By Mehul K. Patel & Manish J. Shah
Advocates                                             
 

WHILE DEALING WITH CONTRAVENTION OF PROVISION OF SECTION 269SS, THE OBJECT OF ITS ENACTMENT MUST BE KEPT IN MIND:

Asst.Director of Inspection (investigation) v. Kum. A.B.Shanthi

( 255 - ITR - 258 (SC)] :

In the above mentioned case before the Hon’ble Supreme Court , the controversy which had travelled to it was the challenge to the constitutionality of the provisions of section 269SS. The Madras High Court in Kum. A.B.Shanthi vs. Assst. Director of Inspection 197 - ITR - 330 (Mad) quashed the proceedings initiated against the respondent under section 269SS of the Income tax Act, by holding that the provisions of section 269SS could not be constitutionally upheld.

While upholding the constitutionality of the provision of section 269SS the Hon’ble Supreme Court, also took into consideration the object for which 269SS was brought on the statutebook. While addressing itself to the object for enacting section 269SS it was held at page 260 and 261 as follows :

           "Section  269SS was inserted in the Income-tax Act by the Finance Act, 1984, with effect from April 1, 1984 ,but the same was made operative from July 1, 1984.The Income-tax Department, in the course of searches carried out by them from time to time recovered large amounts of unaccounted cash from certain taxpayers and often the taxpayers gave explanation for their unaccounted cash to the effect that they had borrowed loans or received deposits made by other persons. Sometimes , it was noticed, that the unaccounted income was also brought into the books of account in the form of loans and deposits and later they would obtain confirmatory letters from other persons in support of their explanation. The Department was not able to unearth the source of such unaccounted cash. Therefore, in order to plug the loopholes and to put an end to the practice of giving false and spurious explanation by the taxpayers , anew provision was inserted in the Income-tax Act debarring persons from taking or accepting from any other person any loan or deposit otherwise  than by account-payee cheque or account-payee bank draft, if the amount of such loan or deposit or the aggregate amount of such loan or deposit is Rs.10,000 or more. The Amount of Rs.10,000/- was later revised as Rs.20,000  with effect from April 1,1989."

At page 266, it was further held -

           "if there was a genuine and bona fide transaction and if for any reason the taxpayer could not get a loan or deposit by account-payee cheque or demand draft for some bona fide reasons,the authority vested with the power to impose penalty has got discretionary power."

Our analysis of 255 ITR 258 (SC) :

As can be seen from the  ratio  of the above mentioned judgment, the Supreme Court has very clearly indicated that whenever a situation arises where the provision of section 269SS  are attracted ,the problem has to be dealt with by keeping the object for bringing about this section in mind.

It would be worthwhile to further mention the scope and rationale behind the introduction of this section which was explained by the Board in Circular No. 387 dated 6th July 1984 ; (1985) 152 ITR (St.) 22.

"Prohibition against taking or accepting certain loans and deposits in cash - 32.1    Unaccounted cash found in the course of searches carried out by the Income-tax Department is often explained by taxpayers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits, and taxpayers are also able to get confirmatory letters from such persons in support of their explanation.

32.2    With a view to countering this device, which enables taxpayers to explain away unaccounted cash or unaccounted deposits , the Finance Act has inserted a new section 269SS in the Income-tax Act debarring persons from taking or  accepting , after 30th June , 1984, from any other person  any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of such loan or deposit or the aggregate amount of such loan and deposit is Rs. 10,000 or more. This prohibition will also apply in cases where on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid  (whether repayment has fallen due or  not), and the amount or the aggregate amount remaining unpaid is Rs. 10,000 or more. The prohibition will also apply in cases where the amount of such loan or deposit, together with the aggregate amount remaining unpaid on the date on which such loan or deposit is proposed to be taken is Rs.10,000 or more.”

If the above-mentioned Supreme Court decision and circular are applied in cases where the transactions are genuine then in our humble opinion, it will not be open to the taxing authorities to apply the provisions of section 269SS wherever the loans and deposits  have been taken other than by mode of account payee cheque or account payee bank draft, if the transaction is a genuine transaction. This being so, because the reason for enacting section 269SS clearly was to hit non-genuine transaction.

The following decisions of the Ahmedabad Benches of Tribunal can be applied, depending upon the facts and circumstances of a particular case, to explain a "reasonable cause" as envisaged by section 273 B:

1.      VIR SALES CORPORATION vs ASSISTANT COMMISSIONER OF INCOME
         TAX, I.T.A.T., AHMEDABAD ‘C’ BENCH (1994) 50 TTJ (Ahd) 130

It is an undisputed fact that the genuineness of all the transactions have been accepted by the Department.  Both the sister concerns of assessee are existing assessees.  It is also not in dispute that whenever the assessee needed funds for sending draft to their suppliers, it received funds from these two sister concerns and whenever these two sister concerns needed funds for similar purpose, the assessee also gave funds to them for enabling them to send draft to their suppliers of goods.  The bona fide of the transactions in question has not been disputed at any stage of the proceedings, there is no material whatsoever on records giving any inkling of the transactions being of a dubious nature.  There is no allegation against the assessee that any attempt has been made for introducing the unaccounted income in the form of such loans or deposits.

