Builtec Engineers and Builders vs Deputy Commissioner of Income Tax

Chitra Venkataraman, J.—This tax case (appeal) filed by the assessee as against the order of the Tribunal relating to the asst. yr. 1994-95,

was admitted by this Court on the following substantial questions of law:

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in confirming the levy of penalty of Rs. 7,35,475 under s.

271D of the IT Act ?

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in rejecting the explanation offered by the appellant that the

amount was received from M.T. Nair by way of gift and consequently, the provisions of s. 271D would not apply to the transaction?

Whether on the facts and in the circumstances of the case and without prejudice to the aforesaid contentions, the Tribunal is right in law in

confirming the levy of penalty under s. 271D in respect of the opening balance of Rs. 45,475 ?

The assessee is a firm engaged in the business of construction. Three of the partners are brothers and the fourth partner happens to be the mother

of the three partners. It is seen from the facts that the appellant had secured certain contracts in Rajamundhry. Taking the stand that the contract

executed at Rajamundhry required urgent cash for disbursal to labourers and suppliers from time to time, the assessee had taken cash from Mr.

M.T. Nair, who happens to be the father of three partners and husband of one of the partners and he had also supervised the business of the firm.

It is stated that because of the close relationship between the parties, M.T. Nair agreed to provide financial support, which was to the tune of Rs.

6,51,000. The said amount was paid in cash on various dates commencing from April, 1993. Considering the fact that the amount received was in

contravention of s. 269SS of the IT Act, the assessing authority called upon the assessee to explain as to why penalty should not be levied under s.

271D of the IT Act. The assessee explained that the amounts received were for use in the business. It pointed out that the assessee had to undergo

financial hardship to meet their commitments for wage payment and to suppliers especially in connection with the work executed at Rajamundhry.

Since there was no bank finance facility for the assessee to meet their requirements, funds were raised from relatives and friends. The letter

addressed by the assessee on 24th Sept., 1997 states that since the work at Rajamundhry was the first out of State contract undertaken and

labour payments had to be made in cash and suppliers were also insisting for cash payment, the amount was received in cash. Not satisfied with

the explanation, the assessing authority confirmed the proposal of penalty and accordingly, a sum of Rs. 7,36,475 was levied as penalty under s.

271D of the IT Act.

Challenging the order of penalty, the assessee filed an appeal before the CIT(A). Confirming the findings of the AO, the CIT(A) held that the

explanation offered by the assessee was far from satisfactory. The work was done in Rajamundhry, which was a District headquarters, where one

could not claim that there was no bank facility. Besides this, the assessee had not given any explanation for accepting the loan in cash. The CIT(A)

further pointed out that the assessee''s explanation that it accepted the deposit for the business expediency was not acceptable, since the said

money could have been routed through bank. The assessee''s business was to put up construction of multi-storeyed building, which required bank

transaction and involved payment and receipts to many suppliers and other miscellaneous nature. Thus, the levy of penalty was confirmed.

Aggrieved by this, the assessee went on appeal before the Tribunal.

In the grounds of appeal the assessee pointed out that the assessee required large amount of cash for payment of labour charges and for

payment of materials, especially, after banking hours, festival days, etc. If the demand for cash payment was not met, the assessee''s work would

come to a stop. Hence, loans were raised to meet such exigencies in the course of the assessee''s business, which could not be avoided in view of

the peculiar nature of business. In the circumstances, the assessee sought for cancellation of the penalty levied. The assessee further pointed out

that the CIT(A) had not considered the fact that the site office of the assessee, where payments were made in cash was at a place where there was

no sufficient or proper banking facility.

