Friday, August 28, 2015

TDS default on capital exp. won't attract disallowance

IT/ILT : Where assessee made payment to a non-resident for purchase of software which had been capitalized in block of asset, in such a case, even though assessee did not deduct tax at source on such payment, still section 40(a)(i) could not be invoked for disallowance of depreciation on amount so capitalized
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[2015] 60 taxmann.com 256 (Bangalore - Trib.)
IN THE ITAT BANGALORE BENCH 'B'
Kawasaki Microelectronics Inc.
v.
Deputy Director of Income-tax, (International Taxation), Circle-1 (1), Bangalore*
VIJAYPAL RAO, JUDICIAL MEMBER
AND Jason P. Boaz, ACCOUNTANT MEMBER
IT (IT) Appeal No. 1512 (Bang.) of 2010
[ASSESSMENT YEAR 2007-08]
JUNE  26, 2015 
Section 195, read with section 40(a)(i), of the Income-tax Act, 1961 - Deduction of tax at source - Payment to non-resident (Income chargeable to tax) - Assessment year 2007-08 - Whether where assessee made payment to a non-resident for purchase of software which had been capitalized in block of asset, in such a case, even though assessee did not deduct tax at source on such payment, still section 40(a)(i) could not be invoked for disallowance of depreciation on amount so capitalized - Held, yes [Para 8] [In favour of assessee]
FACTS


During relevant year, the assessee made payment for purchase of software from one 'cadence'. The software so purchased was capitalized by the assessee under the block of computer and depreciation was claimed.

The Assessing Officer noted that assessee had not deducted the tax at source while making payment to Cadence.

He thus taking a view that payment which was in the nature of royalty was chargeable under the Act and covered under section 40(a)(i). Accordingly, the Assessing Officer proposed to disallow the depreciation claimed by the assessee in respect of the software purchased which was capitalized.

The DRP confirmed the order passed by the Assessing Officer.

On appeal:
HELD


There is no dispute that the assessee has made the payment in question to a non-resident for purchase of software and the said payment has been capitalized by the assessee in the block of asset. Once the assessee capitalized the payment and has not claimed the same as an expenditure against the profits of the business of the assessee, then, the question arises whether the depreciation which is a statutory deduction as per the section 32 can be disallowed by invoking the provisions of section 40(a)(i). [Para 6]

The revenue has submitted that once the assessee has violated the provisions of section 195, then, even the expenditure is capitalized by the assessee, the provisions of section 40(a)(i) are applicable for disallowance of depreciation on such capitalized expenditure. The contention of the revenue cannot be accepted because a remedy for violation of provisions of section 195 is available with the Assessing Officer under sections 201 and 201A.

The provisions of section 40(a) is only an additional measure to enforce the compliance of Chapter XVII-B, by disallowing an expenditure which is otherwise allowable under the provisions of the Act. Therefore, the question of disallowance under section 40(a) arises only when an expenditure is claimed by the assessee without deducting the tax at source as per the provisions of Chapter XVII-B. In the case in hand, when the assessee has not claimed the said payment as an expenditure then the question of disallowance under section 40(a)(i) does not arise. The only remedy which might have been resorted to by the Assessing Officer is the action under sections 201 and 201A. [Para 7]

Therefore, in the facts and circumstances of the case, it is held that once the assessee has capitalized the payment in question though the assessee has not deducted the tax at source on such payment, section 40(a)(i) cannot be invoked for disallowance of depreciation. Accordingly, the orders of the authorities below are set aside and addition made by Assessing Officer is deleted. [Para 8]

In the result, the appeal of the assessee is allowed. [Para 9]
CASE REVIEW

SKOL Breweries Ltd. v. Asstt. CIT [2013] 142 ITD 49/29 taxmann.com 111 (Mum. - Trib.) (para 7) followed.
CASES REFERRED TO

SKOL Breweries Ltd. v. Asstt. CIT [2013] 142 ITD 49/29 taxmann.com 111 (Mum. - Trib.) (para 4) and SMS Demag (P.) Ltd. v. Dy. CIT [2010] 38 SOT 496 (Delhi) (para 4).
Chavali Narayan, CA  for the Appellant. Farhat Hussain Qureshi, CIT DR  for the Respondent.
ORDER

Vijay Pal Rao, Judicial Member - This appeal by the assessee is directed against the assessment order dt. 16.10.2010 passed under Section 143(3) rws 144C(B) of the Income Tax Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute Resolution Panel (DRP) dt.22.9.2010 passed under Section 144C(5) of the Act for Assessment Year 2007-08.
2. The assessee has raised the following grounds :—
"1.

