No Section 271D Penalty Without Recorded Satisfaction: Telangana HC

Srinivasa Reddy Reddeppagari Vs JCIT (Telangana High Court)

The Telangana High Court, in Srinivasa Reddy Reddeppagari Vs JCIT, set aside a penalty order passed under Section 271D of the Income Tax Act, 1961, and remanded the matter back to the Joint Commissioner for fresh consideration. The petitioner had challenged an order imposing a penalty of ₹87.80 lakh for alleged violation of Section 269SS of the Act. The case arose after the Income Tax Department alleged that the petitioner had accepted cash of ₹87.80 lakh from sale transactions relating to immovable properties, instead of receiving the amount through prescribed banking channels.

The petitioner’s income tax return for Assessment Year 2016-17 had originally been accepted by the Assessing Officer under Section 153A without any adverse finding. Subsequently, the Joint Commissioner issued a show cause notice proposing penalty under Section 271D on the ground that acceptance of cash violated Section 269SS.

In reply, the petitioner contended that the Assessing Officer had not recorded any satisfaction in the assessment order regarding initiation of penalty proceedings under Section 271D. The petitioner relied upon the Supreme Court decision in CIT v. Jai Laxmi Rice Mills Ambala City, arguing that recording of satisfaction in the assessment order was mandatory before initiating penalty proceedings. It was also argued that Sections 271D and 271E are pari materia provisions and the legal principle laid down by the Supreme Court in relation to Section 271E would equally apply to Section 271D.

However, the Joint Commissioner rejected the petitioner’s explanation and imposed penalty under Section 271D. While doing so, reliance was placed on the Kerala High Court decision in Grihalaxmi Vision v. Addl. Commissioner of Income Tax and on the Supreme Court decision in CIT v. Mac Data Ltd. to state that the Assessing Officer was not required to record satisfaction in any particular manner.

The High Court examined the provisions of Sections 269SS, 271D, 269T and 271E of the Act. The Court observed that Section 271D imposes penalty for accepting loans, deposits or specified sums in contravention of Section 269SS, while Section 271E deals with repayment of loans or deposits in violation of Section 269T. The Court held that both provisions are pari materia and complementary in nature.

Referring to the Supreme Court judgment in Jai Laxmi Rice Mills Ambala City, the High Court noted that the Supreme Court had clearly held that satisfaction for initiation of penalty proceedings must be recorded in the original assessment order. The High Court observed that in the present case, the petitioner had specifically raised this contention before the Joint Commissioner, but the same was ignored while passing the penalty order.

The Court held that the Joint Commissioner had overlooked the binding decision of the Supreme Court and failed to consider relevant aspects of the matter. Referring to Articles 141 and 144 of the Constitution, the Court emphasized that all authorities are bound to follow the law declared by the Supreme Court.

Accordingly, the High Court set aside the penalty order dated 29.11.2022 and remanded the matter back to the Joint Commissioner to pass a fresh order in accordance with law after granting reasonable opportunity of hearing to the petitioner. The writ petition was allowed without costs.

FULL TEXT OF THE JUDGMENT/ORDER OF TELANGANA HIGH COURT

Heard Mr. S.Ravi, learned counsel for the petitioner and Mr. Ajay Kumar Kulkarni, learned counsel representing Mr. B.Narsimha Sarma, learned Standing Counsel, Income Tax Department for the respondents.

2. By filing this petition under Article 226 of the Constitution of India, petitioner seeks quashing of the order dated 29.11.2022 passed by respondent No.1 under Section 271D of the Income Tax Act, 1961 (briefly ‘the Act’ hereinafter) imposing penalty of Rs.87,80,000.00 under Section 271D of the Act on the petitioner.

3. Petitioner is an assessee under the Act having the status of an individual. For the assessment year 2016-17, petitioner was assessed by respondent No.2 being the assessing officer vide the assessment order dated 24.03.2022 under Section 153A of the Act. Total income returned by the petitioner i.e., Rs.80,84,180.00 was accepted as the assessed income of the petitioner vide the aforesaid assessment order.

