By TIOL News Service

MUMBAI, JULY 17, 2018: THE ISSUE BEFORE THE SPECIAL BENCH IS - Whether since loan from the director will come within the ambit of deposits mentioned under the Companies Act, such transaction in violation of section 269SS of the I-T Act will attract penalty as provided by section 271D. AND THE VERDICT IS YES.

Facts of the case

The assessee-company, which is managed by two directors named Mr Moin A.S.Batliwala and Mrs Sherbanoo A.S.Batliwala, filed return for the relevant AY. During the assessment proceedings, the Additional CIT noticed that the assessee had received aggregate amount of Rs.2.00 lakhs as loans by way of cash in violation of provisions of section 269SS of the Act. Therefore, he initiated penalty proceedings u/s 271D of the Act. However, the assessee contended that it had taken loan of Rs.2.00 lakhs from its director due to urgent business needs. However, according to the Addl CIT, the assessee did not offer any concrete explanations and therefore, he levied penalty of Rs.2.00 lakhs u/s 271D of the Act. On assessee's appeal, the CIT(A) took support of following observations made by Supreme Court in the case of Asst. Director of Inspection (Investigation) Vs. Kum. A.B. Shanthi and held that the assessee had not satisfied the second condition and observed that without satisfying both the conditions specified by the Supreme Court, it could not be concluded that the assessee had any “reasonable cause” for its failure to accept the said amount in compliance with section 269SS of the Act. Accordingly the CIT(A) confirmed the penalty.

The Special Bench held that,

++ the assessee has received loans by way of cash from its director named Sherbanoo A.S Batliwala of Rs.1.00 lakh each on two occasions. Admittedly, the assessee did not offer any explanation before the Addl. CIT except referring to the Grounds of appeal urged before CIT(A) in the appeal filed against quantum assessment proceedings, wherein it was stated that the loans were taken for business requirements. In the appeal filed before CIT(A) challenging the levy of penalty of Rs.2.00 lakhs u/s 271D of the Act, the assessee has further elaborated its explanations that the loans were taken in cash from its director in order to meet the expense relating to payment of Custom duty and freight, towards import of furniture. However no specific details of import was given before CIT(A). The assessee has given further details like, from whom the goods were supposed to be imported, when the goods were shipped;

++ there is no dispute between the parties that bonafide nature of transactions alone would not be sufficient to escape the clutches of sec. 271D of the Act. As per the decision rendered by Supreme Court in the case of Kum. A.B. Shanthi, it is required to be established that there was some bonafide reasons for the assessee for not taking or accepting loan or deposit by account payee cheque or account payee bank draft, so that the provisions of sec.273B of the Act will come to the help of the assessee. Only in such cases, the AO is precluded from levying penalty u/s 271D of the Act. The counsel for the assessee took support of Explanatory note given while introducing the provisions of sec. 269SS of the Act. However, the Supreme Court has rendered its decision in the case of Kum. A.B.Shanthi after considering the same and has expressed the view extracted above. In the case of Triump International Finance (I) Ltd also, the Bombay High Court has deleted the penalty only on the ground of existence of reasonable cause;

++ the ledger account of Smt. Sherbanoo A.S Batliwala does not support the contentions of the assessee. The counsel for the assessee also contended that the amount received from the directors cannot be considered as deposits under Companies Act, 1956. However, we are examining the case under the provisions of the Act and the Delhi High Court has held in the case of Samora Hotels (P) Ltd that the transaction with the directors of the Company are not excluded from the ambit of the provisions of sec. 269SS of the Act. The assessee has not substantiated the said explanation with any documentary evidence, i.e., the assessee has failed show that there was any urgent business necessity and hence the assessee was constrained to take loans by way of cash. As per the explanations of the assessee, the goods were being imported from Hongkong. The assessee received first loan of Rs.1.00 lakh on 01-10- 2007. It was repaid on 03-10-2007, since the consignment was stated to bedelayed. The second loan of Rs.1.00 lakh was received on 05.12.2007, since the foreign supplier was expected to ship the goods on 11.12.2007;

++ the explanation would show that the goods were not shipped either on 01-10-2007 or on 05-10-2007, i.e., on the dates on which the loans were taken. The question of payment of customs duty, would arise only upon shipment or receipt of goods. In fact, the assessee admits that the goods were expected to be shipped on the second occasion only on 11.10.2007, while the cash loan was taken on 05-10-2007. If the director had given cheque on 05-10-2007, the funds would have been credited to the account of the assessee well before 11.10.2007. These facts would show that there was no urgent business necessity for the assessee on both the occasions to accept the loan in cash. Further, the assessee has also failed to demonstrate that on both the dates the assessee was not having sufficient funds in its possession. The assessee has failed to show that there was a reasonable cause for getting loans in violation of the provisions of sec. 269SS of the Act. Accordingly, the CIT(A) was justified in confirming the penalty of Rs.2.00 lakhs imposed on the assessee.

(See 2018-TIOL-1094-ITAT-MUM-SB)