The order of the learned AO and direction of the Hon'ble DRP are based on incorrect interpretation of law and therefore are bad in law.
2.

Based on directions of DRP, the learned AO erred in assessing the total income at Rs.1,029,574/- as against returned loss of Rs.718.133 computed by the appellant.


Grounds of appeal;
3.

The learned AO has erred in law by holding that the payment made to Cadence Systems Ireland Ltd. ("Cadence") for purchase of software (software was capitalized in the assessee's accounts), amounts to royalty under the Act and the India- Ireland Tax Treaty and therefore, tax was required to be deducted at source on the said payment.
4.

The learned AO has erred in law by holding that since tax was not deducted at source from the payment made towards purchase of software, tax depreciation claimed on computer software amounting to Rs.1,747.680 is not allowable as a deduction under section 40(a)(i) of the Act.
5.

The learned AO has erred in law by not considering that even if the tax depreciation is disallowed resulting in an income, Kawasaki India, being a unit registered under the Software Technology Parks of India (STPI) Scheme and having satisfied the conditions prescribed under section 10A of the Act, is eligible to claim deduction under the aforesaid section.
6.

The learned AO erred in levying interest of Rs.115.197 under sections 234B of the Act.


The appellant submits that each of the above grounds is independent and without prejudice to one another."
3. The only issue raised for our consideration and adjudication is regarding disallowance of depreciation by invoking the provisions of section 40(a)(i) of the Act in respect of the payments made for purchase of software and capitalized by the assessee. The Assessing Officer found that the assessee made the payment of Rs.49,42,300 for purchase of software from Cadence Systems Ireland Limited (in short 'Cadence'). The software so purchased has been capitalized by the assessee under the block of computer and depreciation was claimed by the assessee. The Assessing Officer further noted that the assessee has not deducted the tax at source while making payment to Cadence and accordingly asked the assessee as to why the payment should not be disallowed under Section 40(a)(i) of the Act. The assessee objected to the proposed disallowance under Section 40(a)(i) of the Act. The Assessing Officer did not accept the contention of the assessee that the depreciation cannot be allowed under Section 40(a)(i) of the Act. The Assessing Officer has held that the payment was made by the assessee to a non-resident on which the TDS is to be deducted at source but the assessee has not deducted the tax nor has been paid. The payment which was in the nature of royalty is chargeable under the Act and therefore covered under Section 40(a)(i) of the Act. Accordingly, the Assessing Officer proposed to disallow the depreciation of Rs.17,49,680 claimed by the assessee in respect of the software purchased which was capitalized. The assessee raised the objection against the depreciation proposed to be disallowed by the Assessing Officer before the DRP, but could not succeed.
4. Before us, the learned Authorised Representative of the assessee has submitted that since the expenditure is capitalized by the assessee, therefore, the provisions of section 40(a)(i) cannot be invoked for disallowance of the depreciation on the capitalized amount. It is not the case of the claim of any expenditure by the assessee but the expenditure which has already capitalized and consequently the provisions of section 40(a)(i) has no role to play. In support of his contention, he has relied upon the decision of Mumbai Bench, ITAT in the case of SKOL Breweries Ltd. v. Asstt. CIT [2013] 142 ITD 49/29 taxmann.com 111  as well as the decision of the Delhi Bench of ITAT in the case of SMS Demag (P.) Ltd. v. Dy. CIT [2010] 38 SOT 496. The learned Authorised Representative has contended that the issue of disallowance of depreciation by applying the provisions of section 40(a)(i) of the Act is covered in favour of the assessee by the above said decisions of the Tribunal.
5. On the other hand, the learned Departmental Representative has submitted that there is no dispute that the assessee has made the payment for purchase of software which is in the nature of royalty and therefore the provisions of section 195 are applicable on such payment for deduction of tax at source. He has further submitted that it is also not in dispute that the assessee has not deducted the TDS in respect of the payment in question and therefore the assessee has violated the provisions of section 195 of the Act and consequently, the provisions of section 40(a)(i) of the Act are applicable in the case under consideration. The learned Departmental Representative has contended that there is an intricable link between the provisions of sections 40, 195 & 201 of the Act. Once the assessee has failed to comply with the provisions of section 195, the provisions of section 40(a)(i) of the Act are applicable. Has relied on the orders of the authorities below.
