Case Note & Summary
The case involves an appeal by the Commissioner of Income Tax against the order of the Income Tax Appellate Tribunal (ITAT) which deleted the penalty levied under Section 271E of the Income Tax Act, 1961. The respondent-assessee, Triumph International Finance (I) Limited, a public limited company engaged in stock broking and investment, had accepted a loan/intercorporate deposit of Rs.4,29,04,722 from Investment Trust of India prior to 1st April 2002, repayable during the assessment year 2003-2004. During the relevant previous year, the assessee sold 1,99,300 shares of Rashal Agrotech Limited to the same party for Rs.4,28,99,325. Instead of repaying the loan and receiving the sale price separately, both parties agreed to set off the mutual claims through journal entries in their books of account, and the balance amount of Rs.5,397 was paid by a crossed cheque drawn on Citibank. The Assessing Officer, relying on audit objections, held that the repayment of the loan through journal entries amounted to repayment otherwise than by account payee cheque or bank draft, violating Section 269T, and levied a penalty of Rs.4,29,04,722 under Section 271E. The Commissioner of Income Tax (Appeals) confirmed the penalty. However, the ITAT deleted the penalty, holding that journal entries do not constitute repayment within the meaning of Section 269T. The High Court framed the substantial question of law as to whether the Tribunal was justified in its view. The High Court analyzed the provisions of Sections 269T and 271E, noting that Section 269T prohibits repayment of any loan or deposit otherwise than by an account payee cheque or account payee bank draft. The Court observed that the transaction in question was not a repayment but an adjustment of mutual claims through book entries, which is a common commercial practice. The Court emphasized that penalty provisions are to be construed strictly, and since Section 269T does not expressly prohibit adjustment of accounts, no penalty could be levied. The Court also noted that the balance amount was paid by account payee cheque, indicating no intention to evade the provisions. Accordingly, the High Court dismissed the appeal, answering the question in the affirmative, i.e., in favor of the assessee and against the Revenue.
Headnote
A) Income Tax - Repayment of Loan - Section 269T and Section 271E of the Income Tax Act, 1961 - Journal Entry Set-off - The assessee had accepted a loan from Investment Trust of India and later sold shares to the same party. Instead of repaying the loan and receiving sale price separately, both parties agreed to set off the amounts through journal entries and pay the balance by account payee cheque. The Assessing Officer levied penalty under Section 271E for alleged violation of Section 269T. The Tribunal deleted the penalty holding that journal entries do not amount to repayment. The High Court upheld the Tribunal's decision, holding that Section 269T contemplates actual payment by account payee cheque or draft, and not mere book entries. The set-off through journal entries is a mode of adjustment and not repayment. (Paras 1-10) B) Income Tax - Penalty - Section 271E of the Income Tax Act, 1961 - Strict Construction - Penalty provisions are to be construed strictly. Since Section 269T does not prohibit adjustment of mutual claims through book entries, no penalty under Section 271E can be levied. The balance amount was paid by account payee cheque, thus there was no violation. (Paras 8-10)
Issue of Consideration
Whether the Tribunal was justified 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.
Final Decision
Appeal dismissed. The Tribunal was justified in holding that transactions effected through journal entries do not amount to repayment of loan or deposit within the meaning of Section 269T, and no penalty under Section 271E is attracted.
Law Points
- Journal entry set-off does not constitute repayment of loan or deposit under Section 269T
- Penalty under Section 271E not attracted when repayment is by way of adjustment of mutual claims and balance by account payee cheque
- Section 269T requires actual payment by account payee cheque or draft
- not mere book entries
