Facts of the Case

  1. The assessee had recorded loan-related entries of ₹33,75,842 from M/s Shakuntla Export House Pvt. Ltd. and ₹20,00,000 relating to K.N. Bhalla.
  2. The Assessing Officer rejected the assessee's contention that the transactions were merely book entries and did not involve actual transfer of funds.
  3. It was held by the Assessing Officer that such entries fell within the scope of Section 269SS, resulting in a penalty of ₹53,75,840 under Section 271D.
  4. During appellate proceedings, one entry was remanded for fresh examination while another penalty was sustained.
  5. Subsequently, the Income Tax Appellate Tribunal deleted the penalties holding that journal entries without transfer of money do not amount to acceptance of loans or deposits.

Issues Involved

  1. Whether mere journal/book adjustment entries without actual transfer of money constitute acceptance of loan or deposit under Section 269SS of the Income Tax Act, 1961?
  2. Whether penalty under Section 271D can be imposed where no cash transaction has taken place?
  3. Whether transfer entries between ledger accounts amount to acceptance of a fresh loan or deposit?


Petitioner’s Arguments (Revenue)

The Revenue argued that:

  • Book entries and journal adjustments are covered within the scope of Section 269SS.
  • The transactions represented acceptance of loans or deposits in a manner not permitted by law.
  • Transfer of liabilities from one account to another effectively amounted to acceptance of a loan.
  • Therefore, penalty under Section 271D was rightly imposed.

 

Respondent’s Arguments (Assessee)

The assessee contended that:

  • The entries represented mere accounting adjustments and no funds were actually transferred.
  • The transactions were only journal entries and did not involve receipt of money.
  • Substitution of one account for another was merely a transfer entry and did not create a fresh liability.
  • Since there was no actual acceptance of money, Section 269SS was not attracted.

 

Court Order / Findings

The Delhi High Court held that:

  • The issue was already covered by earlier judicial precedents.
  • The Explanation to Section 269SS applies to acceptance of "loan or deposit of money" and not to mere accounting entries.
  • Journal entries or book adjustments without actual movement of funds cannot be treated as receipt of loan or deposit.
  • Since there was no cash transaction or transfer of money, there was no violation of Section 269SS.
  • Consequently, penalty under Section 271D could not be sustained.
  • The substantial question of law was answered in favour of the assessee and against the Revenue.

The appeals filed by the Revenue were accordingly disposed of.

 

Important Clarification

The Court clarified that:

  • Mere journal entries or transfer entries are not equivalent to receipt of money.
  • Sections 269SS and 271D become applicable only when there is an actual transaction involving loan or deposit of money.
  • Accounting adjustments without movement of funds do not automatically trigger penal consequences.
  • The decision followed established principles laid down in:
    • Commissioner of Income Tax v. Ruchika Commercials and Investment Pvt. Ltd.
    • Commissioner of Income Tax v. Noida Toll Bridge Co. Ltd.
    • Commissioner of Income Tax-VI v. Worldwide Townships Project Ltd.

 

Sections Involved

  • Section 260A – Appeal to High Court
  • Section 269SS – Mode of taking or accepting certain loans and deposits
  • Section 271D – Penalty for failure to comply with Section 269SS
  • Explanation to Section 269SS

 

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2014:DHC:7015-DB/VKR12122014ITA2212003.pdf

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