Per Shri K.C. Singhal, Judicial Member - This appeal is directed against the order of the CIT(A) sustaining the levy of penalty levied under section 271D pertaining to assessment year 1991-92. Three grounds have been raised by the assessee but the learned counsel for the assessee has restricted his arguments to ground No. 2 only which is as under :

"2. Without prejudice to ground No. 1 and assuming without admitting that proper opportunity is granted to the appellant to meet the case of the dept. the learned taxing authorities below had erred in law and on facts and circumstances given by the appellant in holding that the transaction is covered by mischief of provisions of section 269SS. On facts and circumstances prevailing in the case and as per provisos of law it be held that the case of the appellant is not covered by mischief or provisions of section 269SS and consequently by mischief of provisions of section 271D of the Act. The penalty so imposed be deleted."

2. The brief facts of the case are these : The assessee is a private limited company which was incorporated on 29-9-1989 with a view to carry on the business as developer and builder. It purchased the plot No. 226 at Panvel for a consideration of Rs. 12,33,990 vide conveyance deed dated 20-11-1989. The said land has been shown in the balance-sheet as on 31-3-1990 under the head ‘Current assets’. The return for A.Y. 1991-92 was originally filed by the assessee on 30-8-1993 which was treated as non est by the department since it was out of time and therefore, notice under section 148 was issued. The return under section 148 was filed by the assessee on 28-1-1994. The balance-sheet as on 31-3-1991 however, showed the value of land at Rs. 40,00,990 enhancing the value of land by Rs. 27.67 lakhs and also showing the corresponding liability under the head ‘Unsecured loans’. In order to understand this factual position, it is necessary to mention that the search was conducted at the premises of Mr. V.R. Banthia, Director of the assessee-company in the financial year 1990-91, in the course of which, it was found from the papers seized that Mr. Banthia had paid a sum of Rs. 27.67 lakhs as ‘on money’ to the vendors of the land purchased by him in the name of the assessee-company. This sum has been offered by Mr. Banthia as his undisclosed income in the computation filed before the Settlement Commission which has been admitted though no final order has been passed. Since this money was offered for taxation, the understanding was reached between Mr. Banthia and the assessee for bringing this transaction in the books of the assessee-company by passing journal entry. Therefore, the assessee-company passed a journal entry on 31-3-1991 crediting the account of Mr. Banthia and debiting the account of land by the sum of Rs. 27.67 lakhs.

2.1 The Assessing Officer while passing the order under section 143(3) observed as under :

"3. From the balance-sheet, it is seen that V.R. Banthia has given loan of Rs. 27,67,000 to the assessee in cash. As this is against the provisions of section 269SS of the Act, proceedings under section 271D are initiated."

Thereafter, after hearing the assessee, the Assessing Officer has levied the penalty of Rs. 27.67 lakhs under section 271D. The said penalty has been confirmed by the CIT(A). Aggrieved by the same, present appeal has been preferred by the assessee.

3. The learned counsel for the assessee Shri C.V. Khandelwal drew our attention to the facts of the case which have already been narrated by us in the preceding paragraphs. He vehemently argued that finding of the Assessing Officer to the effect that Mr. Banthia had given a loan of Rs. 27.67 lakhs to the assessee, was based on surmises, inasmuch as no cash had been passed from Mr. Banthia to the assessee-company. He pointed out that the assessee had made a journal entry on 31-3-1991 in order to acknowledge the debt incurred in connection with the investment made in purchase of the plot on 20-11-1989. According to him, the ‘on money’ of Rs. 27.67 lakhs must have been paid by Mr. Banthia either on 20-11-1989 or on any date earlier to that. Therefore, the question of levying penalty in A.Y. 1991-92 did not arise. Secondly, it was argued by him that according to section 269SS, Explanation ( iii) ‘loan or deposit’ means loan or deposit of money. Since no money had been taken by the assessee from Mr. Banthia, it cannot be said that the assessee had taken the loan of Rs. 27.67 lakhs and therefore, the provisions of section 269SS are not contravened. Entry by rectification cannot fall within the ambit of section 269SS. In support of his contention, he referred to the decision of the Ahmedabad Bench of the Tribunal in the case of Bombay Conductors & Electricals Ltd. v. CIT [ITA No. 1609 (Ahd.) of 1994 dated 30-11-1995], wherein it has been held that constructive loan could not come within the mischief of the provisions of section 269SS. He also relied on the decision of the Calcutta High Court reported in Jatia Investment Co. v. Commissioner Of Income-Tax [1994] 119 CTR (Cal.) 372 and the decision of the Tribunal Cochin Bench at Muthoot M. George Bros. v. Asstt. CIT [1993] 47 TTJ (Coch.) 434.

