Chandra Cement Ltd. v. Deputy Commissioner of Income-tax

C.L. BOKOLIA, A.M. - These two appeals have been preferred by the assessee against the order of the Commissioner (Appeals) on the ground that the Commissioner (Appeals) has grossly erred in confirming the levy of penalty under section 271D amounting to Rs. 79,78,368 and Rs. 1,98,55,171 for the assessment years 1992-93 and 1993-94, which is against the facts and circumstances of the case. Since both these appeals are based on identical facts and common grounds of appeal, these appeals are being decided by a common consolidated order for the sake of convenience.

2. The brief facts of the case are that the appellant company was setting up a mini cement plant at village Paniyala, Tehsil Kotputli, Distt. Jaipur. Shri R.P. Goyal was and has been its promoter-director as well as C.M.D. For establishment of the plant, the appellant approached financial institutions who sanctioned the loan in January, 1992. Pending the disbursement of loan, Mr. Goyal brought his own money from time to time for the project work during the two years under consideration. During the course of assessment proceedings it was noticed by Assessing Officer that the balance sheet of the company indicated unsecured loan from Mr. Goyal at Rs. 1,60,70,138, out of which Rs. 79,78,368 was brought by Mr. Goyal in cash during assessment year 1992-93 violating the provisions of section 269SS, thus the proceedings under section 271D were initiated and ultimately a penalty of Rs. 79,78,368 was levied. Similarly, in assessment year 1993-94, it was observed by the Assessing Officer that Shri Goyal brought the amount of Rs. 1,98,55,171 in cash which was credited in the books of the appellant company. For this year also penalty under section 271D was levied equivalent to the amount alleged to be in default of section 269SS of the Act. The appellant preferred appeals in both the years before the first appellate authority who confirmed penalty in both the years by rejecting the plea of the appellant and hence these appeals. Since both the appeals involve similar issue, they are disposed of through this common order and common discussion. During the course of hearing, oral arguments as well as written submissions were made on behalf of both the parties which are considered while disposing of these appeals.

3. On behalf of the appellant it was submitted that Shri R.P. Goyal, educated upto IXth Class, earlier engaged in Kirana, transport, cement trading and cement distributorship business, promoted this company on 24th July,1991, and became chairman-cum-managing director of the company. The company took up the project of mini cement manufacturing plant at village Paniyala which has no banking facilities within the radius of 25 kms. Pending disbursement of the loan by the financial institutions and to save the project from the cost overrun, Mr. Goyal brought money out of his own resources for the project work with an intention to withdraw such money later on, on disbursement of loan. The entire project was supervised by Shri R.P. Goyal who used to visit the site quite frequently for the construction activities. Since at the construction stage the immediate payments are required to be made to labourers, transporters and suppliers, etc. in cash. Mr. Goyal used to bring the cash and made the payment out of that. The appellant was a new company at construction stage whose suppliers also were not agreeable to take payment otherwise than in cash. The money was brought mainly by withdrawing from proprietorship concern at Delhi, namely, Chintpurni Enterprises. The money brought as such was disbursed for the project work without loss of any time during the stay of Shri Goyal at Paniyala. The amount was credited to the account of Shri R.P. Goyal and in the balance sheet classified as unsecured loan. The learned counsel submitted that all these credits were accepted as genuine in the assessment proceedings. According to him, such credits representing the money brought and directly spent by Mr. Goyal was neither in the nature of loan nor deposit. It was a direct spending either by himself or through his assistant and account rendered by him was thereafter incorporated in the books of the appellant company. There was no place to keep the money with the appellant company as initially there was no place and later on factory was under construction. A reference was made to the definition of loan to contend that it is always at the instance of borrower and is repayable as per the terms of agreement. Reliance was placed on Prabhavshali Chit Fund Co. (P) Ltd. v. Commissioner (1995) 52 TTJ (Del) 271 : (1994) 49 ITD 566 (Del) for this purpose. The definition of deposit given in Commissioner v. Bazpur Cooperative Sugar Factory Ltd. [1988] 172 ITR 321 (SC) was also referred to, to contend that it is a liability to return to the depositor on fulfilment of certain conditions. It was thus claimed that monies brought and spent by Mr. Goyal was neither loan nor deposit. The amount was brought to meet the need of a situation and to save the project cost and time overrun. Reliance was placed on various decisions to support the contention that every receipt of money need not necessarily be in the character of loan or deposit. Our specific attention was invited to section 69 of the Indian Contract Act, 1972. It was explained that Chapter V of Indian Contract Act, 1872, deals with "certain relations resembling those created by contracts", which are not in fact contracts. Section 69 falling within said Chapter V contains one of the situations in which such peculiar relationship is created otherwise than by a contract. According to this section, if any person pays the money which is due by another, in payment of which he is indirectly interested, then such a person even in absence of any bilateral agreement is entitled to have the reimbursement from the person who was primarily obliged to pay such amount. The learned counsel stressed that the situations under the present appeals falls under the provision of section 69 of the Indian Contract Act, 1872, where the company’s obligation to pay arises because of operation of this section and not because of any contract whatsoever. Both loans and deposits are two of the types of contract and, therefore, are essentially the contracts, being arising out of bilateral transactions. The transactions in the present case whereas, though resembling a contract, are not in fact contracts as per Chapter V of the Indian Contract Act.