6. We have considered the rival submissions as well as relevant the material on record. The issue before us is limited only with respect to the disallowance of depreciation by invoking the provisions of section 40(a)(i) of the Act. There is no dispute that the assessee has made the payment in question to a non-resident for purchase of software and the said payment has been capitalized by the assessee in the block of computer asset. Once the assessee capitalized the payment and has not claimed the same as an expenditure against the profits of the business of the assessee, then, the question arises whether the depreciation which is a statutory deduction as per the section 32 of the Act can be disallowed by invoking the provisions of section 40(a)(i) of the Act. At the outset, it is to be noted that on the similar set of facts an identical issue has been dealt by the ITAT, Mumbai Bench in the case of SKOL Breweries Ltd. (supra), wherein it was held in paras 16.1 to 16.4 as under :—
'16.1 As regards the alternative plea of the ld Sr counsel for the assessee that since the assessee has not claimed the entire amount as revenue expenditure; but has capitalized the same and claimed only depreciation u/s 32(1)(ii); therefore, provisions of sec. 40(a)((i) shall not apply. Section 40(a)(i) contemplates that any interest, royalty, fee for technical services or other sum chargeable under this act, which is payable outside India as it is relevant for the case in hand on which tax is deductible at source under Chapter XVII -B and such tax has not been deducted or, after deduction, has not been paid, the amount of interest, royalty, fee for technical services and other sum shall not be deducted in computing the income chargeable under the head "profits & gains of business or profession". This condition of deductibility has been stipulated u/s 40 notwithstanding anything to the contrary in section 30 to 38 of the Act. Sec. 40 begins with non-obstante clause; therefore, it is an overriding effect t the provisions of sec. 30 to 38 of the I T Act. The question arises is whether any amount paid outside India or to the Non Resident without deduction of tax at source and the assessee has capitalized the same in the fixed assets and claimed only depreciation is subjected to the provisions of sec. 40(a)(i) or not ?. We quote the provisions of sec. 40(a)(i) as under:
40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-
in the case of any assessee-
(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,-
outside India; or
in India to a non-resident, not being a company or to a foreign company,
on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 :
Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Explanation. - For the purposes of this sub-clause,-
"royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;
"fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
16.2 It is manifest from the plain reading of provisions of sec. 40(a)(i) that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression 'amount payable' which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under this Act and subject to TDS under Chapter XVII-B. There is a difference between the expenditure and other kind of deduction. The other kind of deduction which includes any loss incidental to carrying on the business, bad debts etc., which are deductible items itself not because an expenditure was laid out and consequentially any sum has gone out; on the contrary the expenditure results a certain sums payable and goes out of the business of the assessee. The sum, as contemplated under sec. 40(a)(i) is the outgoing amount and therefore, necessarily refers to the outgoing expenditure. Depreciation is a statutory deduction and after the insertion of Explanation 5 to sec. 32, it is obligatory on the part of the Assessing Officer to allow the deduction of depreciation on the eligible asset irrespective of any claim made by the assessee. Therefore, depreciation is a mandatory deduction on the asset which is wholly or partly owned by the assessee and used for the purpose of business or profession which means the depreciation is a deduction for an asset owned by the assessee and used for the purpose of business and not for incurring of any expenditure.
16.3 The deduction u/s 32 is not in respect of the amount paid or payable which is subjected to TDS; but is a statutory deduction on an asset which is otherwise eligible for deduction of deprecation. Depreciation is not an outgoing expenditure and therefore, the provisions of sec. 40(a)(i) of the Act are not attracted on such deduction. This view has been fortified by the decision of the Hon'ble Punjab & Haryana High Court in the case of Mark Auto Industries Ltd. (supra) in pars 5 & 6 as under:
"5. Adverting to questions (ii) and (iii), the issue which arises for consideration is whether the assessee could be disallowed claim for depreciation under Section 40(a)(i) of the Act on the ground that the payments made for technical know-how which had been capitalized, no tax deduction at source has been made thereon. The Tribunal while accepting the plea of the assessee, in para 3, had noticed as under:
