PERSONAL TAX: No fine on cash use in business deals

During tax proceedings of a taxpayer who was engaged in the transportation business, the tax officer observed a discrepancy in the gross receipts. The taxpayer had disclosed gross receipts of Rs. 71.61 lakh, but total receipts in his bank account was Rs 89.06 lakh. The taxpayer submitted that three parties had advanced money for transportation of their goods, but later on, had taken back their advances since the work could not be undertaken.

It was observed that the taxpayer had repaid advances totalling to approximately Rs 21.5 lakh to these three parties in cash. The Income Tax Act, 1961 ('the Act') prohibits a taxpayer from repaying any loan or deposit in cash, in excess of Rs 20,000; except under specified circumstances. The tax officer accordingly levied penalty of an amount equal to the advances paid in cash, for violation of the provisions of the Act.

The first appellate authority confirmed the tax officer's decision to levy penalty. The taxpayer then appealed before the tax tribunal, where he referred to the department's circular of July 1984. In the circular it was provided that receiving advance and repayment of advance is a business transaction. The prohibition, as referred above, is confined to loans and deposits only and does not extend to purchase or sale related transactions. The taxpayer submitted that there is no case for penalty in the current case, as various judicial precedents have deleted penalty in similar circumstances.

The tax officer relied heavily on a high court decision, wherein it was held that deposit would cover all sorts of deposits and trade deposits too. The application of penalty under the prohibitive section is not dependent on facts as to whether the transaction is genuine or of doubtful character, even genuine deposits are covered.

The tribunal observed that term loans or deposit has been defined in the Act to mean any loan or deposit of money, which is repayable after notice or repayable after a period. On a perusal of facts of the case, it observed that the taxpayer had received advance money from prospective clients in the course of his business; which can neither qualify as a loan or deposit, within the meaning as defined in the prohibitive section of the Act. This is supported by the fact that the amount returned to the clients has been without interest.

The taxpayer argued that the Act also provides that no penalty shall be imposable on taxpayers for any failures, if it can be proved that there is a reasonable cause for the said failure. The amount was received from clients on account of advance towards transportation services and was not a deposit or loan. The taxpayer was under the bona fide belief that the money received was only for the purpose of trade advance. It was argued that there is no evidence or any compelling reason provided by the tax officer to prove that the money received is a deposit or loan. Given his bona fide belief, the taxpayer had no intention to violate the provisions of the prohibitive section and, hence, had repaid the advances by way of cash.

On a careful perusal of facts and precedents, the Tribunal held that the taxpayer's belief that return of advances from customers is not prohibited by the provisions of the Act was a bona fide belief and therefore ordered the tax officer to delete the penalty of Rs 21.50 lakh.

The writer is a SEBI-registered investment adviser