We settled a loan against an amount the same party owed us, by journal entry, and paid only the small balance by cheque — can penalty under section 271E be levied?
It depends, and on this record no. The Bombay High Court held on 12 June 2012 that repaying a loan or deposit by journal entry does contravene section 269T: the section draws no line between bona fide and other transactions, and does not speak of an outflow of funds, it simply bars every mode except an account payee cheque or draft. But section 273B saves the assessee where reasonable cause is shown, and that expression is wider than sufficient cause and is construed liberally. Here the same party owed the assessee almost the identical sum for shares, the genuineness of both legs was never doubted, and the penalty of Rs.4,28,99,325 was rightly deleted.
Decided by the High Court (Bombay High Court; J.P. Devadhar and A.R. Joshi JJ, judgment delivered by J.P. Devadhar J) on 2012-06-12, reported as Income Tax Appeal No. 5746 of 2010 (Bombay High Court). It bears on section 269T, section 271E, section 273B of the Income Tax Act 1961, in Penalty and Cash Transaction Limits matters.
This is the judgment that split the journal entry question into two, and both halves are now standard. Assessees can no longer argue that book adjustments fall outside section 269T at all — the Bombay High Court rejected the Tribunal's contrary line and held the contravention made out. What survives is the section 273B defence, and the judgment supplies the template for it: a genuine mutual claim, a settlement that avoids an empty two-way exchange of cheques, and no finding anywhere in the assessment or penalty order that the transaction was a device to evade tax. The Court also refused to let the assessee's association with the Ketan Parekh securities scam substitute for such a finding. J.B. Boda is expressly confined to section 80-O and cannot be carried across, because section 269T sits in Chapter XX-B and exists to counteract evasion.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee is a public limited company, a member of the National Stock Exchange and a Category I Merchant Banker registered with SEBI, dealing in shares, stock broking and securities. The assessment year is 2003-04. Before 1 April 2002 it had taken Rs.4,29,04,722 as a loan or inter-corporate deposit from the Investment Trust of India, repayable in that year. On 3 October 2002 it transferred 1,99,300 shares of Rashal Agrotech Limited to the same Investment Trust of India for Rs.4,28,99,325. So each owed the other almost the same sum. Rather than exchange cheques both ways, the parties set the mutual claims off by journal entries in their respective books and the assessee paid the balance of Rs.5,397 by a crossed cheque on 19 February 2003. The audit report raised the point. On a show cause notice, and relying on the report of the Joint Parliamentary Committee on the stock market scam, the Assessing Officer imposed penalty of Rs.4,28,99,325 under section 271E. The Commissioner (Appeals) confirmed it. The Tribunal deleted it, following its own decisions in the V.N. Parekh Securities and Ketan V. Parekh cases, holding journal entries outside sections 269SS and 269T altogether.
The appeal was disposed of with no order as to costs, on reasoning that went against the assessee on the law and in its favour on the penalty. The Tribunal was not justified in holding that repayment through journal entries does not violate section 269T; the assessee did contravene the section. But in the absence of any finding, in the assessment order or the penalty order, that the repayment was not a bona fide transaction or was made with a view to evade tax, the cause shown was a reasonable cause within section 273B, and no penalty under section 271E could be imposed. The Tribunal's deletion of the penalty therefore stood. The Court recorded that settling claims by journal entries in the respective books is itself a recognised mode of repaying a loan or deposit, that neither leg of the transaction had been doubted in the regular assessment under section 143(3), and that nothing suggested the money was unaccounted.
On construction the Court gave the section its words. Section 269T makes no distinction between bona fide and other transactions; it puts an embargo on repayment by any mode except an account payee cheque or draft above the prescribed limit. It does not speak of an outflow of funds, so the argument that it bites only where money moves has nothing in the text to rest on. Nor does a literal reading produce absurdity: repayment by cheque is the most common mode, and making the common method mandatory is not absurd. J.B. Boda was distinguished on principle rather than on facts — section 80-O exists to encourage foreign exchange earnings and prescribes no mode of receipt, while section 269T sits in Chapter XX-B to counteract evasion and bars every mode but one, so a decision on the first cannot be carried into the second. The Court then turned to the safety valve Parliament itself provided. Section 273B was inserted in 1986 precisely to mitigate hardship to genuine transactions caught by the bar, and it excuses the penalty where reasonable cause is proved. The Court drew a deliberate contrast with the phrase sufficient cause used in sections 249(3), 253(5) and 260A(2A): a cause which is reasonable may not be sufficient, so reasonable cause is wider and must be construed liberally on the facts of each case. On these facts, repaying by cheque and taking back almost the same sum for the shares would have been an empty formality; genuineness was never doubted; and the assessee's membership of a group involved in the securities scam could not stand in for a finding of mala fides against this transaction.