4. The learned counsel also placed reliance upon the decisions reported at, Muthoot M. George Bankers v. Asstt. Commissioner [1994] 47 TTJ (Coch) 434 : (1993) 46 ITD 10 (Coch) and ITO v. Rajendra Tdg. Co. [1994] 48 ITD 210 (Chd) concerning the transactions between sister concerns where it was held that when the individual or family owing/handling the transactions on behalf of the two concerns is same it does not give rise to a loan or a deposit in true sense. It was also argued that there are restrictions on power of managing director to borrow the money without prior approval of the Board. Reliance was also placed on Rajabali Nazarali & Sons v. Commissioner (1987) 163 ITR 7 (Guj) and [1988] 172 ITR 321 (SC) (supra) to support the contention that substance of the transaction should be looked into and not mere nomenclature given to the transaction. The accounting entries are not decisive of the nature of transactions as held in Godhara Electricity Co. Ltd. v. Commissioner [1997] 225 ITR 746 (SC) by Hon’ble Supreme Court. The learned counsel also pleaded that virtually there is no difference between the nature of transaction between two years though the different accounting entries are passed. The learned counsel then invited our attention to the nature of law relating to penalties and relevant case laws. He contended that levy of penalty is not mandatory but is only directory. No penalty should be levied for technical breach of law. By referring to the objective of introducing the provisions of section 269SS he mentioned that it was to circumvent the circulation of black money whereas in the present case it was established that the transactions were genuine. At the last some arguments were made regarding quantum of penalty. It was also submitted that there was at least a reasonable course in the present case arising out of a bona fide belief and ignorance of law, particularly in the facts and nature of transactions undertaken as also the circumstances during which they undertaken. On the basis of all these arguments, the learned authorised representative of the assessee submitted that in the facts, the penalty in both the years deserves to be deleted.

5. Elaborate arguments were made on behalf of the Department to support the allegation of violation of the provisions of section 269SS and the levy of penalty under section 271D. At the outset, it was submitted that the company has borrowing powers and it acts through its directors, who are the agents of the company. In assessment year 1992-93, the entire amount was credited in the name of Shri R.P. Goyal reflected as unsecured loan in the balance sheet. However, in assessment year 1993-94, the method of passing entries was changed and they were passed through journal. Merely by saying that credits represent reimbursement of expenses, the appellant cannot be absolved of penalty. A part of loans were received through cheques/drafts also. The liability to pay the construction expenses was wholly, solely and exclusively of assessee-company and not of Shri R.P. Goyal. The entire expenses were incurred by the assessee-company itself through its director Shri R.P. Goyal and other employees. It cannot be said that Mr. R.P. Goyal incurred the expenditure on construction as he acted as an agent of the company only. The company has its distinct identity but is absence of any physical body it has to work through directors. The company has separate status from its directors and even its shareholders. Mr. R.P. Goyal had made the payments and incurred the expenses on behalf of the assessee-company and he was himself not liable to incur such expenses. Merely, method of accounting or passing the entry in the books of account do not change the character of any transaction. The reliance was also placed on certain decisions to support the contention that true nature of transaction need not be decided merely on the basis of manner of passing entries or the method of accounting. The character of transactions has to be independently examined. Further, it was not necessary to charge or pay interest on every loan and the essence of a deposit is that there must be a liability to return it to the party by whom it is made on fulfilment of certain conditions. It is evident that credit to the account of Shri R.P. Goyal in the books of the assessee is nothing but cash amount accepted and the same was utilised for incurring certain expenses by the company. It was also argued on behalf of the Department that penalty proceedings are independent to assessment proceedings and thus even the filing of return in time and accepting the credits as genuine would not come in the way of completing the penalty proceedings under section 271D. There was no reasonable cause with the assessee to obtain loan from Shri Goyal in cash whereas he has repaid the same through cheques/drafts. The quantum of penalty is as per the provisions of section 269SS/271D and, therefore, assessee’s objections are not sustainable. Mr. Goyal had rich experience in business and it cannot be said that he was ignorant of some provisions of income-tax law. Mr. Goyal and the company both have the bank account in Delhi in the same bank and there was no reason why these amounts could not be routed through banking channels. It was mentioned that no prudent businessman would like to carry such huge cash from Delhi to Paniyala. The assessee had a bank account at Nangal (Haryana) which is not very far from Kotputli (Rajasthan). Reliance was placed on various decisions including Unique Constructions v. Dy. Commissioner [1995] 52 TTJ (Bom) 96, Sukh Dev v. Union Of India. [1995] 211 ITR 157 (Guj), K.R.M.V. Ponnuswamy Nadar Sons (Firm) v. Union of India [1992] 196 ITR 431 (Mad), C.A. Baloo v. Union of India [1992] 197 ITR 545 (Mad) : 126 Taxman 328 (sic), Sir Kikabhai Prem Chand v. Commissioner [1953] 24 ITR 506 (SC), Narsingh Ram Ashok Kumar v. Union of India [1998] 234 ITR 414 (Pat), Mehta Vegetables (P) Ltd. v. Union of India [1998] 234 ITR 425 (Raj), Bhushan Chemicals v. Commissioner [995] 54 ITD 5 (Pune) and some unreported judgments. Reliance was also placed on an unreported decision to contend that non-charging of interest by Shri R.P. Goyal was a part of tax planning and merely because no interest was charged, it cannot be said that the amounts were neither loans nor deposits. It was also submitted that the said deposits/loans were not utilised by the company on same day but spent on various days. The receipt of money by the assessee- company in cash was not exceptional but was on regular basis.