A perusal of the order of the Tribunal shows that in the course of hearing, the assessee produced an affidavit from Mr. M.T. Nair stating that he

had given these amounts as gift and not intending it as loan. The affidavit was dt. 1st April, 2003. The assessee also produced certain letters

purportedly written by Mr. M.T. Nair to the partners of the firm in support of the contention that what was given was not loan. In considering the

submission, particularly as regards the claim that the transaction was a gift and not a loan, the Tribunal pointed out that the said plea was made for

the first time and the documents in connection therewith were not placed before any lower authorities. The Tribunal pointed out that the

diametrically opposite stand taken as to the nature of transaction between the parties was clearly an after-thought and that there was no reasonable

cause shown, which prevented the assessee from taking such ground before the authorities below. It also pointed out that there was no statement

or return of gift by the donor and even the letters did not mention the transaction as gift. Thus, both on the maintainability of such alternate plea as

well as on merits of such plea, the Tribunal rejected the plea of the assessee. It also pointed out that there was no bona fide shown in such a plea

taken.

As far as the merit of the transaction is concerned, the Tribunal pointed out that the amount taken was utilised for payment relating to

construction activity throughout the year, such as, wages, material purchases etc. It accepted the Department''s arguments that the requirements of

such payments in a construction business were routine in nature. The Tribunal further pointed out that the assessee had taken the loan in cash from

Mr. M.T. Nair, who happened to be the close relative of the partners throughout the year under consideration. The Tribunal pointed out that on

the mere ground of the expenditure in the form of payment to labours being genuine, the contention of the assessee that there was reasonable cause

shown could not be accepted for exonerating the assessee from the rigour of penalty under s. 271D of the IT Act. In the absence of any

satisfactory explanation offered for receiving cash in violation of s. 269SS of the IT Act, the Tribunal confirmed the levy of penalty. Aggrieved by

this, the present appeal has been filed by the assessee.

Learned counsel appearing for the assessee strenuously argued that the authorities including the Tribunal had not considered the reasonable

cause shown by the assessee through the letter dt. 24th Sept., 1997. She submitted that when the assessee had given the explanation for receiving

cash payment, the authorities should have accepted the case of the assessee for dropping the penalty. Referring to s. 273B that penalty shall not be

levied if the assessee proved that there was a reasonable cause for receiving money in cash over and above Rs. 20,000, she submitted that the

reasonable cause has to be looked at from the angle of the nature of business done by the assessee. The exigencies of the business demanding

payment in cash to labour, the letter written by the assessee thus explains its position as regards the reasonable cause, which ought to have

weighed with the authorities concerned and the assessing authority had not understood to the totality of the circumstances before levying penalty. In

any event, when the assessee had taken an alternate plea that the loan transaction be treated as a gift transaction, the Tribunal should have at least

considered the case in a proper perspective to grant the relief. She submitted that in the event of this Court not accepting the plea on reasonable

cause, the alternate plea taken that the transaction was only a loan transaction merited to be considered by the authorities below.

We do not think that we could accept either the ground projected on the reasonable cause or on the alternate plea taken that the transaction be

treated as a gift and not a loan transaction. The letter dt. 24th Sept., 1997 from the assessee to the assessing authority reads as under:

In reply to your letter referred to above, we wish to state as follows:

During the accounting year ended 31st March, 1994 corresponding to the asst. yr. 1994-95, we had to undergo great financial hardship to meet

our commitments for wage payment, payment to suppliers, etc., especially in connection with a work taken up at Rajamundry (AP) for

construction of a building for Manorama Hotels Project. As there was practically no bank finance facility for us, we had to meet our requirements

out of funds raised from friends and relatives; work undertaken by us at Rajamundry was the first work we undertook out of Madras, where we

were not known and the labour payments had to be made in cash and suppliers were also insisting on cash payment. Major part of the loan

received by us was from Sri. M.T. Nair who is the father of the 3 partners and the husband of the other partner and therefore a very close relative.

He is also working in the firm as the chief executive. An amount of Rs. 6,51,000 was received from him during the year and a sum of Rs. 91,389

was repaid to him. There was an opening balance of Rs. 45,475 due to him in his account. Apart from this, we have taken a very short-term loan

of Rs. 40,000 from M/s. Lakshmy Finance on 20th Aug., 1993 which was repaid on 21st Aug., 1993. The entire amounts were received and

used for our business purposes and we had no option other than to take such funds from close relatives to enable us to continue and survive in the

business.

We would therefore humbly request you to kindly take a lenient view and to kindly drop your proposal for penal action in this regard and oblige.