4. However, respondent No.1 issued show cause notice to the petitioner on 13.05.2022 under Section 274 r/w Section 271D of the Act. It was mentioned therein that petitioner had sold immovable properties for an amount of Rs.92,13,000.00, the details of which were mentioned in the show cause notice. After noting that petitioner had admitted long term capital gains in the return of income, it was mentioned that petitioner had accepted cash to the tune of Rs.87,80,000.00. It was alleged that such a transaction otherwise than by an account payee cheque or use of electronic clearing system through a bank account etc., violated Section 269SS of the Act which attracted levy of penalty under Section 271D of the Act. Accordingly, an opportunity was granted to the petitioner to show cause as well as to avail opportunity of personal hearing.

5. Petitioner submitted reply dated 02.06.2022 to the above show cause notice. Amongst other things, it was mentioned that for the purpose of imposing penalty, satisfaction should be recorded by the assessing officer in the assessment order as to imposition of penalty. Non-recording of satisfaction is fatal. In this connection, reference was made to a decision of the Supreme Court in CIT v. Jaya Laxmi Rice Mills Ambala City’. It was further pointed out that in the aforesaid decision delivered by the Supreme Court in the context of initiation of penalty proceeding under Section 271E of the Act, it was held that recording of satisfaction is mandatory for initiation of penalty proceedings under Section 271E of the Act. Section 271E of the Act is pari materia to Section 271D of the Act. Therefore, prayer was made to drop the proposal to impose penalty under Section 271D of the Act.

6. However, respondent No.1 passed the impugned order dated 29.11.2022 rejecting the reply of the petitioner and imposing the penalty. Aggrieved, the present writ petition has been filed.

7. On 09.12.2022, this Court had passed the following order:

Challenge made in this writ petition is to the order dated 29.11.2022 passed by the assessing officer under Section 271D of the Income Tax Act, 1961 (briefly referred to hereinafter as the `Act).

When the attention of learned Senior Counsel was drawn to the fact that impugned order is an appealable one and why petitioner has not filed appeal, he submits that issue involved in the matter is squarely covered by a decision of the Supreme Court reported in Commissioner of Income-tax, Panchkula v. Jai Laxmi Rice Mills Ambala City [(2015) 64 taxmann.com 75 (SC)]. This aspect was specifically brought to the notice of the first respondent by making written submission on 02.06.2022. However, ignoring the above, impugned order came to be passed.

Issue short notice to the respondents.

Mr. B.Narasimha Sarnia, learned Standing Counsel, Income Tax Department waives notice for both the respondents.

List this matter on 23.12.2022 for admission hearing high on board when an endeavour may be made to hear the matter.

8. On 23.12.2022, learned counsel for the respondents sought for time to obtain instructions. This is how, the matter is listed today.

9. Learned Senior Counsel for the petitioner has drawn the attention of the Court to the provisions of Section 271D as well as Section 271E of the Act. He submits that not only the two provisions are in Para mater a, rather Section 271E can be said to be complimentary to Section 271D of the Act. While penalty under Section 271D of the Act is imposable on a person accepting loan or deposit in contravention of the provisions of Section 269SS of the Act, Section 271E of the Act would be attracted or applicable on a person making the loan or deposit.

10. Referring to the decision of the Supreme Court in Jai Laxmi Rice Mills Ambala City (1 supra), learned Senior Counsel for the petitioner submits that in the facts of that case, order of penalty was passed under Section 271E based on the original assessment order; however, the original assessment order was set aside in appeal; therefore, the satisfaction recorded in the original assessment order no longer survived; in the absence of such satisfaction, penalty proceedings under Section 271E of the Act would also not survive; the view taken by the High Court was accordingly upheld whereafter, it was clarified that penalty under Section 271E of the Act without any recorded satisfaction cannot be levied.

11. Referring to the impugned order, learned Senior Counsel for the petitioner submits that respondent No.1 evaded the point raised by the petitioner that no penalty could be levied under Section 271D of the Act without any recorded satisfaction basing on the decision of the Supreme Court in Jai Laxmi Rice Mills Ambala City (1 supra). Instead, respondent No.1 referred to earlier decision of the Kerala High Court in Grihalaxmi Vision v. Addl. Commissioner of Income Tax² in support of his decision.

