The Commissioner Of Income-Tax v. M/S Samora Hotels P. Ltd

THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 23.02.2012 +ITA No.313/2006 THE COMMISSIONER OF INCOME-TAX … Appellant Versus M/S SAMORA HOTELS P. LTD. … Respondent Advocates who appeared in this case:For the AppellantFor the Respondent : Mr Kiran Babu: Mr Anoop Sharma CORAM:-HON’BLE MR JUSTICE BADAR DURREZ AHMEDHON’BLE MR JUSTICE V.K. JAIN JUDGMENT BADAR DURREZ AHMED, J 1.The substantial question of law which we have to answer in thisappeal is:- “Whether on the facts and circumstances of the case, theIncome Tax Appellate Tribunal was right in law inconcluding that no penalty was leviable on the assesseeunder the provisions of section 271D of the Income Tax Act,1961? 2.This appeal arises out of the order dated 29.07.2005 passed by theIncomeTaxAppellateTribunal,DelhiBench‘E’,NewDelhi(hereinafter referred to as ‘the Tribunal’ ) in ITA No.1066/Del/2005relating to the assessment year 2001-02. 3.Inthecourse of assessmentproceedingsfortherelevantassessment year ( 2001-02), the Assessing Officer noticed that a sum of` 66.50 lakhs was shown to have been received by the assessee fromthree persons (Mr Rajinder Diwan, Mr Puneet Diwan & Mrs UrmilDiwan – promoter directors) by way ofunsecured loans.What issignificant is that, out of the said amount of ` 66.50 lakhs, a sum of` 23.25 lakhs was received by the assessee from the said three persons(Mr Rajinder Diwan – ` 5,00,000/-, Mr Puneet Diwan – ` 9,95,000/- &Mrs Urmil Diwan – ` 8,30,000/-) in cash / bearer cheques in excess ofthe limit of ` 20,000/- laid down in section 269SS of the Income TaxAct, 1961 (hereinafter referred to as ‘the said Act’).Inasmuch as theAssessing Officer felt that loans to the extent of ` 23.25 lakhs had beenreceived and accepted by the assessee company in a manner prohibitedby section 269SS of the said Act, he initiated penalty proceedings undersection 271D of the said Act. 4.In the penalty proceedings, it was submitted on behalf of theassessee company that a hotel was being set up by it at Shimla and forthe purpose of construction of the said hotel, funds were contributed byits directors / shareholders in the form of loans, as and when required. Itwas also submitted that the said amount was actually contributed bythem towards share capital and the same being in the nature of sharecapital money the provisions of Section 269SS were not applicable. TheAssessing Officer, however found that the authorised share capital of theassessee company as on 31.03.2001 was only ` 5 lakhs which was raisedto ` 25 lakhs only on 31.3.2003. He also noted that the amounts standingin the name of the three creditors were shown by the assessee company in its balance sheet as unsecured loans and even in the confirmationletters filed by the said creditors, the said amounts were stated to havebeen paid to the assessee company as loans without any mention of shareapplication money. The Assessing Officer did not, therefore, accept theexplanation of the assessee that the amount in question received from thethree creditors was on account of share application money.TheAssessing Officer also held that the assessee had failed to prove that thesaid amount had been accepted by it in cash or bearer cheques inexceptional circumstances of urgent requirement of funds or businessexigencies. The assessee’s plea that there was a reasonable cause whichprevented it from complying with the requirements of Section 269SSwas also found to be unacceptable by the Assessing Officer. He,therefore, proceeded to impose penalty of ` 23.25 lakhs under section271D. 5.Being aggrieved by the penalty order, the assessee companypreferred an appeal before the Commissioner of Income Tax (Appeals)[hereinafter referred to as ‘the CIT(A)’].Before the CIT(A), it wassubmitted that the amounts received from the directors/ shareholderswere strictly not in the nature of loans and the source of the said amountshaving allegedly been explained in the hands of the concerned creditors,imposition of penalty under section 271D was not justified keeping inview the legislative intent behind enacting the said provisions. It wasreiterated that the said amounts were contributed by the director /shareholders as their share application money and the same havingallegedly been finally adjusted against the shares allotted to the saidcreditors, the amounts in questions could not be treated as loans in the strict sense so as to attract the provisions of Section 269SS. It was alsosubmitted that there was a reasonable cause for having taken the saidamounts from its directors/ shareholders in cash / bearer cheques and itwas therefore not a fit case for imposition of penalty under section 271D.The submissions made on behalf of the assessee company, however, didnot find favour with the CIT (A) and he confirmed the penalty imposedby the Assessing Officer under section 271D. The CIT (A), inter alia,held that no evidence had been produced to show that the said sum hadbeen received as share application money. According to the CIT (A), thestory of share application money was an after-thought, once the assesseerealized that the unsecured loans taken in cash / bearer cheques clearlyviolated section 269SS of the said Act. 6.Thereafter, the assessee preferred the appeal before the Tribunalwhich culminated in the order dated 29.07.2005 which is impugnedbefore us by the revenue. 