Penalties us 269SS and 269T cannot be Levied on Company for Receipt or Repayment of Cash Loans from Directors out of Business Exigency : ITAT

Businesses often face the need of urgent liquidity to tackle certain unforeseen events. Business exigencies are like sudden changes in market conditions, unexpected equipment failures, supply chain disruptions, or urgent regulatory compliance requirements. In such cases, businesses must prioritize and respond quickly to mitigate potential negative impacts on operations and ensure continuity.

Raising funds for such urgent needs from directors or related concerns seems feasible for companies to comply with the necessity on hand. In certain fields like real estate etc. cash payments to labour are a common practice and the same scenario is dealt with in the case of Pearl beach promoters P Ltd. where penalties u/s 269SS and 269T were imposed on the companies for accepting and repaying loans in cash from directors of the company.

Issues Involved:
Pearl beach promoters P Ltd. the assessee company accepted and repaid certain loans in cash from the directors of the company due to certain business exigencies. Assessing officer applied penal provisions u/s271D and 271E for contravention of section 269SS and 269T.

Facts of the case explained:
Directors of the company had provided certain loans to assessee company and they had accepted the repayment also from the said company, everything being in cash. The assessee submitted that the cash was received from the directors to meet the urgent expenses at the project site when the company did not have funds to meet the expenditure. JCIT rejected the merits of the case by observing that when the loans were taken, the assessee had sufficient bank balance for its needs.

One the argument was that the assessee was carrying on construction at remote sites where banking facilities were not available. The directors provided funds at the site for immediate needs for the labors payments and other expenses at the site. It was not possible at that time to go to the bank and withdraw the amounts for disbursements at the sites.

The show cause notice issued by JCIT was well within the time limit. The respondent countered that the assessee had sufficient bank balances at the time of accepting and repaying the loans, thereby negating the claim of necessity.

It was rejected that repayment of cash loans from directors would not be covered under the provisions of Sec.269SS and 269T. No such exception was given in either of these statutory provisions.

Conclusion:
It is an undisputed fact that the assessee was in the business of construction of resorts apartments. The assessee was located at a place different from its ongoing project site. Both the locations were at substantially distant locations. The nature of assessee’s business is such that it would require frequent labor payment and other expenditure at working project sites. The assessee might be having sufficient bank balances but there are certain instances where it is not possible to make bank payments due to various reasons. It may not have been always possible to arrange funds through banking channels at the project site. In such a case, it was quite possible that cash loans were taken from directors and the same were repaid as and when the funds were made available with the assessee.

In the view of ITAT this is not a fit case for levy of impugned penalties. The appeal of the assessee was allowed in this case to cancel the penalties levied upon them.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.