6. Through subsequent written submissions dated 30th November, 1999, it was submitted that books of account relevant to assessment year 1992-93 was neither produced before Assessing Officer nor before Commissioner (Appeals). By quoting the abstracts from Commissioner (Appeals)’s order it was submitted that books of account of Chitipurni Enterprises were not produced before Commissioner (Appeals). It was desired by the Department in these subsequent submissions that books of Chitpurni Enterprises may be produced to prove the genuineness of the loans. According to the learned Departmental Representative the computerised account produced by the assessee was fabricated and false. The learned Departmental Representative also brought to our notice that even at the stage of filing the return the accounts are changed. It is argued that in both the years nature of transaction is same—even when in one year entry is different than other year. Reference was also made to the statement of Shri Rakesh Sharma to contend that some times the amount was not directly spent by Shri Goyal. It was argued that because of time-lag between payment and reimbursement the amounts were rightly shown as unsecured loans which cannot be denied by appellant. The appellant cannot, at this stage, argue that these are not loans. The law of promissory estoppel would work. At the last, the emphasis was made on the definition of loans as per Oxford Dictionary and other publications. Reliance was also placed on Commentary by D.M. Harish in certain decisions of this Bench. On the basis of all these arguments, it was required that the penalty in question deserves to be sustained.

7. We have carefully gone through the facts of the case, arguments advanced and written submissions and case laws relied upon. At the outset, we may mention that it has been argued by both the parties that true character/nature of transactions should be determined without being influenced by manner of entries passed in the books of account or the method of accounting or disclosure made in balance sheet. We agree with this contention put forth by both the parties, and, therefore, we would like to first determine the nature of transactions in the present case in respect of which the penalties under section 271D have been levied.

8. Admittedly, Shri R.P. Goyal, the chairman-cum-managing director, was the promoter-director of the appellant company, who supervised entire project of the company and who remained actively engaged in looking after the construction and other activities of the company. It is equally undisputed that it was he who managed and arranged resources for the construction activity during the period when company was awaiting disbursement from financial institutions Mr. R.P. Goyal provided financial assistance to the company by bringing in requisite money from time to time in piecemeal during the construction period. The money was not brought in one, two or three instalments but was brought in a number of instalments. It appears that the bringing of money every time was a response to the immediate requirement in the project activity. On going through the details of amounts brought in and spent, it is evident that the (sic) period. For this purpose, we perused the utilisation of the money brought on p. 13 to 30 of the paper-book for Financial year 1991-92. First two receipts of Rs. 10,000 and Rs. 1,270 are for expenditure for the incorporation of the company. The next one on 31st July, 1991, is for the purchase of land where Rs. 4,05,960 is paid and credited to Shri Rajendra Goyal. A number of expenditure are for purchase of machinery, automobile, construction material and so. These payments cannot be made from office because till then there was no office or the factory. It is obvious that the payments are made by Shri Rajendra Goyal and he rendered the account. Likewise in the next year 1992-93 where the amounts are credited through journal entry to the amount of Shri Rajendra Goyal and debited to various heads. The details are summarised at pp. 31 and 32 of the paper-book. These are for building, plant & machinery, other assets as also revenue expenditure during construction period. Thus, the fact remains that money was brought for its immediate disposal.