7.Before the Tribunal, the assessee raised the plea that the amountsin question were actually contributed by the concerned directors/shareholders of the assessee company towards share application moneyand that such amounts having been finally adjusted against the sharecapital subsequently in the year 2003, the provisions of section 269SSwere not attracted. But, this plea was rejected by the Tribunal inasmuchas it was of the view that, as the authorized share capital of the assesseecompany during the year in question was only ` 5 lakhs (it was raised to` 25 lakhs only in 2003), the assessee company was not authorized in theyear in question to accept share application money to the extent of` 23.25 lakhs in excess of its authorized capital. The Tribunal also noted that in the balance sheet of the relevant year, the amounts in questionwere shown as unsecured loans.Even the confirmation letters filed bythe concerned three creditors showed the said amounts as loans and didnot refer to application for shares. Thus, the Tribunal found as a fact thatthe amounts in question had not been received as share applicationmoney but as unsecured loans. This finding is final and has not beenchallenged before us by the assessee as it has not preferred any appeal orcross-objection. that in the balance sheet of the relevant year, the amounts in questionwere shown as unsecured loans.Even the confirmation letters filed bythe concerned three creditors showed the said amounts as loans and didnot refer to application for shares. Thus, the Tribunal found as a fact thatthe amounts in question had not been received as share applicationmoney but as unsecured loans. This finding is final and has not beenchallenged before us by the assessee as it has not preferred any appeal orcross-objection. 8.However, the Tribunal accepted the other plea of the assessee thatthe loans were “genuine” loans and that the assessee was under a bonafide belief that the provisions of section 269SS did not apply to the caseof genuine loans and, therefore, there was reasonable cause for theassessee for not complying with the provisions of section 269SS whileaccepting the amounts in question. The Tribunal also held that the bonafide belief of the assessee company was also based on the interpretationof the words “any other person” appearing in section 269SS.TheTribunal noted that the Hyderabad Bench of ITAT in Dillu CineEnterprises (P) Ltd v. ACIT: 80 ITD 484 had taken the view that thewords “any other person” did not include a director of the very companywhich accepted the loan or deposit. Though the Tribunal also noted thata contrary view had been taken by other benches of the ITAT, it was ofthe view that the Hyderabad Bench decision was sufficient to lead theassessee company to believe that its shareholders/ directors were notcovered within the expression “any other person” and consequently theacceptance of the amounts in question were not in violation of section269SS of the said Act. 9.The Tribunal concluded as under:- “10.As such, considering all the facts of the case andkeeping in view the legal position emanating from theaforesaid judicial pronouncement we are of the view thatthe assessee company had entertained bona fide belief thatthe loans accepted by it from its shareholders/ directorswere not covered by the provisions of section 269SSandthis bona fide belief coupled with the fact that the saidloans were genuine and were also accepted in the regularcourse of business constituted a reasonable cause for itsfailure to accept the loans in question from its directorsshareholdersbyaccountpayeecheque/draftsincompliance with the requirement of section 269SS. In thatview of the matter, we find no justification in theimpugned order of learned CIT(A) confirming the penaltyimposed by the Assessing Officer u/s 271D and reversingthe same, we cancel the penalty so imposed.” (emphasis supplied) 10.It is in this backdrop that the question posed has arisen in thisappeal under section 260A of the said Act. The learned counsel for therevenue contended that there was a clear violation of the provisions ofsection 269SS inasmuch as loans had been accepted in excess of the sumof rupees twenty thousand in cash/ bearer cheques whereas the saidprovision strictly required the same to be through account payee chequesor account payee bank drafts.It was contended that the Tribunalmisdirected itself in law in construing the action on the part of theassessee company to be bona fide and/or to be excusable under the“reasonable cause” provision in section 273B of the said Act.Thelearned counsel for the assessee supported the view taken by the Tribunalin the impugned order.He submitted that the