"3. Ground no. 4 is against deletion of an addition of Rs. 6,88,1751- made by the AO on account of deduction of depreciation on technical know-how as the assessee failed to deduct tax in accordance with the provision contained in section 40(a)(i). The finding of the learned CIT(A) was that the assessee had incurred, expenditure by way of technical know-how, which was capitalized amount as made in the return of income. Since the assessee had not claimed deduction for the amount paid, the provisions contained in section 40(a) (i) were not attracted. The learned DR could not find any fault with this direction of the CIT(A) also although she referred to page 4 of the assessment order, where it was mentioned that the tax deducted in respect of the payment was made over to the Government in the subsequent year and, therefore, depreciation could not be deducted on the capital expenditure incurred by the assessee. In reply, the learned counsel pointed out that the expenditure by way of technical know-how was capitalized and it was not claimed as revenue expenditure. Therefore, there was also no reason to disallow depreciation on such capitalized amount as the aforesaid provision does not deal with deduction of depreciation. Having considered arguments from both the sides, we are of the view that there is no error in the order of the learned CIT(A) which requires correction from us. Thus, this ground is also dismissed."
6. Learned counsel for the revenue was unable to substantiate that in the absence of any requirement of law for making deduction of tax out of the expenditure on technical know how which was capitalized and no amount was claimed as revenue expenditure, the deduction could be disallowed under Section 40(a)(i) of the Act. Accordingly, no infirmity could be found in the order passed by the Tribunal which may warrant interference by this Court. Thus, both the questions are answered against the revenue and in favour of the assessee."
16.4 In view of the above discussion as well as following the decision of the Hon'ble Punjab & Haryana High Court, we decide this issue in favour of the assessee and against the revenue.'
7. As it is clear from the above decision that the Tribunal has discussed and analysed the provisions of section 40(a)(i) in detail in the context of disallowance of depreciation. The learned D.R. has submitted that once the assessee has violated the provisions of section 195, then, even the expenditure is capitalized by the assessee, the provisions of section 40(a)(i) are applicable for disallowance of depreciation on such capitalized expenditure. We do not agree with the contention of the learned D.R, because a remedy for violation of provisions of section 195 is available with the Assessing Officer under Section 201 & 201A of the Act. The provisions of section 40(a) is only an additional measure to enforce the compliance of Chapter XVIIB of the Act, by disallowing an expenditure which is otherwise allowable under the provisions of the Act. Therefore, the question of disallowance under Section 40(a) arises only when an expenditure is claimed by the assessee without deducting the tax at source as per the provisions of Chapter-XVIIB of the Act, 1961. In the case on hand, when the assessee has not claimed, the said payment as an expenditure then the question of disallowance under Section 40(a)(i) does not arise. The only remedy which might have been resorted to by the Assessing Officer is the action under Section 201 and 201A of the Act. A similar view has been taken by the Delhi Bench of the Tribunal in the case of SMS Demag (P.) Ltd. (supra) in para 8 as under :—
"8. As regards the claim of assessee for depreciation on assets capitalized, depreciation cannot be disallowed on the ground that at the time of remittance, no tax was deducted at source. Provisions of section 40(a)(i) are not applicable for claim for deduction under section 32 of the Act. Accordingly, in our considered opinion, the AO was not justified in disallowing 50 percent of depreciation on the ground that provisions of section 40(a)(i) were applicable. However, the AO will verify the fact whether the assets in respect of which expenditure has been capitalized have been used in business for period more than 180 days. If the assets have been used for more than 180 days, the AO will allow full depreciation, as claimed by the assessee. The AO is directed accordingly".
8. Therefore, in the facts and circumstances of the case as well as by following the decisions of the co-ordinate benches of the ITAT, we are of the opinion that once the assessee has capitalized the payment in question though the assessee has not deducted the tax at source on such payment, Section 40(a)(i) cannot be invoked for disallowance of depreciation. Accordingly, we set aside the orders of the authorities below and the addition made by the Assessing Officer is deleted.
9. In the result, the appeal of the assessee is allowed.
SUNIL
 


