Penalty under section 271D deleted where journal-entry loan transfer was supported by reasonable cause

5-Second Takeaway

The tribunal deleted the section 271D penalty, holding that the assessee had shown reasonable cause for the loan transfers by journal entries and that the transactions were part of a bona fide financial restructuring. It also noted that journal entries are a recognized mode of recording transactions and, on the facts, the genuineness of the loan receipt and repayment was not doubted.

The case concerned a penalty imposed for receiving and transferring loan funds otherwise than through account-payee cheque or bank draft, in breach of section 269SS. The assessee had obtained loans from 14 parties connected with M/s KBA Infrastructure (P) Ltd. and the amounts were later shifted through journal entries in the course of restructuring arrangements among sister concerns.

The Revenue treated the journal-entry movement as a technical violation and sustained penalty under section 271D. The assessee argued that the lenders had required the takeover of the loan exposure because of the guarantee it had given, and that the transfer was made to meet an immediate funding shortage and facilitate the takeover of M/s Karan Builders by M/s KBA.

The tribunal accepted that explanation. It held that reasonable cause under section 273B must be construed liberally on the facts of each case, and found substantial force in the claim that the entries were part of a genuine commercial arrangement rather than a device to evade the statute.

It also observed that journal entries are a recognized mode of recording transactions and that the regular assessment had not doubted the genuineness of the loan receipt or repayment. On that basis, the penalty of Rs. 70.05 lakh was deleted.