The expression 'reasonable cause' in Section 273B for non-imposition of penalty under Section 271E would have to be construed liberally depending upon the facts of each case.
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Handle my notice → Ask a CA on WhatsAppIt depends, and on this record no. The Bombay High Court held on 12 June 2012 that repaying a loan or deposit by journal entry does contravene section 269T: the section draws no line between bona fide and other transactions, and does not speak of an outflow of funds, it simply bars every mode except an account payee cheque or draft. But section 273B saves the assessee where reasonable cause is shown, and that expression is wider than sufficient cause and is construed liberally. Here the same party owed the assessee almost the identical sum for shares, the genuineness of both legs was never doubted, and the penalty of Rs.4,28,99,325 was rightly deleted. This was decided by the High Court (Bombay High Court; J.P. Devadhar and A.R. Joshi JJ, judgment delivered by J.P. Devadhar J) and bears on section 269T, section 271E, section 273B of the Income Tax Act 1961. It is reported as Income Tax Appeal No. 5746 of 2010 (Bombay High Court). This is the judgment that split the journal entry question into two, and both halves are now standard. Assessees can no longer argue that book adjustments fall outside section 269T at all — the Bombay High Court rejected the Tribunal's contrary line and held the contravention made out. What survives is the section 273B defence, and the judgment supplies the template for it: a genuine mutual claim, a settlement that avoids an empty two-way exchange of cheques, and no finding anywhere in the assessment or penalty order that the transaction was a device to evade tax. The Court also refused to let the assessee's association with the Ketan Parekh securities scam substitute for such a finding. J.B. Boda is expressly confined to section 80-O and cannot be carried across, because section 269T sits in Chapter XX-B and exists to counteract evasion. If it applies to you, the first step is this: Do not settle a loan or deposit of Rs.20,000 or more by journal entry and expect the section to have no application; assume the contravention and build the reasonable cause instead.
The assessee is a public limited company, a member of the National Stock Exchange and a Category I Merchant Banker registered with SEBI, dealing in shares, stock broking and securities. The assessment year is 2003-04. Before 1 April 2002 it had taken Rs.4,29,04,722 as a loan or inter-corporate deposit from the Investment Trust of India, repayable in that year. On 3 October 2002 it transferred 1,99,300 shares of Rashal Agrotech Limited to the same Investment Trust of India for Rs.4,28,99,325. So each owed the other almost the same sum. Rather than exchange cheques both ways, the parties set the mutual claims off by journal entries in their respective books and the assessee paid the balance of Rs.5,397 by a crossed cheque on 19 February 2003. The audit report raised the point. On a show cause notice, and relying on the report of the Joint Parliamentary Committee on the stock market scam, the Assessing Officer imposed penalty of Rs.4,28,99,325 under section 271E. The Commissioner (Appeals) confirmed it. The Tribunal deleted it, following its own decisions in the V.N. Parekh Securities and Ketan V. Parekh cases, holding journal entries outside sections 269SS and 269T altogether. The matter was decided on 2012-06-12 by the High Court (Bombay High Court; J.P. Devadhar and A.R. Joshi JJ, judgment delivered by J.P. Devadhar J). On those facts the High Court held as follows. The appeal was disposed of with no order as to costs, on reasoning that went against the assessee on the law and in its favour on the penalty. The Tribunal was not justified in holding that repayment through journal entries does not violate section 269T; the assessee did contravene the section. But in the absence of any finding, in the assessment order or the penalty order, that the repayment was not a bona fide transaction or was made with a view to evade tax, the cause shown was a reasonable cause within section 273B, and no penalty under section 271E could be imposed. The Tribunal's deletion of the penalty therefore stood. The Court recorded that settling claims by journal entries in the respective books is itself a recognised mode of repaying a loan or deposit, that neither leg of the transaction had been doubted in the regular assessment under section 143(3), and that nothing suggested the money was unaccounted.