*In favour of assessee.

Wednesday, August 12, 2015

IT : Penalty under section 271D could not be levied when assessee sufficiently process that loan was taken in excess of Rs. 20,000 to meet urgent and immediate requirement of Business ■■■ [2015] 56 taxmann.com 439 (Gujarat) HIGH COURT OF GUJARAT Commissioner of Income-tax v. Shreenathji Corpn.*

IT : Penalty under section 271D could not be levied when assessee sufficiently process that loan was taken in excess of Rs. 20,000 to meet urgent and immediate requirement of Business
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[2015] 56 taxmann.com 439 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax
v.
Shreenathji Corpn.*
K.S. Jhaveri AND K.J. THAKER, JJ.
IT reference No. 4 of 2003
DECEMBER  10, 2014 
Section 269SS, read with sections 273B and 271D, of the Income-tax Act, 1961 - Deposits - Mode of taking/accepting (Business need)- Assessee carries on business of construction of building and in course of such business large amount of labour charges and payments for raw material purchased from unorganized trading sectors and bricks etc. are required to be made after banking hours - If their demand for cash payment was not met they would cancel contract work and refused to complete work and would also prevent other contractors from undertaking work till their dues were settled - Whether since loan/deposits was taken in excess of Rs. 20,000 to meet urgent and immediate requirements of business, no penalty could be imposed - Held, yes [Para 5] [In favour of assessee]
Circulars and Notifications : Circular Nos. 387 dated 6-7-1984 and 572, dated 3-8-1990
FACTS


The assessee firm accepted loans/deposits of Rs. 20,000 each from 13 parties in cash, which was in contravention of the provisions of section 269SS. The assessee explained that said deposits were taken in cash for business expediency.

The Assessing Officer, accepted the assessee's explanation and found deposits to be genuine and bona fide. However, DCIT did not accept the explanation given by the assessee and imposed penalty under section 271D.

On appeal, the Commissioner (Appeals) confirmed order of penalty and dismissed assessee's appeal.

The Tribunal allowed the second appeal and cancelled penalty imposed on the assessee.

On reference:
HELD


The Tribunal held that the assessee received the said loans/deposits from the various parties in cash in contravention of provisions of section 269SS. These loans/deposits have been accepted by the revenue as genuine. The assessee during the course of penalty proceedings in written submissions filed claimed that the assessee carries on business of construction of building and in the course of such business large amount of labour charges and payments for raw material purchased from unorganized trading sectors and bricks etc. are required to be made after banking hours particularly on the festival days. If their demand for cash payment is not met they would cancel the contract work and refused to complete the work and would also prevent the other contractors from undertaking the work till their dues are settled. Raw material would also not be made available for construction on time if the payment is not made in cash on such occasions. According to the assessee the loans were raised from various parties to meet exigencies of construction work.

The Deputy Commissioner was not satisfied with the explanation had not given and required details or evidence in support of the submissions made in written reply. He should have given an opportunity to the assessee produce required details and evidence.

The loan/deposits taken in excess of Rs. 20,000 to meet urgent and immediate requirements of business and the impression gathered as taxpayers 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 section 273B of the Act.

The Tribunal further rightly concluded that the loan/deposits was taken to meet urgent and immediate requirements of business and the impression gathered as taxpayers from the aforesaid circular and the advertisement constituted a reasonable cause for accepting the said loans/deposits of Rs.20,000 from each party in cash within the meaning of section 273B of the Act. [Para 5]
CASE REVIEW

CIT v. Madhukar B. Pawar [2009] 319 ITR 255 (Bom.) (para 6) followed.
Shreenathji v. Asstt. CIT [1997] 58 TTJ 611 (Ahd.) (para 8) partly affirmed.
CASES REFERRED TO

CIT v. Madhukar B. Pawar [2009] 319 ITR 255 (Bom.) (para 4.1).
Mrs. Mauna M. Bhatt, Advocate  for the Applicant. Ms. Niyati K. Shah, Advocate  for the Respondent.
JUDGMENT

K.S. Jhaveri, J. - By way of this reference, the Tribunal has referred the following questions of law to this Court for consideration:—
"1.

