The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) set aside a penalty of ₹3,50,000 imposed under Section 271D of the Income Tax Act. The Deputy Commissioner of Income Tax (DCIT) initially levied the penalty for the alleged violation of Section 269SS, which prohibits cash transactions exceeding a prescribed limit.
The assessing officer (AO) conducted a search and seizure proceeding under Section 153C on the assessee. It was found that Rudra Buildwell Projects Ltd had accepted a cash loan of ₹3,50,000. Holding this a violation of Section 269SS, the AO imposed a penalty of that amount under Section 271D.
The assessee was aggrieved by the AO’s penalty and appealed to the CIT(A), arguing that the transaction was not a loan or deposit but merely a contra entry. This meant an internal adjustment of an earlier amount advanced via cheque to an employee for purchasing a car. Since the employee did not use the funds, he returned the amount to the company. However, the CIT(A) upheld the penalty made by the AO.
Aggrieved by this, the assessee forwarded an appeal to the ITAT, where the authorised representative submitted that the ₹3.5 lakh transaction was not a fresh loan or deposit but a reversal of a previous transfer. It was argued that the original amount was given via cheque, and its return in cash did not amount to a breach of Section 269SS. The AR also asserted that since the quantum reassessment order under Section 153C was quashed, any penalty based on that order should automatically be annulled.
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The department representative (DR) defended the penalty, stating that the CIT(A) upheld it on merits and that the reassessment order’s invalidity should not impact the penalty imposed. The ITAT, after observing the submissions made by both parties,
noted that the quantum reassessment under Section 153C was quashed due to a lack of valid satisfaction notes and the absence of incriminating material. There was observed to be no foundation for the penalty, thereby preventing the penalty itself from surviving.
The tribunal cited the Supreme Court judgment in CIT v. Jayalakshmi Rice Mills (2015), which ruled that penalties cannot be sustained if the reassessment order is invalid. Similarly, the ITAT also relied on the ITAT Mumbai ruling in Ravi Nirman Nigam Ltd. v. ACIT (2024), which held that when reassessment is declared void, associated penalties automatically collapse. The tribunal agreed with the assessee’s argument that no fresh loan or deposit was involved, and the transaction was a mere book adjustment. Thus, Section 269SS was not violated, making the penalty under Section 271D unjustified.
The ITAT bench consisting of S. Rifaur Rahman (Accountant Member) and Sudhir Kumar (Judicial Member) deleted the ₹3,50,000 penalty under Section 271D. As a result, the assessee’s appeal was allowed.
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