Landmark Judgements of Supreme Court on Section Section 271D [Penalty for failure to comply with the provisions of Section 269SS]

SLP dismissed against High Court ruling that where director of assessee-company obtained cash in excess of Rs. 20,000 as loan from a financier and deposited same in cash in bank account of company, merely because director took cash loans from financier and deposited it in current account of assessee-company on very same day and assessee utilized it to pay salaries, rent and EMI commitments, same could not be a ground to be taken as a mitigating factor to escape from rigour of levy of penalty under section 271

Director of assessee-company obtained loan/cash exceeding Rs. 20,000 from financier JD. Loans so obtained were deposited by him in cash in bank account of assessee-company - In response to notice issued by Assessing Officer regarding violation of provisions of section 269SS, assessee explained that amount so received by director was deposited in company's bank account on very same day and same was utilized to pay salaries, rents and EMI commitments, thus, there was reasonable cause for having availed loan transactions - Assessing Officer having rejected assessee's explanation, passed penalty order under section 271D. High Court by impugned order held that merely because director deposited cash obtained by it from JD in current account of assessee-company on very same day and assessee utilized it to pay salaries, rent and EMI commitments, same could not be a ground to be taken as a mitigating factor to escape from rigour of levy of penalty under section 271D. Special leave petition filed against impugned order was to be dismissed. [In favour of revenue] (Related Assessment year : 2015-16) – [Vasan Healthcare (P) Ltd. v. Addl. CIT, Chennai (2021) 278 Taxman 273 : 125 taxmann.com 266 (SC)]

Takes or accepts any loan or deposit – Journal entries – Penalty under section 271D cannot be levied if the transactions are bona fide, genuine and have reasonable cause -No substantial question of law

-   SLP dismissed against High Court ruling that receipt of deposits/loans received through journal entries is in breach of section 269SS

Mode of taking or accepting (Journal entries) - High Court by impugned order held that receipt of any advance or loan by way of journal entries is in breach of section 269SS. It further held that journal entries constitute a recognized mode of recording of transactions and in absence of any adverse finding by authorities that journal entries were made with a view to achieve purpose outside normal business operations or there was any involvement of money, there was a reasonable cause for not complying with section 269SS and penalty under section 271D was not to be imposed. Special Leave Petition filed against impugned order was to be dismissed. [In favour of assessee] - [CIT(C) v. Adinath Builders (P) Ltd. (2019) 261 Taxman 168 : 102 taxmann.com 57 (SC)]

Provisions of sections 271D and 271E were invoked after six months of limitation, penalty imposed was to be quashed

On perusing the judgment of the High Court, it is found that penalty imposed on the respondent herein was also set aside on the ground that the provisions of Section 271-D and 271-E of the Income Tax Act were invoked after six months of limitation and, therefore, such penalty could not have been imposed.

Since the outcome of the judgment of the High Court can be sustained on this aspect alone, it is not even necessary to go into other aspects. Leaving the other questions of law open, the appeal is dismissed. There shall be no order as to costs. – [CIT, Bikaner v. Hissaria Brothers (2016) 243 Taxman 174 : 74 taxmann.com 22 (SC)]

Where the transaction of loan has found place in the books of account of the assessee as well as the lender of the loan – Penalty not justified

The Supreme Court considered the provision of Sections 271D and 273B of the Act and held:–

“It is important to note that another provision, namely section 273B was also incorporated which provides that notwithstanding anything contained in the provisions of section 271D, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provision which he proves that there was reasonable cause for such failure and if the assessee proves that there was reasonable cause for failure to take a loan otherwise than by account-payee cheque or accountpayee demand draft, then the penalty may not be levied. Therefore, undue hardship is very much mitigated by the inclusion of section 273B in the Act. If there was a genuine and bona fide transaction and if for any reason the taxpayer..” [Chamundi Granites (P) Ltd. v. CIT (2002) 255 ITR 258 (SC)]

Takes or accepts any loan or deposit – Representative of the assessee consented to the proposition that apart from the bona fides of the transaction, assessee is also required to prove the existence of reasonable cause to come within the immunity provided in Section 273B of the Act. Accordingly, the Tribunal has not dealt with the reservations expressed by the Division Bench in the reference note. On facts the assessee has failed to show that there was a reasonable cause for getting loans in violation of the provisions of Section 269SS of the Act – Levy of penalty under section 271D is held to be justified

It was held that since the Learned representative for the assessee consented to the proposition that apart from the bona fides of the transaction, assessee is also required to prove the existence of reasonable cause to come within the immunity provided in Section 273B of the Act, there was no reason to dwell upon any further on the reservations expressed by the Division Bench. – [ADIT (Inv) v. Kum. A.B. Shanthi (2002) 255 ITR 258 (SC)]

Penalty under section 271D is not leviable on loan taken in cash by partners from firm

It was held that partnership is only a collective of separate persons and not a legal person in itself. Thus, there cannot be a contract of service in strict law between a firm and one of its partners. – [CIT v. R.M. Chidambaram Pillai (1977) 106 ITR 292 (SC)]

It was held that, an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. The penalty will not also be imposed merely because of it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of authority to be exercised judicially and on a consideration of all relevant circumstances. Even if a minimum penalty is prescribed the authority competent to impose penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or when there is