Section 269SS Does Not Apply to a Cash Loan Obtained by a Company from Its Director | ITAT

Case Details: Thamira Green Farm (P.) Ltd. v. Additional Commissioner of Income-tax - [2023] 155 taxmann.com 320 (Chennai-Trib.)

Judiciary and Counsel Details

• • V. Durga Rao, Judicial Member & Manjunatha G., Accountant Member
  • S. Sridhar, Adv. for the Appellant.
  • A.R.V. Sreenivasan, Addl. CIT for the Respondent.

Facts of the Case

Assessee-company received loans in cash from its director to purchase lands in its name. Assessing Officer (AO) issued a notice seeking an explanation for receipt of a loan over Rs. 20,000 otherwise than by Account payee Cheque/Bank Draft in contravention of provisions of section 269SS.

In response, the assessee contended that it did not have any bank account at the given time, and the land sellers were residing in remote places and insisted on cash payments. However, AO considered invoking section 269SS and continued to levy penalty under section 271D.

On appeal, the CIT(A) sustained the penalty levied by the AO. Aggrieved by the order, the assessee filed an appeal to the Chennai Tribunal.

ITAT Held

The Tribunal held that section 273B deals with reasonable cause. If there is a reasonable cause in accepting loans in violation of provisions of section 269SS, then such transactions need to be taken out of the rigorous of section 271D. The assessee’s explanation needs to be considered to consider whether there is a reasonable cause in violation of relevant provisions. If the assessee’s explanation is bonafide and reasonable, then said explanation needs to be considered in light of reasonable cause as provided under section 273B.

In the instant case, based on the assessee’s explanation, there appeared to be a reasonable cause for accepting a loan from the director in contravention of provisions of section 269SS for two reasons. Firstly, the entire amount of the loan was utilized to acquire capital assets for the business of the company. Secondly, the assessee and the director both had disclosed transactions in their books of accounts for the relevant previous year. Further, the director explained the loan source given to the assessee.

Since, all these paramount’s were satisfied, the genuineness of the transactions was not in doubt. Moreover, it was a case of loan between the director and the company. Although the company and its director were separate legal entities, they cannot be considered separate for these transactions. If there are transactions between the company and director, then said transactions inter-se cannot be considered as loans or deposits within the meaning of section 269SS. This principle was also supported by the decision of the Delhi High Court in the case of CIT v. M/s. Muthoot Financiers in ITA No. 336/2002, dated 3-2-2015.

Therefore, it was opined that the transactions between the assessee and director were in the nature of current account transactions, which did not come under the purview of loan and deposit as per section 269SS. Accordingly, the penalty levied under section 271D was deleted.

List of Cases Reviewed

• • CIT v. M/s. Muthoot Financiers in ITA No. 336/2002, dated 3-2-2015 (para 12) followed.
  • CIT v. Idhayam Publications Ltd. [2006] 285 ITR 221 (para 14)
  • Vasan Healthcare (P.) Ltd. v. ACIT [2019] 411 ITR 499 (Mad) (para 14)
  • P. Baskar v. CIT [2012] 340 ITR 560 (para 15)
  • Kasi Consultant Corporation v. DCIT [2009] 311 ITR 419 (para 16) distinguished.