provided that a person who takes or accepts any loan or deposit in contravention of the provision of Section 269SS, he would be liable to pay by way of penalty a sum equal to the amount of the loan or deposit so taken or accepted. This provision caused undue hardship to the tax payers where they took a loan or deposit in cash exceeding Rs.20,000/- even where there was a genuine or bonafide transaction. The legislature accordingly, introduced Section 273B, which provided that if there was a genuine and bonafide transaction and the tax payer could not get a loan or deposit by an account payee cheque or demand transaction for some bonafide reason, the authority vested with the power to impose penalty had a discretion not to levy the penalty;

++ in this case the Tribunal has given a categorical finding that the assessee had established a reasonable cause for failure to comply with the provision of Section 269SS. The Tribunal further found that the loan given by the Samajwadi Party was a genuine loan, which was reflected in the books of accounts on account of the Samajwadi Party as well as in the books of account of the assessee and that the cash given by the party was deposited in the bank of the assessee and, thereafter, used for the purpose of converting the nazul land into free hold. The Tribunal found that the genuineness of the transaction was also not disputed by the AO. The contention of the counsel for the Revenue that since there was no urgency, the assessee could have taken the loan through cheque and should have processed the matter through regular banking channels is immaterial, inasmuch as the genuineness of the transaction has not been disputed by the AO. In the light of the aforesaid, this court is of the view that reasonable cause had been shown by the assessee and the provisions of Section 273B was applicable, leading to no invocation of penalty u/s 271D.

(See 2015-TIOL-1954-HC-ALL-IT)