Whether the Appellate Tribunal is right in law and on facts in deleting the penalty levied under Section 271D of the Act ?
2.

Whether, the Appellate Tribunal has correctly appreciated the facts on record so as to impliedly reach to a conclusion that ignorance of law was a proper excuse ? "
2. The facts of this case are that the Assessing Officer during the course of assessment proceedings noted that the assessee firm accepted loans/deposits of Rs.20,000/- each from 13 parties totalling to Rs.2,60,000/- in cash, in contravention of the provisions of Section 269SS of the Income Tax Act. The Assessing Officer, therefore, reported the matter to the Deputy Commissioner of Income Tax for initiation of proceedings under Section 271D of the Income Tax Act. On a show cause notice issued by the Deputy Commissioner of Income Tax, the assessee explained that the said deposits were taken in cash for business expediency. The Assessing Officer, accepted the deposits as genuine and bonafide, however, the Deputy Commissioner of Income Tax not did not accept the explanation given by the assessee and imposed penalty of Rs.2,60,000/- under Section 271D of the Act.
2.1. Against the said order, the assessee filed an appeal before the CIT(A). The CIT(A) confirmed the order of penalty and dismissed the appeal filed by the assessee. Being aggrieved by the order of the CIT(A), the assessee filed an appeal before the Tribunal. The Tribunal allowed the said appeal and cancelled the penalty imposed on the assessee. Pursuant to the order of the Tribunal, the revenue filed reference application under Section 256(1), which has led to reference of the present application.
3. Learned Senior advocate Mr. Bhatt, appearing for the appellant-revenue has pointed out that the tribunal has committed an error in reversing the order of the CIT(A) and in cancelling the penalty. He further submitted that on the same day, the assessee accepted the sum of Rs.20,000/- each from 13 parties, totalling to Rs.2,60,000/- in cash. Therefore, he submitted that the act of the assessee is nothing but a systematic act to avoid the provisions of Section 269SS and its rigour.
3.1. Learned senior advocate for the appealing-revenue has drawn our attention to Section 269SS of the Income Tax Act, which reads as under:—
'269SS. No person shall, after the 30th day of June, 1984, take or accept from any other person (hereafter in this section referred to as the depositor), any loan or deposit otherwise than by an account payee cheque or account payee bank draft if -
(a)

The amount of such loan or deposit or the aggregate amount of such loan and deposit; or

(b)

On the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the deposit or is remaining unpaid (whether repayment has fallen due or not),the amount or the aggregate amount remaining unpaid; or

(c)

The amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b), is thousand rupees or more:



Provided that the provisions of this section shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by, —

(a)

Government;
(b)

Any banking company, post office savings bank or co-operative bank;
(c)

Any Corporation established by a Central, State or Provincial Act;
(d)

Any Government company as defined in Section 617 of the Companies Act, 1956 (1 of 1956);
(e)

Such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing notify in this behalf in the Official Gazettee;
Provided further that the provisions of this section shall not apply to any loan or deposit where the person from whom the loan or deposits is taken or accepted and the persons by whom the loan or deposit is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act.
Explanation — For the purposes of this section,—
(i)

"Banking company" means a company to which the Banking Regulation Act, 1949 (10 of 1949), applies and includes any bank or banking institution referred to in section 51 of the Act
(ii)

"Co-operative Bank" shall have the meaning assigned to it in part V of the Banking Regulation Act, 1949 (10 of 1949);
(iii)

