Court Cancels Penalty on Technical Breach, Finds Reasonable Cause

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Case Name:

Commissioner of Income Tax vs. Bombay Conductors & Electricals Ltd. (High Court of Gujarat)

Income Tax Reference No.103 of 1996

Date: 11th February 2008

Key Takeaways:

1. The court found that the breach, if any, was merely a technical or "venial" (minor) one, and did not warrant a penalty.

2. The court emphasized the importance of reasonable cause under Section 273B (of Income Tax Act, 1961), which can preclude the imposition of a penalty even if a technical violation occurred.

3. The case highlights the courts' reluctance to impose penalties in the absence of clear evidence of tax evasion or defiance of the law.

Issue:

Whether the Income Tax Appellate Tribunal was correct in law and on the facts in canceling the penalty of Rs.23 lakhs levied under Section 271-D (of Income Tax Act, 1961) for the violation of the provisions of Section 269SS (of Income Tax Act, 1961).

Facts:

- The assessee, Bombay Conductors & Electricals Ltd., is a subsidiary of another company, Lallubhai Amichand and Company Limited.

- The assessee purchased goods from the creditor company (Lallubhai Amichand) on various dates in 1989, accumulating a total outstanding purchase price of Rs.23,33,037.

- As the assessee was unable to make immediate payment, the parties agreed to treat the outstanding purchase price as a loan in the "Sarafi Account".

- During the assessment proceedings, the Assessing Officer treated the outstanding amounts of Rs.9 lakhs and Rs.14 lakhs as acceptance of deposits in violation of Section 269SS (of Income Tax Act, 1961).

- The Deputy Commissioner of Income Tax levied a penalty of Rs.23 lakhs under Section 271D (of Income Tax Act, 1961).

Arguments:

- The Revenue argued that the conversion of the outstanding balance from the goods purchase account to the Sarafi account amounted to a deposit in violation of Section 269SS (of Income Tax Act, 1961), and therefore the penalty was rightly levied.

- The assessee argued that there was a reasonable cause for the breach, as the Tribunal had found that the assessee had made the adjustments bona fide without knowing that it could lead to a penalty under Section 271D (of Income Tax Act, 1961).

Key Legal Precedents:

1. Asstt. Director of Inspection vs. Kum A.B. Shanthi (2002) 255 ITR 258 (SC):

The Supreme Court explained the object of introducing Section 269SS (of Income Tax Act, 1961), which was to curb the practice of taxpayers giving false explanations for unaccounted money.

2. Hindustan Steel Ltd. vs. State of Orissa (1972) 83 ITR 26 (SC):

The Supreme Court held that the penalty is not automatic and the authority imposing the penalty should exercise discretion.

3. CIT vs. Saini Medical Store (2005) 277 ITR 420 (P&H):

The Punjab and Haryana High Court held that a technical or venial breach does not warrant the imposition of a penalty.

Judgment:

The High Court upheld the Income Tax Appellate Tribunal's decision to cancel the penalty. The court found that:

1. There was no evidence to show that the breach was with knowledge or in defiance of the provisions.

2. The Tribunal had found that the assessee made the adjustments bona fide, without knowing that it could lead to a penalty under Section 271D (of Income Tax Act, 1961).

3. The breach, if any, was merely a technical or venial breach, and no penalty was leviable as per the Supreme Court's rulings.

4. The court also noted that there was a reasonable cause for the failure, as per Section 273B (of Income Tax Act, 1961), which precludes the imposition of a penalty.

FAQs:

Q1: What is the significance of the "reasonable cause" provision in the Income Tax Act?

A1: The "reasonable cause" provision under Section 273B (of Income Tax Act, 1961) allows the assessee to avoid a penalty even if a technical violation of the law has occurred. The court emphasized that the presence of a reasonable cause, as found by the Tribunal in this case, is a valid ground to cancel the penalty.

Q2: Why did the court find the breach to be merely "technical" or "venial" in nature?

A2: The court relied on the Tribunal's findings that the assessee had made the adjustments bona fide, without knowing that it could lead to a penalty under Section 271D (of Income Tax Act, 1961). The court held that a technical or minor breach, without evidence of tax evasion or defiance of the law, does not warrant the imposition of a penalty.

