Income Tax Act | Penalty U/S 271E Cannot Be Levied On Repayment Of Loan In Absence Of Cash Transaction: Madras HC

While observing that transaction pertaining to loan between two concerns wherein the liability of borrower stood reduced in the books of accounts to an extent of payment made to clear the liability of assessee appears to be in accordance with law, the Madras High Court ruled that penalty under Section 271E of Income tax Act, 1961 cannot be levied on repayment of loan in absence of cash transaction.

The High Court made it clear that the question of dealing with cash transaction does not arise and therefore penalty under Section 271E cannot be levied.

A Single Judge Bench of Justice Krishnan Ramasamy observed that “with regard to the grant of loan by the petitioner to M/s. Shakti Sugar Ltd. and repayment of the same made by M/s. Shakti Sugar Ltd. to the aforesaid three entities based on the instructions of the petitioner and as regards the discharge of liabilities, suitable entries have been made both in the books of account of the petitioner as well as M/s. Shakti Sugar Ltd. and in a similar way, the same was reflected in the audited books of account. When such being the case, initiation of proceedings against the petitioner appears to have been made under an wrong assumption that there was cash transaction”. (Para 7.2)

As per the brief facts of the case, the assessee company during the A.Y 2018-19 had advanced loan to M/s Shakti Sugar Ltd. (borrower) which on the instructions of the assessee was repaid by the borrower to three different entities namely M/s Hapline Commodities, M/s Padam Sugar Company and M/s Medicare Clinic P. Ltd. The assessee consequently made suitable entries regarding reduction of liabilities of lender company in the audited books of accounts. While finalizing the assessment, the AO passed assessment order imposing penalty under Section 271E on the premise that entire repay of loan by the borrower is cash transaction.

The Appellant contended that no cash transaction was involved in repayment of loan which can be substantiated from the audited books of accounts wherein the liability of borrower was settled. Thus, the Department had erroneously imposed penalty under Section 271E.

The Bench found from perusal of records that transaction between two concerns wherein the liability of borrower company has been reduced to an extent of payment made to clear the liabilities of assessee appears to be in accordance with law.

The Bench also found that grant of loan by assessee to the borrower and repayment of same to the three entities on instructions of assessee, was recorded in the audited books of accounts.

However, such recordings were not considered during assessment and penalty proceedings were initiated under wrong assumption that there was cash transaction, added the Bench.

The Bench therefore allowed assessee's appeal and set aside the entire penalty proceedings under Section 271E.

However, due to pendency of appeal and stay application, the Bench directed the CIT(A) to consider assessee's appeal without insisting upon any pre-deposit and dispose of the appeal in accordance with law within a period of eight weeks.

Case Title: Anamallais Bus Transports P Ltd verses The Principal Commissioner of Income Tax

Citation: 2024 LiveLaw (Mad) 24

Case Number: W.P.No.31682 of 2023

Counsel for Petitioner: A.S. Sriraman

Counsel for Respondent: R.S. Balaji & S. Premalatha

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