Journal Entries Are Not a Substitute for Banking Channels: ITAT Upholds Penalties for violating Sections 269SS and 269T

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has upheld penalties imposed on M/s Manjri Horse Breeders Farm Pvt. Ltd. for violating Sections 269SS and 269T of the Income Tax Act, holding that large financial transactions routed through journal entries cannot automatically escape the statutory requirement of using prescribed banking channels.

The dispute arose during scrutiny proceedings for Assessment Year 2020-21 when the tax department noticed that substantial financial liabilities involving an entity named Joyville had been accepted and repaid through book adjustment entries rather than through account-payee cheques, bank drafts, or electronic banking modes. According to the Revenue, these transactions effectively amounted to acceptance and repayment of loans or deposits in a manner prohibited under Sections 269SS and 269T.

Based on this finding, the department levied penalties under Sections 271D and 271E, equal to the amount of the transactions. The assessee challenged the action, contending that the transactions were merely accounting adjustments recorded through journal entries and therefore did not attract the penal provisions.

The matter ultimately reached the ITAT Mumbai Bench comprising Shri Om Prakash Kant (Accountant Member) and Shri Anikesh Banerjee (Judicial Member). The Tribunal observed that the assessee had routed multi-crore liabilities through journal entries without establishing any compelling business necessity or commercial exigency that prevented the use of normal banking channels. It noted that the legislative objective behind Sections 269SS and 269T is to ensure transparency and maintain a verifiable trail of loan and deposit transactions. Permitting large-scale liability transfers through unsupported book entries would defeat that purpose.

The Tribunal further held that the assessee failed to demonstrate any “reasonable cause” within the meaning of Section 273B that could justify relief from penalty. Since no convincing explanation was offered for bypassing banking modes, the Bench found no infirmity in the orders passed by the lower authorities.

Thus, the ITAT dismissed both appeals and confirmed the penalties imposed under Sections 271D and 271E, reiterating that mere journal entries in the books of account do not automatically shield taxpayers from the consequences of violating the statutory provisions governing acceptance and repayment of loans and deposits.

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