The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the deletion of a penalty of Rs 41.74 crore imposed under Section 271D of the Income Tax Act, holding that mere journal entries recording unpaid share purchase consideration do not amount to acceptance of a loan or deposit in violation of Section 269SS. The Bench comprising Judicial Member S.S. Viswanethra Ravi and Accountant Member S.R. Raghunatha dismissed the Revenue’s appeal against Anamallais Bus Transport Private Limited.

The dispute arose after the Assessing Officer noticed that the assessee had acquired unlisted shares of certain group companies from ABT Investments India Private Limited and ABT Limited, resulting in an outstanding payable of Rs 41.74 crore. The department treated the outstanding amount as a loan accepted other than through prescribed banking channels and, consequently, levied an equivalent penalty under Section 271D for the alleged violation of Section 269SS.

The assessee contended that the transaction was purely a share purchase transaction and not a loan or deposit. It explained that the purchase consideration remained unpaid and was reflected as a long-term liability in the balance sheet. According to the assessee, no cash, cheque, RTGS, or any other form of monetary transfer had taken place, and the transaction was recorded solely through accounting entries.

Before the Tribunal, the assessee relied on its audited financial statements showing the investment in shares on the asset side and the corresponding payable amount under “Other Long-Term Liabilities”. It was further pointed out that the Madras High Court, while dealing with proceedings arising from the same transaction, had already observed that no amount had been transferred by cash, RTGS or any other mode and that the penalty proceedings were initiated due to a wrongful interpretation of the balance sheet.

The Tribunal noted that the transaction represented only an outstanding share purchase consideration reflected through journal entries and that no actual flow or movement of money had taken place between the parties.

Referring to the balance sheet entries and the confirmation furnished by the seller company, the Bench found that the consideration remained payable and had never been received as a loan or deposit. It was observed that the very foundation of Section 269SS is the actual receipt of a loan, deposit or specified sum through impermissible modes, which was absent in the present case.

The Bench held that where a transaction is recorded merely as a payable entry and there is no transfer of money, the provisions of Section 269SS cannot be invoked and consequently no penalty under Section 271D can be levied.

The Tribunal also noted that courts have consistently held that journal entries, by themselves, do not constitute a violation of Section 269SS unless they are shown to be a device for achieving purposes outside normal business operations. In the present case, the Revenue had not established any involvement of cash or any actual transfer of funds.

The Bench further observed that even assuming there was a technical breach, the explanation offered by the assessee that the transaction represented a credit purchase of shares would constitute a reasonable cause under Section 273B, thereby protecting it from penalty.

Thus, the ITAT upheld the order of the Commissioner (Appeals) deleting the penalty of Rs 41.74 crore and dismissed the Revenue’s appeal.

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