Q3: What are the key legal principles established in this case?

A3: The key principles are:

  - Penalties are not automatic, and the authority imposing the penalty must exercise discretion.

  - A technical or minor breach, without evidence of tax evasion or defiance, does not warrant a penalty.

  - The presence of a "reasonable cause" under Section 273B (of Income Tax Act, 1961) can preclude the imposition of a penalty, even if a technical violation has occurred.

1 The Income Tax Appellate Tribunal, Ahmedabad Bench 'C' has referred the following question for the opinion of this Court u/s. 256(1) (of Income Tax Act, 1961) (the Act) at the instance of the Commissioner of Income Tax.

“Whether, the Appellate Tribunal is right in law and on the facts in cancelling penalty of Rs. 23 lacs levied u/s.271 (of Income Tax Act, 1961)-D of the Act for violation of the provisions of section 269SS (of Income Tax Act, 1961) when the assessee transferred the purchase price as Sharafi?”

2 The Assessment Year is 1991. The assessee, a limited company, is a subsidiary of another limited company M/s. Lallubhai Amichand and Company Limited (the creditor company). The assessee purchased goods from time to time from the creditor company as per following details :

“Date Amount

26-5-1989 Rs.5,65,858

27-5-1989 Rs.3,59,050 Rs.9,24,908

7-6-1989 Rs.4,65,613

8-6-1989 Rs.4,62,946

8-6-1989 Rs.4,79,606 Rs.14,08,165

Rs.23,33,037”.

As the assessee was not in a position to make payment of the outstanding purchase price immediately the parties arrived at an understanding whereunder the outstanding purchase price was to be treated as a loan on Sarafi Account after making part payment of the outstanding dues. As per the terms agreed upon, on 31.05.1989 a sum of Rs.24,908/- was paid by Account Payee Cheque out of total of Rs.9,24,908/- and the balance of Rs.9 lacs was simultaneously transferred to 'Lallubhai Amichand Sarafi Account'. The balance outstanding liability in the goods account was adjusted by way of journal entries. Similarly out of total outstanding dues of Rs.14,08,165/- a sum of Rs.8,165/- was paid by Account Payee Cheque and balance amount of Rs. 14 lacs was identically treated as a loan outstanding in the Sarafi Account with requisite journal entries in support thereof.

3. During course of assessment proceedings the Assessing Officer treated the outstanding amounts of Rs.9 lacs and Rs.14 lacs respectively as acceptance of deposit in violation of provisions of Section 269SS (of Income Tax Act, 1961) and referred the matter for levy of penalty to the Dy.C.I.T. After issuing show cause notice and considering the written explanation tendered by the assessee and after hearing the assessee the Dy. C.I.T. came to the conclusion that the conversion of the outstanding balance from goods purchase Account to Sarafi Account by transfer entries was a deposit in violation of provisions of Section 269SS (of Income Tax Act, 1961). Accordingly penalty of Rs.23 lacs was levied u/s. 271D (of Income Tax Act, 1961) by treating the amount as loan or deposit taken or accepted. The assessee carried the matter in Appeal before the Commissioner (Appeals) who vide order dated 15.02.1994 confirmed the levy of penalty. The assessee carried the matter in Second Appeal before the Tribunal who has allowed the Appeal vide impugned order dated 30.11.1995.

4. Mr. B.B.Naik, learned Standing Counsel for applicant-Revenue has assailed the impugned order of Tribunal on the ground that the reasons assigned by the Tribunal are dehors the provisions of the Act. That for the purpose of imposing penalty the only thing which was material was the provision of Section 269SS (of Income Tax Act, 1961) which provides that no person shall after the specified date take or accept from any other person any loan or deposit otherwise than by an Account Payee Cheque or Bank Draft subject to the stipulated limit. That admittedly a sum of Rs.23 lacs which was to be paid as purchase price by the assessee had undergone change in character and was now an outstanding loan so far as the assessee was concerned. Thus in effect by mere transfer entry, it could be stated that, the outstanding purchase price had been paid up by the assessee and then received as a loan from the creditor company. According to Mr. Naik, Explanation to Section 269SS (of Income Tax Act, 1961) merely stated that “ 'loan or deposit' means loan or deposit of moneys”, and therefore it could not be stated that by such transfer entries no money was involved in the transaction. That money in form of outstanding purchase price was due from assessee and now money in form of loan was accepted by the assessee and due to the creditor company by virtue of journal entries. Hence, penalty was rightly levied. It was therefore urged that the Reference be answered in favour of the Revenue.