amounts could not beregarded as loans or deposits as they were receipts from directors/ shareholders. In support, the decision of the Madras High Court in thecase ofCIT v. Idhayam Publications Ltd :285 ITR 221 was cited. Itwas also submitted by the learned counsel for the assessee that, in anyevent, the “loans” were genuine and the assessee had demonstrated a“reasonable cause” for its failure to comply with section 269SS of thesaid Act. 11.First of all, let us have a look at sections 269SS, 271D and 273B: shareholders. In support, the decision of the Madras High Court in thecase ofCIT v. Idhayam Publications Ltd :285 ITR 221 was cited. Itwas also submitted by the learned counsel for the assessee that, in anyevent, the “loans” were genuine and the assessee had demonstrated a“reasonable cause” for its failure to comply with section 269SS of thesaid Act. 11.First of all, let us have a look at sections 269SS, 271D and 273B: “269SS. Mode of taking or accepting certain loans anddeposits.--No person shall after the 30th day of June, 1984,take or accept from any other person (hereafter in thissection referred to as the depositor), any loan or depositotherwise than by an account payee cheque or accountpayee bank draft if,-- (a)the amount of such loan or deposit or the aggregateamount of such loan and deposit ; oramount of such loan and deposit ; or (b)on the date of taking or accepting such loan ordeposit, any loan or deposit taken or accepted earlierby such person from the depositor is remainingunpaid (whether repayment has fallen due or not), theamount or the aggregate amount remaining unpaid ;ordeposit, any loan or deposit taken or accepted earlierby such person from the depositor is remainingunpaid (whether repayment has fallen due or not), theamount or the aggregate amount remaining unpaid ;or (c)the amount or the aggregate amount referred to inclause (a) together with the amount or the aggregateamount referred to in clause (b),clause (a) together with the amount or the aggregateamount referred to in clause (b), is twenty thousand rupees or more: Provided that the provisions of this section shall not applyto any loan or deposit taken or accepted from, or any loan ordeposit taken or accepted by,-- (a)Government ; (b)any banking company, post office savings bank or co-operative bank ;operative bank ; (c)any corporation established by a Central, State orProvincial Act ;Provincial Act ; (d)any Government company as defined in section 617of the Companies Act, 1956 (1 of 1956) ;of the Companies Act, 1956 (1 of 1956) ; (e)such other institution, association or body or class ofinstitutions, associations or bodies which the CentralGovernment may, for reasons to be recorded inwriting, notify in this behalf in the Official Gazette.institutions, associations or bodies which the CentralGovernment may, for reasons to be recorded inwriting, notify in this behalf in the Official Gazette. Provided further that the provisions of this section shall notapply to any loan or deposit where the person from whomthe loan or deposit is taken or accepted and that person bywhom the loan or deposit is taken or accepted are bothhaving agricultural income and neither of them has anyincome chargeable to tax under this Act. Explanation.--For the purposes of this section,-- (i)"banking company" means a company to which theBanking Regulation Act, 1949 (10 of 1949), appliesand includes any bank or banking institution referredto in section 51 of that Act ;Banking Regulation Act, 1949 (10 of 1949), appliesand includes any bank or banking institution referredto in section 51 of that Act ; (ii)"co-operative bank" shall have the meaning assignedto it in Part V of the Banking Regulation Act, 1949(10 of 1949) ;to it in Part V of the Banking Regulation Act, 1949(10 of 1949) ; (iii)"loan or deposit" means loan or deposit of money.” “271D. Penalty for failure to comply with the provisionsof section 269SS.-- (1) If a person takes or accepts any loanor deposit in contravention of the provisions of section269SS, he shall be liable to pay, by way of penalty, a sumequal to the amount of the loan or deposit so taken oraccepted. (2) Any penalty imposable under sub-section (1) shall beimposed by the Joint Commissioner.” “273B. Penalty not to be imposed in certain cases.--Notwithstanding anything contained in the provisions ofclause (b) of sub-section (1) of section 271, section 271A, (ii)"co-operative bank" shall have the meaning assignedto it in Part V of the Banking Regulation Act, 1949(10 of 1949) ;to it in Part V of the Banking Regulation Act, 1949(10 of 1949) ; (iii)"loan or deposit" means loan or deposit of money.” “271D. Penalty for failure to comply with the provisionsof section 269SS.-- (1) If a person takes or accepts any loanor deposit in contravention of the provisions of section269SS, he shall be liable to pay, by way of penalty, a sumequal to the amount of the loan or deposit so taken oraccepted. (2) Any penalty imposable under sub-section (1) shall beimposed by the Joint Commissioner.” “273B. Penalty not to be imposed in certain cases.