"Loan or deposit" means loan or deposit of money'
3.2. He also drew our attention to Section 271D, which reads as under:—
"271D. Penalty for failure to comply with the provisions of section 269SS— (1) If a person takes of accepts any loan or deposit in contravention of the provisions 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.
(2) Any penalty imposable under sub-section (1) shall be imposed by the joint Commissioner."
3.3. By making such submissions, learned senior advocate for the appellant-revenue has submitted that the present appeal deserves to be allowed and the issues referred are required to be answered in favour of the department.
4. Learned counsel for the respondent-assessee has supported the order of the Tribunal and submitted that the Tribunal after appreciating the material available on record has allowed the appeal of the assessee and deleted the penalty imposed on the assessee, therefore, there is no germane reason to interfere with the impugned order of the Tribunal.
4.1. Learned advocate for the respondent has relied upon the decision of the Bombay High Court in the case of CIT v. Madhukar B. Pawar [2009] 319 ITR 255, more particularly paragraph No.4, which reads as under:—
"4. It is now well settled that circulars issued by CDBT are statutory in character and are binding on the Departmental authorities. The authorities including AO and other consequently would be bound by that circular. In the instant case, CDBT for the purpose of attracting Section 271D has set out that the loan or deposit should be in excess of Rs.20,000. It is true that what CDBT has stated may be contrary to the express language of Section 269 SS which uses the expression "Twenty thousand rupees or more". The law and the CBDT circular can be spelled out from the following judgments of the Supreme Court. In Navnit Lal C. Javeri v. K.K. Sen AAC Manu/SC/0147/1964 : [1965] 561 ITR 198(SC), a Constitution Bench of the supreme Court observed "it is clear that a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act under Section 5(8) of the Act. "Navnit Lal (supra) was followed in Ellerman Lines Ltd. v. CIT Manu/SC/0345/1971: [1971] 82 ITR 913 (SC). In UCO Bank v. CIT Manu/SC/0389/1999 : [1999] 237 ITR 889 (SC), the law was restated and it was held that circular of CBDT are legally binding on the Revenue and this binding character attaches to the circulars even if they be found not in accordance with the correction interpretation of the section and they depart or deviate from such construction, when they are issued in exercise of the statutory powers under Section 119. It was however clarified that the Board cannot pre-empt a judicial interpretation of the scope and ambit of the provision and further could not impose a burden on the taxpayer higher than what the Act itself, on a true interpretation, envisages. It was obserged that the Board has the statutory power under Section 119 to tone down the rigour of the law for the benefit of the assessee by issuing circulars to ensure a proper administration of the fiscal statute. In CST v. Indra Industries MANU/SC/0577/2000 : (2001) 168 CTR (SC) 50 : MANU/SC/0577/2000 : (2001) 248 ITR 338, the Court further observed that the taxing authority cannot be heard to advance an argument that it is contrary to that interpretation."
5. We have heard learned advocates appearing for both the parties and perused the material on record. While deciding the appeal of the assessee, the Tribunal in Nos. 6.2 to 6.6, has observed as under:—
"Before we examined the question regarding the existence or absence of reasonable cause for the purprose of S. 271D, it would be appropriate to see the legislative intention or the object for which the provisions of S.269SS were inserted by the Finance Act, 1984. The Board in its Circular No.387, dt. 6th July, 1984 elaborately explained the scope and intention of inserting the provisions of S.269SS in the following words in para 32.1 and 32.2:-
32.1. Unaccounted cash found in the curse of search carried out by the IT 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 counter this device which enables taxpayers to explain away unaccounted cash or unaccounted deposits, the Finance Act, 1984, has inserted a new s. 269SS in the IT 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 of the aggregate amount of such loan and deposits 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 of deposit, together with the aggregate amount remaining unpaid on the date on which such loan or deposit proposed to be taken is Rs.10,000 or more (raised to Rs.20,000 from 1st April, 1989)
It is clear from the above circular by the Board that s. 269 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 exercise in a just and fair manner having regard to the facts and material existing on records.