Ordinarily a plea as to ignorance of law cannot support the breach of a statutory provision.  But the fact of such an innocent mistake due to ignorance of the relevant provisions of law, coupled with the fact that the transactions in question are genuine and bona fide transactions and had to be made for meeting the urgent business necessity will constitute a reasonable cause.  In the light of aforesaid facts and the legal position, the transactions inter se between the sister concerns made with a view to meet the urgent business necessity and made under the bona fide belief and under ignorance of the relevant provisions of law (ss. 269SS and 269T) is a valid excuse and constitute a reasonable cause within the meaning of s. 273B.

The penal provisions of ss.271D and 271E r/w.s. 273B confer a discretion on the authorities to levy or not to levy penalty.  Such discretion needs to be exercised with wisdom and in a fair and just manner.  Even if the relevant provisions of law prescribe levy of a minimum penalty, it does not mean that penalty must necessarily be imposed in every case falling within ss. 269SS or 269T.  Even if the minimum penalty is prescribed the authority competent to impose the penalty will be justified in refusing to impose penalty when there is a technical breach or venial violation of the provisions of the Act or where the breach flows from a bone fide belief like in the present case.  Since the transactions in question were bone fide and genuine transactions and were made on account of urgent business necessity and there was no guilty intention or guilty mind on the part of the assessee at the time when the transactions were made, the penalties levied on the assessee also deserve to be cancelled. - Hindustan Steel Ltd. vs State of Orissa (1972) 83 ITR 26 (SC) followed.

2.       SHREENATHJI CORPORATION vs ASSISTANT COMMISSIONER OF
          INCOME TAX, I.T.A.T., AHMEDABAD ‘C’ BENCH (1997) 58 TTJ (Ahd) 611

It is clear from the Circular No.387, dt. 6th July, 1984 issued by the Board that s. 269SS was introduced with a view to counter various devices adopted by the tax evaders for explaining their unaccounted cash found during the course of search or for introducing their unaccounted income in the form of loans and deposits thereby countering major economic evil of proliferation of black money, etc.  It would be worthwhile to point out that a harmonious construction of the relevant provisions of ss.273B and 271D would reveal that the use of the expression “shall be liable to pay” in s. 271D and the provisions of s.273B providing that no penalty would be leviable if the person concerned proves that there was reasonable cause for the said failure, that these provisions give discretion to the authorities to impose the penalty or not to impose the penalty and such discretion has to be exercised in just and fair manner having regard to the facts and material existing on records.

The Board Circular NO.572 dated 3rd August , 1990 reported in 186 ITR (St.) 81 at 111 (para 43) as well as the advertisement given by Department for information of the taxpayers at large gave the impression that the default is committed and penalty is leviable only if the loan/deposit amount in cash involved is in excess of Rs. 20,000/-.  A plain reading of the circular as well as advertisement would no doubt makes one believe that only loan/deposit in excess of Rs. 20,000 is required to be taken by account-payee cheque or draft and such loan/deposit of Rs. 20,000 or below that amount could otherwise be taken by cash.  The impression gathered as tax-payers from the aforesaid circular and the advertisement did constitute a reasonable cause for accepting the said loans/deposits of Rs. 20,000 from each party in cash within the meaning of 273B. 

(3)     M/S GANESH WOODEN INDUSTRES 
          ITA NO. 1626/AHD/1997, BENCH "SMC"
         ORDER DATED 8/7/2002.

 Assessee firm carrying on business in wood, required to make payments in cash towards purchases. Assessee accepted deposits from agriculturists who are alliterate persons  and do not maintain any bank accounts. Depositors confirmed  transactions by affidavits HELD - The transactions were bonafide and were undertaken for argent requirement of business and motivated by commercial consideration. The penalty u/s. 271D was cancelled by applying  the following ratio laid down by 255 ITR 258 (SC):

 "The object of introducing section 269SS is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money , or if he makes some false entries, he shall not escape by giving false explanation for the same. During search and seizures, unaccounted money is unearthed and the taxpayer 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 to suit the plea of the taxpayer. The main object of section 269SS was to curb this menace of making false entries in the account books and later giving an explanation for the same."

July   2002

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• For the month of June 2002