By TIOL News Service

KOLKATA, MAY 26, 2016: THE issue is - Whether the transactions between the assessee and its director maintained in a current account can be categorized as a loan or deposit. NO is the answer.

Facts of the case

The assessee is engaged in the business of civil construction works. The assessee had availed bank loan from PNB for the purpose of its business and could not repay the dues to the bank and thereby the said loan account was classified as NPA by PNB. The said loan was assigned by PNB in favour of ARCIL and assessee was directed to settle the dues and have further negotiations with ARCIL. Accordingly, a MOU was entered into between ARCIL represented by its constituted Attorney and the assessee. One of the directors of the company, had mortgaged his personal property which was offered as security for the loan given to the assessee by the bank. This mortgage was also assigned in favour of ARCIL. As against the balance due of Rs. 57.58 lakhs with interest thereon, the assessee agreed to pay Rs. 45 lakhs as full and final settlement to UMFL, lawful attorney of ARCIL pursuant to MOU. The assessee negotiated with UMFL and finally the liability on account of PNB loan was settled at Rs. 38 lakhs. The lands which were subjected to mortgage were released by ARCIL in order to effect the sale. The Director sold his agricultural lands and the buyer of the lands issued Pay Orders directly in favour of "ARCIL- on behalf of the assessee and handed over the Pay Orders to assessee company for Rs. 17,25,000/-. These pay orders for Rs. 17,25,000/- were later on handed over by the assessee to UMFL as per the MOU. The receipt of monies were duly acknowledged by UMFL. For this transaction, the assessee need to respond in their books by knocking off the loan liability to PNB to the extent of Rs. 17,25,000/- and correspondingly credit the director account as unsecured loan. The assessee instead of passing a journal entry in its books, routed these transactions as cash received from Director amounting to Rs. 17,25,000/- and also amount repaid to PNB by cash amounting to Rs. 17,25,000/-. The AO doubted the veracity of this entry and stated that this entry has been passed by the assessee in its books which is prior to the date mentioned in the money receipt by UMFL and accordingly concluded that this receipt transaction is totally separate from the demand drafts handed over to UMFL. He further stated that the narration mentioned appears to be misleading and incorrect and he made an allegation that the assessee had changed the said narration to suit his needs. The AO invoked the provisions of section 269SS for receipt of cash loans exceeding Rs 20,000/- and show caused the assessee why penalty u/s 271D should not be levied on the assessee. The AO proceeded to levy penalty u/s 271D which has been upheld by the CIT(A).

ITA No. 209/Kol/2013 A.Y 2007-08 - Penalty u/s 271E

The assessee had made the payments in cash to its director .The assessee claimed that the said payments were made to its director out of balances payable in the current account of the director as the said monies were to paid back by the director to the buyers of the agricultural lands as the registration of sale deeds were kept in abeyance for removal of certain defects in the said land purchase deed. Ultimately the defects were duly removed and the registration of agricultural lands was executed on 19.2.2007.The AO not convinced with the arguments of the assessee proceeded to levy penalty u/s 271E. The CIT(A) upheld the same.

Having heard the parties, the tribunal held that,

++ the assessee was under a bonafide belief that the transaction need to be responded by the assessee in its books on the date of agreement itself which is 13.9.2006 and accordingly passed the receipt entry erroneously in the cash book. The assessee ought to have only responded by passing a journal entry in its books of accounts. There is no doubt that the director's account should be credited for the amounts discharged by him on behalf of the assessee. Moreover, we find that the transactions of the director with the assessee company, the same is maintained in the form of a current account and it is well established that the transactions in the running current account would not take the character of a loan or deposit;

++ merely by passing one receipt entry in cash book and one payment entry in cash book for the same sum of Rs. 17,25,000/-, no additional source of cash had emanated to the assessee, which fact is quite evident from the relevant pages of the cash book itself, forming part of the paper book. The closing cash balance as on 26.9.2006 was only Rs. 13,17,466.11 and it had not increased by Rs. 17,25,000/- as alleged by the AO. From the totality of the facts and circumstances of the case, there is no case for invoking the provisions of section 269SS and hence the penalty levied u/s 271D for violation of section 269SS thereon is quashed herewith;

++ on the issue of levy penalty u/s 271E, the transactions between the assessee and its director are maintained in a current account which would neither be categorized as a loan or deposit. Hence the provisions of section 269T cannot be applied in the facts of the instant case.The assessee was duly necessitated by force to make the payments in cash to its director. The assessee had duly adduced reasonable cause in terms of section 273B and hence no penalty could be levied u/s 271D. There is no case for invoking the provisions of section 269T and hence the penalty levied u/s 271E for violation of section 269T of the Act thereon is quashed herewith.

(See 2016-TIOL-869-ITAT-KOL)