--Notwithstanding anything contained in the provisions ofclause (b) of sub-section (1) of section 271, section 271A, section 271B, section 271BB, section 271C, section 271D,section 271E, section 271F, clause (c) or clause (d) of sub-section (1) or sub-section (2) of section 272A, sub-section(1) of section 272AA or sub-section (1) of section 272BB orclause (b) of sub-section (1) or clause (b) or clause (c) ofsub-section (2) of section 273, no penalty shall be imposableon the person or the assessee, as the case may be, for anyfailure referred to in the said provisions if he proves thatthere was reasonable cause for the said failure.” 12.Section 269SS prohibits “a person” from taking or accepting from“any other person” any “loan or deposit” otherwise than by an accountpayee cheque or account payee bank draft if, inter alia, the amount ofsuch loan or deposit or the aggregate amount of such loan and deposit istwenty thousand rupees or more. The assessee company being a juristicperson would be covered by the said provision. There is no dispute withthis. However, it was contended that the expression “any other person”would not refer to a director or shareholder of the company in question.Such a view is not warranted from a plain reading of the section. Thereis no indication that the corporate veil is to be pierced so as to bringabout an identity between the company as a juristic person and itsdirectors or members. Therefore, in our view, the expression “any otherperson” does not exclude the directors or members of the assesseecompany which has received or accepted the loans or deposits. 13.The view taken by the Tribunal that the assessee company hadentertained a bona fide belief that the loans accepted by it from itsdirectors/ shareholders were not covered by the provisions of section269SS, we are afraid, is not borne out by the record. When the assesseecompany was asked to furnish its answer in the penalty proceedings, the assessee company did not take the plea that the receipts in question wereloans but, because they were from directors/shareholders, the loans werenot covered under section 269SS. On the contrary, the specific plea ofthe assessee company was that the amounts in question represented shareapplication money and were not loans or deposits at all! When the clearstand of the assessee was that the amounts in question were not loans ordeposits how can it said that the assessee company had entertained abona fide belief that the loans accepted by it from its directors/shareholders were not covered by the provisions of section 269SS? It isanother matter that the story of share application money was itself anafter thought and was rightly rejected by all the authorities below. At thesame time, there was no belief what to speak of “bona fide belief” thatthe loans taken from directors/ shareholders were not within the ambit ofsection 269SS. 14.This is the appropriate point to refer to the Madras High Courtdecision in Idhayam Publications (supra), a decision relied upon by thelearned counsel for the assessee. In that decision, the Madras High Courtobserved as under:- 14.This is the appropriate point to refer to the Madras High Courtdecision in Idhayam Publications (supra), a decision relied upon by thelearned counsel for the assessee. In that decision, the Madras High Courtobserved as under:- “Companies (Acceptance of Deposits) Rules, 1975, underrule 2(b)(ix), deposit does not include any amount receivedfrom a director or a shareholder of a private limitedcompany. Therefore the transaction between the appellantand the director cum shareholder is not a loan or depositand it is only a current account in nature and no interest isbeing charged for the above transaction.” 15.In the case at hand, as already pointed out above, the stand of theassessee was entirely different.It had contended that the amounts inquestion represented share application money.In any event, Rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules, 1975 wouldhave no application in the present case. This is because the said rulecarries a proviso which stipulates a condition precedent which has notbeen satisfied in the present case. To make things clear, the proviso isset out hereinbelow:- “Provided that the director or member, as the case may be,from whom the money is received, furnishes to the companyat the time of giving the money, a declaration in writing tothe effect that the amount is not being given out of fundsacquired by him by borrowing or accepting from others;” 16.There is no evidence that the three persons from whom theamounts were received had furnished such declarations. Clearly, then,the assessee cannot take refuge under the said rule. We may also make itclear that we have neither expressed our agreement or disgreement withthe Madras High Court view and leave that issue open. What we say isthat even taking the Madras High Court view to be correct, it does notcome to the rescue of the assessee herein because there is no factualfoundation of the condition precedent stipulated in the said provisohaving been fulfilled. 