On construction the Court gave the section its words. Section 269T makes no distinction between bona fide and other transactions; it puts an embargo on repayment by any mode except an account payee cheque or draft above the prescribed limit. It does not speak of an outflow of funds, so the argument that it bites only where money moves has nothing in the text to rest on. Nor does a literal reading produce absurdity: repayment by cheque is the most common mode, and making the common method mandatory is not absurd. J.B. Boda was distinguished on principle rather than on facts — section 80-O exists to encourage foreign exchange earnings and prescribes no mode of receipt, while section 269T sits in Chapter XX-B to counteract evasion and bars every mode but one, so a decision on the first cannot be carried into the second. The Court then turned to the safety valve Parliament itself provided. Section 273B was inserted in 1986 precisely to mitigate hardship to genuine transactions caught by the bar, and it excuses the penalty where reasonable cause is proved. The Court drew a deliberate contrast with the phrase sufficient cause used in sections 249(3), 253(5) and 260A(2A): a cause which is reasonable may not be sufficient, so reasonable cause is wider and must be construed liberally on the facts of each case. On these facts, repaying by cheque and taking back almost the same sum for the shares would have been an empty formality; genuineness was never doubted; and the assessee's membership of a group involved in the securities scam could not stand in for a finding of mala fides against this transaction. In the words reproduced by the source cited on this page: "The expression 'reasonable cause' in Section 273B for non-imposition of penalty under Section 271E would have to be construed liberally depending upon the facts of each case."
It was decided by the High Court on 2012-06-12 and is reported as Income Tax Appeal No. 5746 of 2010 (Bombay High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 269T, section 271E, section 273B, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The appeal was disposed of with no order as to costs, on reasoning that went against the assessee on the law and in its favour on the penalty. The Tribunal was not justified in holding that repayment through journal entries does not violate section 269T; the assessee did contravene the section. But in the absence of any finding, in the assessment order or the penalty order, that the repayment was not a bona fide transaction or was made with a view to evade tax, the cause shown was a reasonable cause within section 273B, and no penalty under section 271E could be imposed. The Tribunal's deletion of the penalty therefore stood. The Court recorded that settling claims by journal entries in the respective books is itself a recognised mode of repaying a loan or deposit, that neither leg of the transaction had been doubted in the regular assessment under section 143(3), and that nothing suggested the money was unaccounted. It arises in Penalty and Cash Transaction Limits matters, on section 269T, section 271E, section 273B of the Income Tax Act 1961, and was decided by Bombay High Court; J.P. Devadhar and A.R. Joshi JJ, judgment delivered by J.P. Devadhar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Document the commercial reason at the time — the mutual claim, its amount, why a two-way exchange of cheques would have been an empty formality — and pay any balance by account payee cheque, as this assessee did. In the penalty reply, point to the absence of any finding in the assessment order or the penalty order that the transaction was not bona fide or was made to evade tax; that absence is what carried the day here. Do not rely on J.B. Boda or other empty-formality authorities decided under different provisions; argue section 273B on its own terms, and press that reasonable cause is a lower threshold than sufficient cause.
Validity check could not be completed. A Bombay High Court Division Bench judgment of 12 June 2012 on assessment year 2003-04, construing section 269T as substituted by the Finance Act 2002 with effect from 1 June 2002. Only the judgment text was before me; I made no citator check and cannot say whether it was carried to the Supreme Court or how later Benches have applied it. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The full judgment text was harvested and read. The source printed no reporter citations, so the case number from the judgment's own first page is used. Two limits on how far the decision goes. It is expressly confined to section 269T; the Court noted that the Tribunal had also decided the section 269SS and 271D side of the question, but the substantial question admitted before it concerned only repayment, so nothing here settles the position on acceptance of a loan by journal entry. And the reasonable cause finding turns on the absence of any adverse finding in the assessment and penalty orders — a case where such a finding is recorded is not covered. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was disposed of with no order as to costs, on reasoning that went against the assessee on the law and in its favour on the penalty. The Tribunal was not justified in holding that repayment through journal entries does not violate section 269T; the assessee did contravene the section. But in the absence of any finding, in the assessment order or the penalty order, that the repayment was not a bona fide transaction or was made with a view to evade tax, the cause shown was a reasonable cause within section 273B, and no penalty under section 271E could be imposed. The Tribunal's deletion of the penalty therefore stood. The Court recorded that settling claims by journal entries in the respective books is itself a recognised mode of repaying a loan or deposit, that neither leg of the transaction had been doubted in the regular assessment under section 143(3), and that nothing suggested the money was unaccounted.
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