4. On the other hand, the learned departmental representative Mr. Sanjay Prasad, strongly opposed the contention advanced on behalf of the assessee. Regarding the finding of the Assessing Officer to the effect that it had taken loan in cash, he referred to confirmation letter filed by the assessee in the course of assessment proceedings. He pointed out from the confirmation letter that Mr. Banthia had given in writing that the amount of Rs. 27.67 lakhs has been invested by him in cash out of the funds available in procuring plot No. 226 at Panvel in the name of Sunflower Builders Pvt. Ltd. According to him, this was the admission by Mr. Banthia to the effect that he had given loan to the assessee in cash. Therefore, he justified the finding given by the Assessing Officer. In addition to this, he raised a legal contention that the Legislature has used the word "accept" in section 269SS. According to him, even if it be held that the assessee had not received any amount in cash, the provisions of section 269SS can be applied to the facts of the case, inasmuch as, the assessee had accepted the fact of loan by passing the entries in its books of account. Therefore, such acceptance of loan was within the ambit of section 269SS. It was also submitted by him that the case law relied upon by the assessee’s counsel are distinguishable on facts of the case. At this stage of argument, the learned Senior Departmental Representative Mr. Hari Krishan further supported the order of the CIT(A) by arguing that while interpreting section 269SS one should consider the purpose and intention of the Legislature. He submitted that these provisions were enacted in order to overcome the difficulty of the department to disprove the cash credit introduced by the assessee beyond doubt where the transactions were in cash. He submitted that the interpretation should be made in such a manner so as to make the provisions workable.

5. Rival submissions of the parties as well as the material placed before us have been considered carefully. The question to be considered before us is whether the penalty levied by the Assessing Officer under section 271D can be sustained in law as well as on facts of the case. The basis of the Assessing Officer to initiate the penalty proceeding was that the assessee had taken loan of Rs. 27.67 lakhs from Mr. Banthia in cash. This is apparent from the finding recorded by him in the assessment order passed under section 143(3) for assessment year 1991-92. The same basis has been mentioned in the notice issued by the Assessing Officer under section 271D. Even in the letter issued by the Dy. CIT this fact has been mentioned. Even, the learned departmental representative has argued the matter before us on the basis of this finding. In support of his contention, he has relied on the confirmation letter. But the assessee’s right from the very beginning has denied this fact as is apparent from his letter dated 29-9-1994 written to the Dy. CIT Range-II, Pune. The learned counsel for the assessee has also denied this fact before us. We have gone through the entire material placed before us but we are unable to uphold such a finding of fact recorded by the Assessing Officer. The relevant portion of confirmation letter of Mr. Banthia, on which reliance has been placed by the learned Departmental representative is reproduced below :

"The amount of Rs. 27,67,000 (Rs. twenty-seven lakhs sixty-seven thousand only) appearing in the records of Sunflower Builders Pvt. Ltd. Raikar Bhavan, 2nd Floor, Sector 17, Washi, New Bombay-73 under the head of unsecured loans has been invested by me in cash out of funds available in procuring plot No. 226 at Panvel in the name of Sunflower Builders Pvt. Ltd."

Perusal of the aforesaid letter shows that Mr. Banthia has never said that he gave money in cash by way of loan to the assessee-company. What he has confirmed is that he had invested money in cash in purchasing the plot in the name of the assessee out of available funds with him. The land was admittedly purchased on 28-11-1989. In the course of hearing both the parties proceeded on the basis that the department came to know about the investment of undisclosed money by Mr. Banthia in the purchase of land in the name of the assessee, in the course of search proceedings at the premises of Mr. Banthia. Admittedly, the money was paid by Mr. Banthia to the vendors of the land as ‘on money’. Since the land was purchased on 20-11-1989 as is apparent from the conveyance deed, the only inference which can be drawn is that ‘on money’ of Rs. 27.67 lakhs was paid either on the date of conveyance deed, i.e., 20-11-1989 or on some other date earlier to that date. That ultimately shows that there was no cash transaction during the financial year 1990-91 relevant to assessment year 1991-92 with which we are concerned. There is no material to hold that the sum of Rs. 27.67 lakhs was ever received in cash by the assessee-company from Mr. Banthia. The said sum was directly paid by him to the vendors of the land and the assessee had merely acknowledged the said debt in the assessment year 1991-92 by passing a journal entry. Therefore, we hold that during the assessment year 1991-92, there is no transaction of loan in cash from Mr. Banthia to the assessee-company. The finding of the Assessing Officer to this effect which has been sustained by the CIT (Appeals) is hereby reversed. Since the basis on which the penalty has been levied does not survive the penalty under section 271D, also cannot be upheld on that ground.

6. We are also unable to accept the legal contention raised by Mr. Prasad to the effect that the words "take or accept" used by the Legislature in section 269SS would include the acceptance of debt by the assessee by making journal entry in this year even though debt has been incurred in the earlier year. In our opinion, one must consider in what context these words have been used. The relevant portion of section 269SS is being reproduced as under :

"269SS. No person shall, after the 30th day of June, 1984, take or accept from any other person (hereafter in this section referred to as the depositor), any loan or deposit otherwise than by an account payee cheque or account payee bank draft if,-

(a).................................................................................................................................................