6.3. It would be evident from the facts given that the assessee received the said loans/deposits from the various parties in cash in contravention of provisions of section 269SS. We also note that these loans/ deposits have been accepted by the Revenue as genuine. The assessee during the course of penalty proceedings in written submissions filed claimed that the assessee carries on business of construction of building and in the course of such business large amount of labour charges and payments for raw material purchased from unorganized trading sectors and bricks etc. are required to be made after banking hours particularly on the festival days. If their demand for cash payment is not met they would cancel the contract work and refused to complete the work and would also prevent the other contractors from undertaking the work till their dues are settled. Raw material would also not be made available for construction on time if the payment is not made in cash on such occasions. According to the assessee the loans were raised from various parties to meet exigencies of construction work. According to the Revenue no details or evidence in support of such contention were filed by the assessee. According to the learned counsel for the assessee the assessee gave such written submissions before the Dy. CIT in response to the show cause notice given. The Dy. CIT never demanded any details or any evidence in support of such submissions made before him and as such there was no occasion nor any opportunity was given to file such details and evidence. We also note that the penalty proceedings were initiated by issue of a show-cause notice by the predecessor Dy. CIT and the present successor, Dy. CIT gave a reminder to the assessee about the proceedings already initiated and in reply the assessee submitted the written submissions. If the Dy. CIT was not satisfied with the explanation so given and required further details or evidence in support of the submissions made in written reply, he should have given an opportunity to the assessee produce required details and evidence. The Dy. CIT, however, passed the penalty order considering the written submission made without requiring the assessee to furnish any details or evidence in support of the written submission given. We also note that the assessee during the appellate proceedings also in its letter dated 26th October, 1994, asked for permission to produce books of accounts in support of the submissions made that the loans were taken because of business requirements but in spite of such request made first appellate authority also gave no such opportunity. In this view of the matter, we take that the submissions made in this behalf before the lower authorities were duly supported by the transactions recorded in the books of accounts maintained in the normal course of business.
6.4. The assessee has placed strong reliance on the Board Circular No.572 explaining various Sections of Finance Act, 1990. Para 43 of the Circular explains, that s. 271D among others which was inserted w.e.f. 1st April, 1989; by the Direct Tax Laws (Amendment) Act, 1987 provides for the levy of penalty for failure to comply with the provisions of s.269SS for taking or accepting any loan or deposit in excess of Rs.20,000/- otherwise than by account payee cheque or bank draft. Further an advertisement dt. 26th March, 1992, appearing in the newspaper given by the Department was to the effect that loans/deposits exceeding Rs.20,000/- should be by account payee cheques or account-payee bank drafts; otherwise the amount in excess of Rs.20,000 loans/deposits would be considered as default in contravention of s.269SS and defaulter shall be liable to pay by way of penalty a sum equal to amount of loan/deposit as per s.271D. According to the learned counsel for the assessee the aforesaid Board circular as well as the advertisement given by Department for information of the taxpayer 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 and not Rs.20,000. The facts in this behalf have neither been disputed nor denied by the Revenue. 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.
6.5. Looking to the facts and circumstances we are of the opinion that the loan/deposits taken to meet urgent and immediate requirements of business and the impression gathered as taxpayers 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 of the Act.
6.6. The assessee has also strongly relied upon the decision of the Tribunal in the case of Vir Sales Corporation v. Asstt. CIT (supra). We note that though this decision was cited before the CIT(A) but he has not considered the ratio of this decision in his order. We have gone through the order of the Tribunal and find that in that case also the penalty was levied under s. 271D as well as 271E. It was found therein that loans/deposits raised were to meet exigencies of business. For detailed and elaborate reasons discussed therein the penalty levied was cancelled. The aforesaid decision thus do support the present case of the assessee."
6. Taking into consideration the explanation tendered by the assessee as also the reasonings adopted by the Tribunal and the principle laid down by the Bombay High Court in the case of Madhukar B. Pawar (supra), we are of the considered opinion that the Tribunal has rightly cancelled the penalty imposed on the assessee.
7. So far as the issue No.2 is concerned, we are of the opinion that ignorance of law cannot be a proper excuse. Therefore, we are of the view that the question No.2 is required to be answered in favour of the department.
8. In that view of the matter, the question No.1 is answered in affirmative i.e. in favour of the assessee and against the revenue. Accordingly, we hold that the Tribunal was right in law and on facts in deleting the penalty levied under Section 271D of the Act. The issue No.2 is answered in negative i.e. in favour of the revenue and against the department. Therefore, we hold that ignorance of law was not a proper excuse. The reference stands partly allowed and disposed of accordingly.
SB
 


*In favour of assessee.

Arising out of order of Tribunal in Shreenathji Corporation v. Asstt. CIT [1997] 58 TTJ 611 (Ahd.)