The Commissioner of Income Tax vs M/S. Triumph International Finance (I) Ltd

M K Road, Mumbai - 400 020 ..Appellant.

Versus

M/s.Triumph International Finance (I) Limited,

Oxford Centre, 10, Shroff Lane,

Colaba Causeway, Mumbai - 400 023 ..Respondent.

Mr.Suresh Kumar, Advocate for the appellant. Mr.Percy J Pardiwala, Senior Advocate with Mr.Atul K Jasani for the respondent.

CORAM : J.P. Devadhar & A.R. Joshi, JJ. Judgment Reserved on : 29th March 2012.

Judgment Pronounced on : 12th June 2012.

ORAL JUDGMENT : (Per J.P. Devadhar, J.)

1. This appeal was admitted on 13th September 2010 on the

following substantial question of law :-

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"Whether, on the facts and in the circumstances of the

case, the Tribunal was justified in law in holding that transactions effected through journal entries in the books of the

assessee would not amount to repayment of any loan or deposit otherwise than by account payee cheque or account payee bank draft within the meaning of Section 269T to attract levy of penalty under Section 271E of the Income Tax Act, 1961 ?"

2. The assessment year involved herein is AY 2003-2004.

3. The respondent - assessee, a Public Limited Company, is a

member of the National Stock Exchange and is also a Category I Merchant

Banker, registered with the Securities and Exchange Board of India (SEBI).

The assessee is engaged in the business of shares, stock broking, investment

and trading in shares and securities.

4. In the assessment year in question, the assessee had filed its

return of income declaring loss of Rs.17,27,21,815/-. The assessment was

completed on 5th November 2003 under Section 143(3) of the Income Tax

Act, 1961 ('Act' for short) determining loss at Rs.9,84,92,500/-.

5. Prior to 1st April 2002, the assessee had accepted a sum of

Rs.4,29,04,722/- as and by way of loan / inter-corporate deposit from the

Investment Trust of India which was repayable during the assessment year

2003-2004. During the previous year relevant to the assessment year in

question, the assessee on 3rd October 2002 had transferred 1,99,300 shares of

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Rashal Agrotech Limited held by it to the Investment Trust of India for an

aggregate consideration of Rs.4,28,99,325/-. Thus, in the assessment year in

question, the assessee was liable to repay the loan / inter-corporate deposit

amounting to Rs.4,29,04,722/- to the Investment Trust of India and receive

Rs.4,28,99,325/- from Investment Trust of India towards sale price of the

shares of Rashal Agrotech Limited sold by the assessee to the Investment

Trust of India. Instead of repaying the loan / inter-corporate deposit to the

Investment Trust of India and receiving the sale price of the shares from the

Investment Trust of India, both the parties agreed that the amount payable /

receivable be set-off in the respective books of account by making journal

entries and pay the balance by account payee cheque. Accordingly, after

setting off of the mutual claim through journal entries, the balance amount of

Rs.5,397/- due and payable by the assessee to the Investment Trust of India

was paid by a crossed cheque dated 19th February 2003 drawn on the

Citibank.

6. In view of the objections raised in the Audit Report regarding

repayment of loan / inter-corporate deposit otherwise than by an account

payee cheque or draft, the assessing officer issued a show-cause notice calling

upon the assessee to show cause as to why action should not be taken against

the assessee for violating the provisions of Section 269T of the Act. The

assessee opposed the show-cause notice by filing a detailed reply. However,

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by an order dated 21st March 2006 passed under Section 271E of the Act, the

assessing officer on the basis of the report of the Joint Parliamentary

Committee of Lok Sabha and Rajya Sabha on the Stock Market Scam

imposed penalty amounting to Rs.4,28,99,325/- on the ground that the

assessee had repaid the loan / inter-corporate deposit to the extent of

Rs.4,28,99,325/- in contravention of the provisions of Section 269T of the

Act.

7.

On appeal filed by the assessee, the Commissioner of Income Tax

(Appeals) by his order dated 21 st December 2006 confirmed the penalty

levied upon the assessee. On further appeal filed by the assessee, the

Tribunal by the impugned order dated 29 th January 2008 allowed the appeal

by following its decision in the case of V N Parekh Securities Private Limited

and Ketan V Parekh and held that the payment through journal entries do not

fall within the ambit of Section 269SS or 269T of the Act and consequently

no penalty can be levied either under Section 271D or Section 271E of the

Act. Challenging the aforesaid order, the Revenue has filed the present

appeal.