5. Mr. M.J.Shah, learned Advocate appearing on behalf of the respondent-assessee apart from heavily relying on the impugned order of Tribunal pointed out that the order of the Tribunal was passed after taking into consideration the object of bringing provisions of section 299SS (of Income Tax Act, 1961) on the statute as well as after considering existence of reasonable cause as provided in section 273B (of Income Tax Act, 1961). It was further submitted that the Tribunal had found that even if there was any breach the same was only a venial or technical breach which does not warrant penalty as laid down by the Apex Court. That there was difference between the terms 'loan' and 'deposit'. The authorities below had treated both the terms as synonymous and therefore also no penalty was leviable in absence of any firm conclusion as to the nature of transaction. In support of the propositions reliance has been placed on the following decisions :

[1] Asstt. Director of Inspection Vs. Kum A.B. Shanthi (2002)255 ITR 258 SC.

[2] Hindustan Steel Ltd. Vs. State of Orissa,(1972) 83 ITR 26 SC.

[3] CIT Vs. Saini Medical Store (2005) 277 ITR 420 (P&H).

[4] CIT Vs. Bhagwati Prasad Bajoria (HUF) (2003) 263 ITR 487.

[5] Baidya Nath Plastic Industries (P.) Ltd. Vs. K.L.Anand, I.T.O.(1998) 230 ITR 522 (Del.).

6. The object of introduction of section 269SS (of Income Tax Act, 1961) has been stated by the Apex Court in the aforesaid case of Asstt. Director of Inspection Vs. Kum A.B. Shanthi in the following terms :

“The object of introducing section 269SS (of Income Tax Act, 1961) is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money, or if he has given some false entries in his accounts, he shall not escape by giving false explanation for the same. During search and seizures, unaccounted money is unearthed and the tax payer would usually give the explanation that he had borrowed or received deposits from his relatives or friends and it is easy for the so-called lender also to manipulate his records later to suit the plea of the taxpayer. The main object of section 269SS (of Income Tax Act, 1961) was to curb this menace.”

At the same time while introducing section 269SS (of Income Tax Act, 1961), section 273B (of Income Tax Act, 1961) was also incorporated in the statute which provides that no penalty shall be imposable on a person or an assessee, as the case may be, for any failure referred to in the said provision if the assessee proves that there was reasonable cause for such failure. In other words penalty is not automatic u/s. 271D (of Income Tax Act, 1961) on mere violation of provisions of section 269SS (of Income Tax Act, 1961).

7. The Tribunal has found that there is no evidence on record to show that infraction of the provisions was with knowledge or in defiance of the provisions. It has further been held that there is nothing on record to indicate that the assessee had indulged in any tax planning or tax evasion. To the contrary, the Tribunal has recorded that by making the book entries the assessee has made the adjustment bonafide without having the knowledge that such book entries may render the assessee liable to penalty u/s. 271D (of Income Tax Act, 1961) on account of violation of provisions of section 269SS (of Income Tax Act, 1961). That there was a reasonable cause and hence no penalty was leviable.

8. In light of the findings of facts recorded by the Tribunal after appreciating evidence on record and applying the ratio of the Apex Court decisions it is not possible to find any legal infirmity in the impugned of the Tribunal. Not only there is a reasonable cause, as found by the Tribunal, but in light of the finding of the Tribunal that the breach, if any, is merely a technical or venial breach no penalty is leviable as laid down by the Apex Court merely because it is lawful to do so without exercising discretion before imposing the penalty.

9. In the result, the question referred is answered in the affirmative i.e. in favour of the assessee and against the revenue.

10. The Reference stands disposed of accordingly with no order as to costs.

Sd/-

(D.A.Mehta, J.)

Sd/-

(Z.K. Saiyed, J.)