On the facts projected before this Court, it is evident that the assessee is in the business of construction, which required many a time payment in

cash to the labour. As far as the present case is concerned, we may note that the subject-matter of dispute is not with reference to an outgoing, but

as regards a receipt. Thus, the necessities of making payment to labour or to small suppliers in cash cannot be accepted as a good and justifiable

ground for receiving cash by the assessee herein. The necessities of expenditure to be made in cash are not the same as necessities involved in

receiving money in cash. If the line of reasoning of the assessee is to be accepted, then the purport of s. 269SS itself would be lost and there is no

necessity at all to the provision like s. 273D of the IT Act. The parameters which would govern an outgoing and receipt cannot be one and the

same, the assessee is duty-bound to justify the receipt of cash from a close relative, particularly when the assessee is an established business and

that to meet the requirements, funds were raised from friends and relatives. The said submission was made in the context of the explanation given in

the letter that the assessee had no bank finance facility. While there could be no objection to the assessee raising funds from friends and relatives,

the only requirement of law is that when the assessee goes for any finance facility from friends and relatives or from any quarters, the receipt has to

be in the manner provided for under the Act. When such receipt crosses the particular sum, law does not frown on receipt of cash beyond a

particular level subject to the fact that the assessee explains the reasonable cause for taking money in cash.

As far as the present case is concerned, except for stating that they had to make payments to the suppliers and the labours, there is hardly any

material available on record to show any justification for receipt of cash over and above Rs. 20,000 during the course of the year. The assessee

admits that they are in the line of business of construction where day in and day out cash payments are made to labourers and to suppliers. Even

herein, the justification for making payment in cash must necessarily satisfy r. 6DD of the IT Rules, as it existed then. The assessee had not shown

any acceptable or unavoidable circumstances or impracticability or difficulty in receiving money otherwise than in cash. Even accepting the

reasoning of the assessee that the reasonable cause that the assessee may show could be appreciated on the lines shown in r. 6DD, we fail to find

any reasonable cause shown in the letter, which was in a very general form. Except for mere statement that the work undertaken by the assessee at

outside the State was for the first time and there was necessity for meeting the requirements to labour and other suppliers demanding cash, we do

not find any details placed before the authorities concerned to accept the case of the assessee that there was a reasonable cause shown in receiving

an amount of Rs. 6,51,000 in cash from Mr. M.T. Nair. Thus, the assessing authority rightly pointed out that the explanation was not convincing,

hence, the case of the assessee was rejected. As the CIT(A) as well as the Tribunal confirming such a finding, we do not think that there are

grounds in the appeal which persuade us to take a different view. In the circumstances, we have no hesitation in rejecting the tax case.

As far as the submission for the alternate plea taken by the assessee is concerned, as rightly pointed out by the Tribunal, the plea that the

transaction should be viewed as a loan (sic-gift) transaction is devoid of merit and it is only an after-thought. Confronting with the factual situation

the transaction in cash attracted penal provision, the assessee immediately wanted to change the colour of the transaction to one of gift. We do not

think that facts could take different colour at different point of time when confronted with one kind of conclusion against the assessee, that too to

wriggle out of penal liability, the assessee attempted to give a different colour to the nature of transaction as it pleased. As pointed out by the

Tribunal, we do not find any bona fides in such a claim. In the circumstances, we have no hesitation in rejecting such a plea. Thus, taking into

consideration the statement in the letter dt. 24th Sept., 1997, the alternate contention does not call for even a remand. It is stated in the letter that

the assessee received Rs. 6,51,000 from Mr. M.T. Nair during the year and a sum of Rs. 91,389 was repaid to him. There was an opening

balance of Rs. 45,475 due to him in his account. Thus, the conduct of the assessee treating the transaction as loan transaction and so too the letter

dt. 24th Sept., 1997 belies the claim of the assessee made through the affidavit of Mr. M.T. Nair that the transaction be treated as a gift, we agree

with the Tribunal that the changed stand is only an after-thought and does not merit any consideration including the remand. Accordingly, the tax

case (appeal) stands dismissed. No costs.