9. It is true that the company has a separate status and entity than its shareholders and directors. It is also true that directors act as agents of the company and are answerable to their principal, i.e., the company. This is the reason why Mr. Goyal undertook all the construction activities of the appellant company at his instance, as he was responsible and answerable to the company. It was in this background that when he found company being unable to make the resources available for the project work, he decided to involve and utilise his own money for construction work. There were neither compelling reasons nor a compelling force by the so-called artificial person-company to bring in the money, it appears that it was merely a suo motu decision of Mr. Goyal to expose himself to such a huge risk of utilizing his personal money for company’s purposes, with the hope that he would take it back when the loans are disbursed to the company.

10. In other words, it is a case where agent utilised his own money in order to fulfil his obligations towards the principal upon which he became entitled to get back the money. This is thus a unilateral transaction on the part of Mr. Goyal to involve and utilize his own money by withdrawing it from his own sources. An unilateral act cannot result in a contract for which existence of two parties is a sine qua non. Whether loan or deposit they both are contracts only, originated from bilateral act. We are impressed by the reference of section 69 of the Indian Contract Act, 1872, which helps on understanding the true character of these transactions. Section 69 of said Act falling within Chapter V thereof, reads as follows :

"CHAPTER V OF CERTAIN RELATIONS RESEMBLING THOSE CREATED BY CONTRACT

…………………………………………………………………………………………………………………..

Section 69 : A person who is interested in the payment of money which is bound by law to pay, and who, therefore, pays it, is entitled to be reimbursed by the other."

The transactions under consideration are evidently of the nature referred to in section 69 of the Indian Contract Act, 1872. The company was bound to pay for the construction expenditure. The director Shri R.P. Goyal paid it because he was interested in the capacity as promoter and also because his personal guarantees are involved in the finances to the company. Thus, he paid the amount and became entitled for the reimbursement by the company.

11. It is thus, neither a loan which is a bilateral transaction at the instance of borrower having predetermined repayment period, nor a deposit which is at the instance of depositor and is repayable on fulfilment of certain conditions. Mr. R.P. Goyal, the director and the agent of the company suo motu spent his own money for his principal, i.e., the company, who by way of incorporation the transaction in its books, undertook the obligation to repay.

12. Let us also consider as to what would constitute primary evidence of the amount advanced by Mr. Goyal in cash in the present facts. There is no loan agreement and no deposit receipts are issued. In our opinion, if any dispute ever arises about the amount spent by Mr. Goyal, on company’s construction, the appropriate method for measurement of amounts advanced by Mr. Goyal would be the valuation of construction work, because, firstly, there is a direct nexus between the advance and expenditure, and secondly, hardly any activity other than construction was there during this period. This is for this reason that advances made by Mr. R.P. Goyal in the present case are inseparable from construction activity. Making of advance and spending for construction work cannot be considered to be independent from each other. The person at whose instance amounts were advanced or the construction was carried out was the same individual. Therefore, in the present case, the primary evidence of amount advanced by Mr. Goyal would be the amount spent on construction, whatever be the manner of incorporating them in the books of account.

13. Thus, going by the nature of transactions, we are satisfied that the impugned transactions were neither loan nor deposits and there is enough material on record to suggest that the amounts were brought by Mr. Goyal for directly incurring on the construction expenditure which was not in terms of any agreement with the company, but was suo motu. The nomenclature used by the parties is immaterial and would not alter the nature of captioned monies. Having decided that impugned amounts were neither loans nor deposits, all order allegations and arguments become irrelevant to the context since the provisions of section 269SS are not attracted in the facts of the present case.

14. However, before concluding, we would like to observe that when one single individual is managing the affairs of two concerns and the decision to transfer the funds from one concern to another or to repay the funds could have been said to have been largely influenced by the same individual, it cannot be said that transaction partake the nature of either deposit or loan. Reliance is placed on the decision of Tribunal, Cochin Bench, in the case of Muttoot M. George Bankers v. Asstt. Commissioner (supra) and also Tribunal, Chandigarh in ITO v. Rajendra Trading Co. (supra). Further, the transactions have not been impeached as non-genuine or bogus in the respective assessments, the arguments at this stage that Department wants to verify the genuineness is only for the sake of arguments. It was the assessment order which should have spoken about the ingenuity of the transactions. Thus, for all these reasons, the provisions of section 269SS are not attracted to the facts of the case. The penalties levied are, therefore, cancelled. Even if they were to apply, in the facts and circumstances explained above the action of the appellant in accepting the funds in cash can be ascribed to its bona fide belief that provisions of section 269SS would not be attracted in the nature of transactions. Bona fide belief coupled with the genuineness of the transactions will constitute reasonable cause in this case. In view of this also, we are inclined to cancel the orders of penalty.

15. In the result, the appeals are allowed.