8. Mr.Suresh Kumar, learned counsel appearing for the Revenue

submitted that the assessee belongs to the Ketan Parekh Group, which is

involved in the securities scam. He submitted that the Ketan Parekh Group

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was found to be indulging in large scale manipulation of prices of select

scripts through fraudulent use of bank and other public funds and had

flouted all the norms of risk management by making transactions through a

large number of entities so as to hide the nexus between the sources of funds

and their ultimate use with the sole motive of evading tax. He submitted that

since the language of Section 269T of the Act is clear and unambiguous, the

Tribunal ought to have held that repayment of the loan / inter-corporate

deposit otherwise than by account payee cheque or demand draft was in

violation of the provisions of Section 269T of the Act and, hence, the penalty

imposed under Section 271E of the Act was justified.

9. Mr.Pardiwala, learned Senior Advocate appearing on behalf of

the respondent - assessee, on the other hand submitted that Section 269T of

the Act has been enacted to curb the menace of giving false explanation of

the unaccounted money found during the course of search and seizure. He

submitted that the bona fide transaction of repayment of loan or deposit by

way of adjustment through book entries carried out in the ordinary course of

business would not come within the mischief of the provisions of Section

269T of the Act. Referring to the legislative history as also the circulars

issued by the Central Board of Direct Taxes from time-to-time, Mr.Pardiwala

submitted that Sections 269SS and 269T were not meant to hit the genuine

transactions and the legislative intent is to mitigate any unintended hardships

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caused by the provisions to genuine transactions. He submitted that in the

present case genuineness of the transactions entered into by the assessee

with the Investment Trust of India is not in doubt. No additions on account

of the impugned transactions have been made in the regular assessment

made under Section 143(3) of the Act. He submitted that Section 269T

postulates that if a loan or deposit is repaid by an outflow of funds, same has

to be by an account payee cheque or demand draft. He submitted that

discharge of the debt in the nature of loan or deposit in a manner otherwise

than by an outflow of funds would not be hit by the provisions of Section

269T.

10. Mr.Pardiwala further submitted that in the present case

Rs.4,29,04,722/- was due and payable by the assessee to the Investment

Trust of India and the assessee was liable to receive a sum of

Rs.4,28,99,325/- from the Investment Trust of India. Instead of repaying the

amount by account payee cheque / demand draft and receiving back the

amount by way of demand draft / cheque, the parties as and by way of

commercial prudence have settled the account by netting off the accounts

and paid the balance by account payee cheque. Relying on a decision of the

Apex Court in the case of J B Boda and Company P Limited V/s. Central

Board of Direct Taxes reported in (1997) 223 ITR 271 (S.C.), counsel for

the assessee submitted that the two-way traffic of forwarding bank draft and

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receiving back more or less same amount by way of bank draft was

unnecessary and, therefore, in the facts of the present case, no fault could be

found with the repayment of loan through journal entries.

11. Mr.Pardiwala submitted that Section 269T, if plainly read,

supports the contention of the Revenue that each and every loan or deposit

has to be repaid only by an account payee cheque or draft. However, such

literal interpretation, if accepted, would lead to absurdity because, by such

interpretation not only mala fide transactions but even the genuine

transactions would be affected. Relying on the judgments of the Apex Court

in the case of ADIT (Inv.) V/s. Kum.A B Shanti reported in (2002) 255 ITR

258 (S.C.) and Commissioner of Income Tax V/s. J H Gotla reported in 156

ITR 323, counsel for the assessee submitted that if a strict and literal

construction of a statute leads to an absurd result, that is, a result not

intended to be sub-served by the object of the legislation ascertained from

the scheme of the legislation and if another construction is possible apart

from the strict and literal construction, then, that construction should be

preferred to strict literal construction.

