Penalty U/s 269SS or 269T?

There is a private company. It has taken loan from a party exceeding RS 20,000. Now party wants to transfer this money to someone's name. Can private company do that? Will that book transfer fall under mischief of any section of the I T Act. Ritha Bang

"32.1 Unaccounted cash found in the course of searches carried out by the Income tax Department is often explained by taxpayers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits, and taxpayers are also able to get confirmatory letters from such persons in support of their explanation.
32.2 With a view to countering this device, which enables taxpayers to explain away unaccounted cash or unaccounted deposits, the Finance Act, 1984, has inserted a new section 269SS in the Income tax Act debarring persons from taking or accepting, after June 30, 1984, from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft it the amount of such loan or deposit or the aggregate amount of such loan and deposit is Rs. 10,000 or more. This prohibition will also apply in cases where on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), and the amount or the aggregate amount remaining unpaid is Rs. 10,000 or more. The prohibition will also apply in cases where the amount of such loan or deposit, together with the aggregate amount remaining unpaid on the date on which such loan or deposit is proposed to be taken is Rs. 10,000 or more."

[RS 10,000 was initially the limit u/s 269SS or 269T , now it is Rs 20,000]

Book Entries Liable to Penalty?
The transfer of loan by money is proper and shows that there is no intention of concleament or evasion of tax. Therefore , if the loan is transferred through book entries , backed by letter of the lender to do so and acceptance letter by the person in whose name same is being transferred , section 269SS or 269TT can not be applicable.In this regard , ITAT , Pune Bench in Sunflower Builders Pvt. Limited. vs Deputy Commissioner Of Income-Tax. 61 ITD 227 ruled on this issue as under

This clearly shows that this section can be applied only where money passes from one person to another by way of 'loan or deposit'. This provision cannot therefore, be applied where the money does not pass from one person to another but the debt is acknowledged by passing entry in the books of account, depending upon the facts of the case. If the contention of the learned departmental representative is accepted, then, it may result in absurdity. For example, a person may give the money to a vendor by way of advance against the supply of goods. Such transaction at the time of giving money would not come within the ambit of the words 'deposit or loan'. But on subsequent date the contract for supply of goods may be cancelled due to unforeseen circumstances and the parties may agree to treat the advance of money as loan. In such a situation, if the provisions of section 269SS are applied then the assessee cannot be penalised for no fault of his. Similarly, in the case of dissolution of the firm, the parties may agree that the amount standing to the credit of retiring partner may be treated as loan with the continuing partners. In such a situation also, only journal entries are made and no cash is transferred from one person to another. The application of section 269SS to such situation would create anomaly and absurdity. In our opinion, there cannot be the intention of the Legislature to penalise the innocent assessees. Therefore, we are of the opinion that the provisions of section 269SS cannot be applied where the assessee merely acknowledges the debt incurred earlier and there is no transfer of money from one person to another. The same view has been taken by the Tribunal, Ahmedabad Bench in the case of Bombay Conductors & Electricals Ltd. wherein it has been held that deposit/loan must be made through money and constructive loan or deposit could not come within the mischief of provisions of section 269SS. In that case, the assessee had purchased goods worth Rs. 23.00 lakhs from its subsidiary company and since it was not in a position to pay the said amount immediately, the holding company agreed to treat the amount as loan. The respective entries were made by the assessee in this regard. On these facts, the Tribunal held that the provisions of section 269SS could not be applied. For the benefit of our order, we may refer the following observations of the Hon'ble Supreme Court in the case of Bombay Steam Navigation Co. (1953)(P.) Ltd. v. CIT [1965] 56 ITR 52 at page 57 :

"An agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources. Every creditor who is entitled to receive a debt cannot be regarded as a lender."

Keeping in view the above discussion, we are of the view that the acknowledgement of the debt by the assessee-company by passing a journal entry in its books of account would not come within the ambit of the words 'loan or deposit' as mentioned in section 269SS. Therefore, even on this ground, the levy of penalty cannot be sustained.