17.The learned counsel for the assessee had also placed reliance on arecent decision of a Division Bench of this court in the case ofCIT,Delhi-IV v. I.P. India (P) Ltd: (2012) 204 Taxman 368.But, thatdecision would also be of no help to the assessee inasmuch as in thatcase, the receipts by the assessee company were in the form of shareapplication monies. The Division Bench held that such receipts cannotbe treated as receipts of loans or deposits. However, in the present case,the receipts are not in the nature of share application money. Therefore, the decision in I.P. India (P) Ltd (supra) is clearly distinguishable andwould not be of any help to the assessee in the case at hand. 18.Let us now consider section 271D.The meaning is clear.If aperson takes or accepts any loan or deposit in contravention of theprovisions of section 269SS, he shall be liable to pay, by way of penalty,a sum equal to the amount of the loan or deposit so taken or accepted.Once it is established that there is a violation of section 269SS, thepenalty is mandatory and so is the amount of penalty. 19.In such an eventuality where section 271D is attracted, it is onlysection 273B of the said Act which can save a person from penalty.Section 273B provides that, notwithstanding anything contained in theprovisions of section 271D, no penalty shall be imposable on theassessee for any failure referred to in section 271D if he proves that therewas “reasonable cause” for the said failure. 20.The Supreme Court inAsst. Director of Inspection (Investigation)v. Kum. A.B. Shanthi:255 ITR 258 (SC), while upholding theconstitutional validity of sections 269SS and 271D, held as under: 19.In such an eventuality where section 271D is attracted, it is onlysection 273B of the said Act which can save a person from penalty.Section 273B provides that, notwithstanding anything contained in theprovisions of section 271D, no penalty shall be imposable on theassessee for any failure referred to in section 271D if he proves that therewas “reasonable cause” for the said failure. 20.The Supreme Court inAsst. Director of Inspection (Investigation)v. Kum. A.B. Shanthi:255 ITR 258 (SC), while upholding theconstitutional validity of sections 269SS and 271D, held as under: “The new section 271D provides only for fine equal to theamount of loan or deposit taken or accepted. It is importantto note that another provision, namely section 273B wasalsoincorporated which provides that notwithstandinganything contained in the provisions of section 271D, nopenalty shall be imposable on the person or the assessee, asthe case may be, for any failure referred to in the saidprovision if he proves that there was reasonable cause forsuch failure and if the assesseeproves that there wasreasonable cause for failure to take a loan otherwise than byaccount-payee cheque or account-payee demand draft, then the penalty may not be levied.Therefore, undue hardshipis very much mitigated by the inclusion of section 273Bin the Act. If there was a genuine and bonafidetransaction and if for any reason the taxpayer could not-get a loan ordeposit by accountpayee cheque ordemand draft for some bona fide reasons, the authorityvested with the power to impose penalty has gotdiscretionary power.In that view of the matter, we do notthink that section 269SS or 271D or theearlier section276DD is unconstitutional on the ground that it wasdraconian or expropriatory in nature.” (emphasis supplied) 21.The above extract gives us a key to the understanding of section273B of the said Act. The Supreme Court observed that (1) if there wasa genuine and bona fide transactionand(2) if for any reason thetaxpayer could not get a loan or deposit by account-payee cheque ordemand draft for some bona fide reasons, the authority vested with thepower to impose penalty has got discretionary power. The existence of agenuine or bona fide transaction is not sufficient to attract the reliefunder section 273B of the said Act. It must also be established that forsome bona fide reasons the assessee could not get a loan or deposit by anaccount payee cheque or account payee bank draft. In the present case,the Tribunal has not returned any finding as to the second aspect.Without a clear finding on both the aspects referred to in the saidSupreme Court decision, the Tribunal, in law, could not have concludedthat the assessee had “reasonable cause” for its failure to accept the saidamounts in compliance with section 269SS of the said Act.There isnothing on record to show that there were bona fide reasons for notaccepting the said amounts through account payee cheques or account payee bank drafts. And, unless that is established, the shelter of section273B is not available. 22.Consequently, we answer the question in the negative and infavour of the revenue. The impugned order cancelling the penalty is setaside. The appeal is allowed. There shall be no order as to costs. BADAR DURREZ AHMED, J February 23, 2012HJ V.K. JAIN, J