12. Referring to the provisions contained in the Code of Civil

Procedure and books on accountancy, counsel for the assessee submitted that

set off of the claim / counter-claim otherwise than by account-payee cheque

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or bank draft are legally permissible in commercial transactions as also in the

accounting practice. Therefore, it must be held that genuine transactions like

the transaction in the present case involving repayment of loan through

journal entries do not violate Section 269T of the Act. In any event, it is

contended that having regard to the commercial dealings between the parties

it must be held that there was reasonable cause for repaying the loan through

journal entries and in view of Section 273B of the Act penalty was not

imposable under Section 271E of the Act. In support of the above

contention, reliance was placed on the decision of the Delhi high Court in the

case of Commissioner of Income Tax V/s. Noida Toll Bridge Company

Limited reported in 262 ITR 260 (Del.), decision of the Gujarat High Court

in the case of Commissioner of Income Tax V/s. Shree Ambica Flour Mills

Corporation reported in (2008) 6 DTR 169 (Guj.) and a decision of this

Court in the case of Commissioner of Income Tax V/s. Motta Constructions

P. Limited reported in (2011) 338 ITR 66 (Bom.).

13. We have carefully considered the rival submissions.

14. The basic question to be considered in this appeal is, whether

repayment of loan of Rs.4,28,99,325/- by making journal entries in the books

of account maintained by the assessee is in contravention of Section 269T of

the Act, and, if so, for failure to comply with the provisions of Section 269T,

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the assessee is liable for penalty under Section 271E of the Act.

15. Section 269T, Section 271E and Section 273B of the Act, to the

extent relevant for the present case relating to AY 2003-2004 read thus :-

"Mode of repayment of certain loans or deposits.

269T.- No branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit made with it

otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the

loan or deposit if -

(a) the amount of the loan or deposit together with the

interest, if any, payable thereon, or

(b) the aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-

operative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in

his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits,

is twenty thousand rupees or more :

Provided that where the repayment is by a branch of a banking company or co-operative bank, such repayment may also be made by crediting the amount of such loan or deposit to the savings

bank account or the current account (if any) with such branch of the person to whom such loan or deposit has to be repaid :

Provided further ..........

Explanation. - For the purposes of this section, -

(i) ..........

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(ii) ..........

(iii) "loan or deposit" means any loan or deposit of money which is repayable after notice or repayable after a period

and, in the case of a person other than a company, includes loan or deposit of any nature."

*********

"Penalty for failure to comply with the provisions of Section

269T 271E.- (1) If a person repays any loan or deposit referred to in Section 269T otherwise than in accordance with the provisions of

that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so repaid.

(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner."

**********

"Penalty not to be imposed in certain cases.

273B.- Notwithstanding anything contained in the provisions of clause (b) of sub-section (1) of section 271, section 271A, section

271AA, section 271B, section 271BA, section 271BB, section 271C, section 271D, section 271E, section 271F, section 271G, clause (c) or clause (d) of sub-section (1) or sub-section (2) of section 272A, sub-section (1) of section 272AA or section 272B or

sub-section (1) of section 272BB or sub-section (1) of section 272BBB or clause (b) of sub-section (1) or clause (b) or clause

(c) of sub-section (2) of section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that

there was reasonable clause for the said failure."

16. Chapter XXB containing Sections 269SS to Section 269TT were

introduced by the Income Tax (Second Amendment) Act 1981 with effect

from 11th July 1981 with a view to counter the evasion of tax. The object of

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the provisions contained in Chapter XXB of the Act as explained by the CBDT

in its circular No.345 dated 28th June 1982 is that the proliferation of black

money poses a serious threat to the national economy and to counter that

major economic evil, Chapter XXB has been introduced.

17. Section 269T in Chapter XXB of the Act, as introduced originally

in the year 1981 provides that none of the entities specified therein (which

includes a Company like the assessee) shall repay any deposit made with it

otherwise than by an account payee cheque / bank draft drawn in the name

of the person who had made the deposit, if the amount of the deposit

together with the interest, if any, payable thereon, exceeds the amount

specified therein. The obligation to repay the deposit by account payee

cheque / bank draft for the entities specified in Section 269T would have to

be construed as mandatory in view of the negative language used in the

Section. Section 269T provides that none of the entities specified therein

shall repay deposit otherwise than by the modes set out therein. In other

words, the Section provides that irrespective of the fact that there are several

modes for repaying the deposit, the entities specified in Section 269T shall

repay the deposit only by the modes set out therein. The mandatory

requirement of Section 269T is further fortified by Section 276E inserted

along with Section 269T on 11th July 1981 which provides that if a person

referred to in Section 269T of the Act repays any deposit in contravention of

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Section 269T then such person shall be punishable with imprisonment for a

period upto two years and also liable to fine equal to the amount of deposit.