(b).................................................................................................................................................

(c).................................................................................................................................................

Provided that the provisions of this section shall not apply to any loan or deposit taken or accepted from,.............................................................................................

(a).................................................................................................................................................

(b).................................................................................................................................................

(c).................................................................................................................................................

(d).................................................................................................................................................

(e).................................................................................................................................................

Provided further that the provisions of this section shall not apply to any loan or deposit where the person from whom the loan or deposit is taken or accepted and the person by whom the loan or deposit is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act.

Explanation—

(i).................................................................................................................................................

(ii).................................................................................................................................................

(iii)‘loan or deposit’ means loan or deposit of money.’’

The bare reading of the aforesaid section clearly shows that the words ‘take or accept’ has been used with reference to the words ‘loan or deposit’ respectively. The reason is obvious. In the case of loan, it is the borrower who goes to the lender for obtaining the loan and in the case of deposit, it is the depositor who goes to the person with whom he wants to deposit the money. This is the reason that the Legislature has used the word ‘take’ with reference to the word ‘loan’ and used the word ‘accept’ with reference to the word ‘deposit’. Therefore, in our opinion, the legal contention raised by Mr. Prasad cannot be accepted. The Legislature has also defined the words ‘loan or deposit’ as ‘loan or deposit of ‘on money’.’ This clearly shows that this section can be applied only where money passes from one person to another by way of ‘loan or deposit’. This provision cannot therefore, be applied where the money does not pass from one person to another but the debt is acknowledged by passing entry in the books of account, depending upon the facts of the case. If the contention of the learned departmental representative is accepted, then, it may result in absurdity. For example, a person may give the money to a vendor by way of advance against the supply of goods. Such transaction at the time of giving money would not come within the ambit of the words ‘deposit or loan’. But on subsequent date the contract for supply of goods may be cancelled due to unforeseen circumstances and the parties may agree to treat the advance of money as loan. In such a situation, if the provisions of section 269SS are applied then the assessee cannot be penalised for no fault of his. Similarly, in the case of dissolution of the firm, the parties may agree that the amount standing to the credit of retiring partner may be treated as loan with the continuing partners. In such a situation also, only journal entries are made and no cash is transferred from one person to another. The application of section 269SS to such situation would create anomaly and absurdity. In our opinion, there cannot be the intention of the Legislature to penalise the innocent assessees. Therefore, we are of the opinion that the provisions of section 269SS cannot be applied where the assessee merely acknowledges the debt incurred earlier and there is no transfer of money from one person to another. The same view has been taken by the Tribunal, Ahmedabad Bench in the case of Bombay Conductors & Electricals Ltd. (supra) wherein it has been held that deposit/loan must be made through money and constructive loan or deposit could not come within the mischief of provisions of section 269SS. In that case, the assessee had purchased goods worth Rs. 23.00 lakhs from its subsidiary company and since it was not in a position to pay the said amount immediately, the holding company agreed to treat the amount as loan. The respective entries were made by the assessee in this regard. On these facts, the Tribunal held that the provisions of section 269SS could not be applied. For the benefit of our order, we may refer the following observations of the Hon’ble Supreme Court in the case of Bombay Steam Navigation Co. (1953)(P.) Ltd. v. CIT [1965] 56 ITR 52 at page 57:

"An agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources. Every creditor who is entitled to receive a debt cannot be regarded as a lender."

Keeping in view the above discussion, we are of the view that the acknowledgement of the debt by the assessee-company by passing a journal entry in its books of account would not come within the ambit of the words ‘loan or deposit’ as mentioned in section 269SS. Therefore, even on this ground, the levy of penalty cannot be sustained.

7. Lastly, we may deal with the contention raised by the learned Senior Departmental Representative. It is well settled by now that penal provi- sions are to be construed strictly and no person can be penalised unless the default falls within the four corners of the penal provisions. The contention of the learned Senior Departmental Representative that inter-pretation should be made to make the provisions workable can be applied only to the provisions other than the charging section and penal provi-sions. When the provisions are to be construed strictly, it is impermissible for the courts to reach into the taxing provisions any words which are not there and exclude the words which are there. If there is any lacuna left by the Legislature while enacting the penal provisions, it is only for the Legislature to amend such law. It is also settled provision of law that if the penal provisions are susceptible of two interpretations, then the interpretation which is favourable to the assessee should be adopted. Reference may be made to the decision of the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. Therefore, the contention of the learned Senior Departmental Representative has to be rejected.

8. In view of the above discussions, we set aside the order of the CIT (Appeals) and cancel the penalty levied under section 271D sustained by him.

9. In the result, the appeal of the assessee is allowed.