12. On the other hand, learned counsel for the respondents submits that evidently there was violation of Section 269SS of the Act, which attracted penalty under Section 271D of the Act; respondent No.1 had rightly imposed the penalty, no case for interference is made out.

13. We have considered the rival submissions made at the bar.

14. Issue raised in the writ petition is whether without satisfaction being recorded in the assessment order, penalty can be levied by the Joint Commissioner under Section 271D of the Act ?

15. Insofar the present case is concerned, we find that in the assessment order dated 24.03.2022 passed under Section 153A of the Act, return of income filed by the petitioner was accepted by the assessing officer and accordingly, the total income was assessed. In the return of income, petitioner had admitted receiving total income of Rs.80,84,180.00 which was also accepted by the assessing officer.

16. Subsequently, respondent No.1 took the view that petitioner had sold immovable properties for a total sale consideration of Rs.92,13,000.00 out of which he had accepted cash to the tune of Rs.87,80,000.00 which was in violation of Section 269SS of the Act, attracting penalty under Section 271D of the Act.

17. Before we advert to the reply submitted by the petitioner, we may mention that under Section 2695S of the Act, no person shall take or accept from any other person (referred to as a depositor) any loan or deposit or any specified sum otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, if the amount of such loan or deposit or specified sum is twenty thousand rupees or more. However, as per the first proviso, the rigor of Section 269SS is not applicable to the Government, bancing company, post office savings bank or cooperative bank etc. As per the second proviso, this provision would also not be applicable where both the depositor and the receiver are having agricultural income and neither of them has any income chargeable to tax under the Act.

18. Section 271D of the Act deals with penalty for failure to comply with the provisions of Section 269SS of the Act. Section 271D of the Act being relevant is extracted hereunder:

Penalty for failure to comply with the provisions of section 269SS.

271D. (1) If a person takes or accepts any loan or deposit [or specified sum] in contravention of the provisions of section 269SS, 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.]

[(2) Any penalty imposable under sub-section (1) shall be imposed by the [Joint] Commissioner.]

19. Thus, what sub-section (1) of Section 271D provides for is that if a person takes or accepts any loan or deposit or specified amount in contravention of the provisions of Section 269SS, 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. Sub-section (2) clarifies that any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.

20. It would be useful to refer to Section 271E of the Act also at this stage which deals with penalty for failure to comply with the provisions of Section 269T of the Act. Be it stated that Section 269T of the Act provides that no branch of a banking company or a cooperative bank and no other company or cooperative society and no firm or other person shall repay any loan or deposit made with it or any specified advance received by it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who had made the loan or deposit or who had paid the specified advance or by use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, if such an amount is twenty thousand rupees or more. As in the case of Section 269SS, Section 269T of the Act also does not apply to the Government, banking company, post office savings bank etc. Section 271E of the Act reads as under:

Penalty for failure to comply with the provisions of section 269T.

271E. [(1)] If a person repays any [loan or] deposit [or specified advance] referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the [loan or] deposit [or specified advance] so repaid.]

[(2) Any penalty imposable under sub-section (1) shall be imposed by the [Joint] Commissioner.]

21. Thus, sub-section (1) of Section 271E of the Act provides that if a person repays any loan or deposit or specified advance referred to in Section 269T of the Act otherwise than in accordance with the provisions of that section, he shall be liable to pay by way of penalty a sum equal to the amount of the loan or deposit or specified advance so repaid. Sub-section (2) clarifies that any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.

22. From an analysis of Sections 271D and 271E of the Act, it is seen that both the provisions are parr materia to each other. While Section 271D of the Act would be attracted on a person accepting loan or deposit or specified sum in contravention of Section 269SS of the Act, penalty under Section 271E of the Act would be imposable on a person who makes or repays the loan or deposit or specified advance in contravention of Section 269T. Therefore, in a way, the two provisions are complimentary to each other.

