Facts of the Case

  • The Revenue alleged that the respondent assessee had accepted an unsecured loan amounting to Rs. 8,52,71,500 from M/s Oswal Agro Mills Ltd., otherwise than through account payee cheque or account payee bank draft.
  • M/s Oswal Agro Mills Ltd. did not make any payment directly to the respondent assessee. Instead, it discharged liabilities owed by the respondent assessee to its creditors.
  • Consequently, accounting entries were made in the books of accounts recognizing that the respondent assessee became liable to repay the amount to M/s Oswal Agro Mills Ltd.
  • The transactions were intended to facilitate acquisition of shares of group companies and were initially reflected as investments.
  • The Assessing Officer imposed penalty under Section 271D alleging violation of Section 269SS. The Commissioner of Income Tax (Appeals) affirmed the penalty. Subsequently, the Income Tax Appellate Tribunal deleted the penalty.

Issues Involved

  1. Whether journal entries recording liabilities without actual receipt of cash amount to acceptance of loans or deposits under Section 269SS of the Income Tax Act, 1961.
  2. Whether penalty under Section 271D can be imposed where no cash transaction exists and entries are merely passed in books of accounts.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that the respondent assessee had accepted unsecured loans of Rs. 8,52,71,500 in violation of Section 269SS.
  • It was argued that since the amount had not been received through account payee cheque or account payee bank draft, statutory requirements under Section 269SS stood violated.
  • Accordingly, penalty under Section 271D was claimed to be validly imposed.

 

Respondent’s Arguments (Assessee)

  • The respondent submitted that no money was received by it directly from M/s Oswal Agro Mills Ltd.
  • It was argued that the alleged loan transaction merely involved book entries and accounting adjustments.
  • The respondent contended that payments were made directly to third-party creditors and therefore there was no cash movement or transfer of money to the assessee.
  • Since there was no acceptance of loan or deposit in the manner contemplated under Section 269SS, no penalty under Section 271D could be sustained.

 

Court Findings / Order

The High Court upheld the decision of the Income Tax Appellate Tribunal and dismissed the Revenue’s appeal.

The Court held that:

  • Mere journal entries in books of accounts do not amount to receipt of loans or deposits under Section 269SS.
  • There was no actual payment of money or cash to the assessee.
  • M/s Oswal Agro Mills Ltd. only discharged liabilities of third-party creditors on behalf of the assessee.
  • The transactions were genuine and their bona fide nature was never disputed by the Revenue.
  • Since there was no violation of Section 269SS, penalty under Section 271D was not sustainable.

The substantial question of law was answered in favour of the assessee and against the Revenue.

 

Important Clarification

The Court clarified that a distinction exists between:

  • Actual acceptance of loan or deposit involving transfer of money; and
  • Mere accounting entries creating liabilities through journal adjustments.

Journal entries by themselves do not constitute a loan or deposit under Section 269SS if there is no actual cash movement or receipt of funds by the assessee.

 

Sections Involved

  • Section 260A – Appeal to High Court
  • Section 269SS – Mode of Taking or Accepting Certain Loans, Deposits, or Specified Sums
  • Section 271D – Penalty for Failure to Comply with Section 269SS

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2014:DHC:7014-DB/VKR12122014ITA14212006.pdf

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