Thus, the negative language used in Section 269T as also the penal

consequences provided in Section 276E for non-compliance of the procedure

prescribed under Section 269T leave no manner of doubt that repayment of

deposit in the manner prescribed under Section 269T is mandatory.

18. With effect from 1st April 1989, Section 276E dealing with the

consequences on failure to comply with Section 269T has been omitted and

Section 271E has been inserted which provides penalty for failure to comply

with Section 269T of the Act. Section 269T has been substituted by Finance

Act 2002 with effect from 1st June 2002 wherein the provision relating to

repayment of deposit exceeding the prescribed limit by account payee cheque

/ draft has been extended to repayment of loans as well. Thus, with effect

from 1st June 2002, it is mandatory under Section 269T of the Act for the

persons specified therein to repay any loan / deposit together with interest, if

any, exceeding the limits prescribed therein, by account payee cheque / bank

draft and failure to do so is made liable for penalty under Section 271E of the

Act.

19. In the present case, it is not in dispute that the assessee has

repaid loan / deposit by debiting the account through journal entries. The

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question is, whether such repayment of loan / deposit is in contravention of

the modes of repayment set out in Section 269T ? The argument advanced

by the counsel for the assessee that the bonafide transaction of repayment of

loan / deposit by way of adjustment through book entries carried out in the

ordinary course of business would not come within the mischief of Section

269T cannot be accepted, because, the section does not make any distinction

between the bonafide and non-bonafide transactions and requires the entities

specified therein not to make repayment of any loan / deposit together with

the interest, if any otherwise than by an account payee cheque / bank draft if

the amount of loan / deposit with interest if any exceeds the limits prescribed

therein. Similarly, the argument that only in cases where any loan or deposit

is repaid by an outflow of funds, Section 269T provides for repayment by an

account payee cheque / draft cannot be accepted because Section 269T

neither refers to the repayment of loan / deposit by outflow of funds nor

refers any of other permissible modes of repayment of loan / deposit, but

merely puts an embargo on repayment of loan / deposit except by the modes

specified therein. Therefore, in the present case, where loan / deposit has

been repaid by debiting the account through journal entries, it must be held

that the assessee has contravened the provisions of Section 269T of the Act.

20. Strong reliance was placed by the counsel for the assessee on the

decision of the Apex Court in the case of J B Boda & Company P. Limited

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(supra). In that case, J B Boda & Company P Limited carrying on business as

reinsurance brokers were during the course of business required to remit the

entire reinsurance premium payable to the foreign reinsurers in foreign

currency and then receive commission in foreign currency from the said

foreign insurers. Instead of remitting the entire amount to the foreign

reinsurers and then receiving commission from the said foreign insurers, J B

Boda & Company with the approval of the Reserve Bank of India retained the

foreign currency to the extent of the commission and remitted the balance

amount to the foreign reinsurers. As deduction under Section 80-O of the

Act in respect of the amount retained as commission was denied by the

income tax authorities as also the High Court, the Company approached the

Apex Court and the Apex Court held that to insist on a formal remittance to

the foreign reinsurers first and thereafter to receive the commission from the

foreign reinsurer would be an empty formality and a meaningless ritual on

the facts of that case. Accordingly, the Apex Court held that the Company

was entitled to 80-O deduction in respect of the commission retained by the

Company. In our opinion, the aforesaid decision of the Apex Court has no

relevance to the facts of the present case, because, Section 80-O and Section

269T operate in completely different fields. The object of Section 80-O is to

encourage Indian Companies to develop technical knowhow and make it

available to foreign companies and foreign enterprises so as to augment the

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foreign exchange earnings, where as, the object of Section 269T in Chapter

XXB of the Act is to counteract evasion of tax. For Section 80-O, receiving

income in convertible foreign exchange is the basic requirement, where as,

for Section 269T, compliance of the conditions set out therein is the basic

requirement. Section 80-O does not prescribe any particular mode for

receiving the convertible foreign exchange, where as, Section 269T bars

repayment of loan or deposit by any mode other than the mode stipulated

under that Section and for contravention of Section 269T penalty is

imposable under Section 271E of the Act. In these circumstances, the

decision of the Apex Court rendered in the context of Section 80-O cannot be

applied while interpreting the provisions of Section 269T of the Act.