23. In Jai Laxmi Rice Mills Ambala City (supra), Supreme Court considered the question as to whether penalty proceedings under Section 271D of the Act is independent of the assessment proceeding ? In the facts of that case, it was found that the penalty order was issued following the assessment order. However in appeal, Commissioner of Income Tax (Appeals) had set aside the original assessment I order with a direction to frame assessment de novo. In the’ fresh assessment order, no satisfaction was recorded by the assessing officer regarding initiation of penalty proceedings under Section 271E of the Act. It was noticed that the penalty order was passed before the appeal of the assessee was allowed by the Commissioner of Income Tax (Appeals). It was in that context that Supreme Court held as follows:

The Tribunal as well as the High Court has held that it could not be so for the simple reason that when the original assessment order itself was set aside, the satisfaction recorded therein for the purpose of initiation of the penalty proceeding under Section 271E would also not survive. This according to us is the correct proposition of law stated by the High Court in the impugned order.

As pointed out above, insofar as, fresh assessment order is concerned, there was no satisfaction recorded regarding penalty proceeding under Section 271E of the Act, though in that order the Assessing Officer wanted penalty proceeding to be initiated under Section 271(1)(c) of the Act. Thus, insofar as penalty under Section 271E is concerned, it was without any satisfaction and, therefore, no such penalty could be levied. These appeals are, accordingly, dismissed.

24. Reverting back to the facts of the present case, we find that petitioner had submitted reply to the show cause notice on 02.06.2022. In his reply, petitioner mentioned that no satisfaction was recorded by the assessing officer in the assessment order as to infraction of Section 269SS of the Act. Therefore, no penalty could be levied under Section 271D of the Act without recorded satisfaction. In this connection, reference was made to the decision of the Supreme Court in Jai Laxmi Rice Mills Ambala City (1 supra) wherein it was clarified that provisions of Section 271E are inpari materia with the provisions of Section 271D of the Act. However, this aspect of the matter was not considered by respondent No.1 while passing the impugned order. Respondent No.1 relying upon the Kerala High Court decision in Grihalaxmi Vision (2 supra) noted that competent authority to levy penalty is the Joint Commissioner. He has also referred to an earlier decision of the Supreme Court in CIT V. Mac Data Ltd.³ wherein it was observed that assessing officer has to satisfy himself as to whether penalty proceedings should be initiated or not. Assessing officer is not required to record his satisfaction in a particular manner or reduce it into writing. Therefore, respondent No.1 imposed the penalty under Section 271D of the Act.

25. We are afraid respondent No.1 had completely overlooked the decision of the Supreme Court in Jai Laxmi Rice Mills Ambala City (1 supra). In the said decision as extracted above, Supreme Court had concurred with the view taken by the High Court holding that satisfaction must be recorded in the original assessment order for the purpose of initiation of penalty proceedings under Section 271E of the Act. We have already discussed above that provisions of Section 271E and 271D of the Act are in pan materia. When there is a decision of the Supreme Court, it is the bounden duty of an adjudicating authority, be it an income tax authority or any other civil authority or for that matter any court in the country, to comply with the decision of the Supreme Court.

26. Article 141 of the Constitution of India is clear that law declared by the Supreme Court shall be binding on all courts within the territory of India. This is further clarified in Article 144, which says that all authorities, civil and judicial, in the territory of India shall act in aid of the Supreme Court. We are therefore, of the unhesitant view that respondent I\ o.1 overlooked the relevant considerations while passing the impugned order dated.29.11.2022.

27. Further, issue in the present writ petition is not the competence of the Joint Commissioner in issuing the order of penalty. Therefore, reference to Grihalaxmi Vision (2 supra) was wholly unnecessary

28. Consequently, we set aside the impugned order dated 29.11.2022 and remand the matter back to the file of respondent No.1 to pass a fresh order in accordance with law after giving a reasonable opportunity of hearing to the petitioner.

29. Writ Petition is accordingly allowed. No costs.

As a sequel, miscellaneous petitions, pending if any, stand closed.

Notes:

¹ (2015) 64 Taxmann.com 75 (SC)

² Order dated 08.07.2015 passed by the Kerala High Court in ITA.Nos.83 & 86 of 2014

³ (2013) 352 ITR 1