Top Stories Loans taken from Partnership Firms, in Violation of u/s 269SS of Income Tax Act: ITAT imposes Penalty u/s 275 (1) (c) of Income Tax Act [Read Order] ITAT imposed a penalty under Section 275(1) (c) of the Income Tax Act, 1961, on loans taken from partnership firms, which were deemed to violate Section 269SS of the Income Tax Act, 1961 By Aiswarya Krishnadas – On February 17, 2024 2:33 pm – 2 mins read The single member bench of the Income Tax Appellate Tribunal ( ITAT ) Ahmedabad, imposed a penalty under Section 275(1)(c) of the Income Tax Act, 1961, on loans taken from partnership firms, which were deemed to violate Section 269SS of the Income Tax Act, 1961 The assesse, a practicing gynecologist and partner in the firm M/s. Kalpna Hospital filed their income tax return on August 31, 2015, declaring a total income of Rs. 35,35,230/-.

The assessment under section 143(3) of the Income Tax Act, 1961 was finalized on November 10, 2017, with the return being accepted.

The Assessing Officer noted that the assessee had made an excessive withdrawal of capital amounting to Rs. 8, 71,471/-, resulting in a debit balance. This withdrawal was intended for the purchase of personal immovable property. Consequently, on November 16, 2017, the Assessing Officer referred the matter for the imposition of a penalty under Section 271D of the Income Tax Act, 1961, relating to the violation of the provisions of Section 269SS of the Income Tax Act, 1961. The counsel for the assessee Kinjal Shah submitted a response dated December 11, 2017, which was duly considered.

Despite this, the Assessing Officer imposed a penalty of Rs. 8, 71,471/- under Section 271D, of Income Tax Act, 1961, equivalent to the debit balance in the partner’s capital account. The counsel further submitted that it was  a very clear case that section 269SS was not violated and therefore provisions of penalty under Section 271D of the Income Tax Act, 1961, are not attracted in levy of penalty of Rs. 8,71,471/-. The counsel for the revenue Saumya Pandey Jain further submitted that the assessee has not challenged the reopening assessment passed u/s. 143(3) of the Income Tax Act, 1961.

The counsel submitted that the circular no. 387 of 06-07-1984 will not be applicable in the present case and therefore the decisions relied upon are also not applicable If a person takes or accepts any loan or deposit or specified sum] in contravention of the provisions of section 269SS, of the Income Tax Act, 1961, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified sum so taken or accepted The bench observed that the assessee made an excess withdrawal of capital amounting to Rs. 8, 71,471/-, resulting in a debit balance, and this withdrawal was intended for the purchase of personal property. The assessee paid interest to the firm in case of a debit balance, thus giving the transactional behavior the appearance of a loan. Therefore, the Assessing Officer correctly observed that the assessee violated the provisions of section 269SS of the Income Tax Act, 1961.

The tribunal comprising Suchithra Kamble observed that the assessee, who was both a gynecologist and a partner in M/s. Kalpana Hospital conducted this transaction in a personal capacity but portrayed it as a loan taken from the partnership firm. Hence, the decision relied upon by the assessee and Circular No. 387 dated 06-07-1984 issued by the CBDT are not applicable in the present case. Consequently, the appeal of the assessee was dismissed.