21. It is relevant to note that with a view to mitigate the hardship

that may be caused to the genuine business transactions on account of the

bar imposed under Section 269T and the penalty imposable under Section

271E, the legislature, by the Taxation Laws (Amendment & Miscellaneous

Provisions) Act 1986 has introduced Section 273B with effect from 10 th

September 1986. Section 273B interalia provides that notwithstanding

anything contained in Section 271E, no penalty shall be imposed on the

person or the assessee as the case may be for any failure referred to in the

said Section, if such person or assessee proves that there was reasonable

cause for such failure. Thus, reading Section 269T, 271E and 273B together

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it becomes clear that :

a) Under Section 269T it is mandatory for the persons specified therein to

repay loan / deposit only by account payee cheque / draft if the amount of

loan / deposit together with interest, if any, exceeds the limits prescribed

therein;

b) Non-compliance of the provisions of Section 269T renders the person

liable for penalty under Section 271E; and

c) Section 273B provides that no penalty under Section 271E shall be

imposed if reasonable cause is shown by the concerned person for failure to

comply with the provisions of Section 269T of the Act.

22. The argument advanced on behalf of the assessee that if Section

269T is construed literally, it would lead to absurdity cannot be accepted,

because, repayment of loan / deposit by account payee cheque / bank draft is

the most common mode of repaying the loan / deposit and making such

common method as mandatory does not lead to any absurdity. No doubt,

that in some cases genuine business constraints may necessitate repayment of

loan / deposit by a mode other than the mode prescribed under Section 269T.

To cater to the needs of such exigencies, the legislature has enacted Section

273B which provides that no penalty under Section 271E shall be imposed

for contravention of Section 269T if reasonable cause for such contravention

is shown.

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23. The expression 'reasonable cause' used in Section 273B is not

defined under the Act. Unlike the expression 'sufficient cause' used in

Section 249(3), 253(5) and 260A(2A) of the Act, the legislature has used the

expression 'reasonable cause' in Section 273B of the Act. A cause which is

reasonable may not be a sufficient cause. Thus, the expression 'reasonable

cause' would have wider connotation than the expression 'sufficient cause'.

Therefore, the expression 'reasonable cause' in Section 273B for non-

imposition of penalty under Section 271E would have to be construed

liberally depending upon the facts of each case.

24. In the present case, the cause shown by the assessee for

repayment of the loan / deposit otherwise than by account-payee cheque /

bank draft was on account of the fact that the assessee was liable to receive

amount towards the sale price of the shares sold by the assessee to the person

from whom loan / deposit was received by the assessee. It would have been

an empty formality to repay the loan / deposit amount by account-payee

cheque / draft and receive back almost the same amount towards the sale

price of the shares. Neither the genuineness of the receipt of loan / deposit

nor the transaction of repayment of loan by way of adjustment through book

entries carried out in the ordinary course of business has been doubted in the

regular assessment. There is nothing on record to suggest that the amounts

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advanced by Investment Trust of India to the assessee represented the

unaccounted money of the Investment Trust of India or the assessee. The

fact that the assessee company belongs to the Ketan Parekh Group which is

involved in the securities scam cannot be a ground for sustaining penalty

imposed under Section 271E of the Act if reasonable cause is shown by the

assessee for failing to comply with the provisions of Section 269T. It is not in

dispute that settling the claims by making journal entries in the respective

books is also one of the recognized modes of repaying loan / deposit.

Therefore, in the facts of the present case, in our opinion, though the

assessee has violated the provisions of Section 269T, the assessee has shown

reasonable cause and, therefore, the decision of the Tribunal to delete the

penalty imposed under Section 271E of the Act deserves acceptance.

25. In the result, we hold that the Tribunal was not justified in

holding that repayment of loan / deposit through journal entries did not

violate the provisions of Section 269T of the Act. However, in the absence of

any finding recorded in the assessment order or in the penalty order to the

effect that the repayment of loan / deposit was not a bonafide transaction

and was made with a view to evade tax, we hold that the cause shown by the

assessee was a reasonable cause and, therefore, in view of Section 273B of

the Act, no penalty under Section 271E could be imposed for contravening

the provisions of Section 269T of the Act.

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26. The appeal is disposed of in the above terms with no order as to

costs.

(A.R. Joshi, J.) (J.P. Devadhar, J.)

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