Case Law Details
Ganganally Mallappa Basavaraju Vs ITO (ITAT Bangalore)
Bangalore ITAT Deletes Penalty U/s 271AAC – Penalty for Unsecured Loans Not Automatic Merely Because Addition Was Made U/s 68
In a significant ruling, the Bangalore ITAT held that penalty u/s 271AAC is not automatic merely because an addition is made u/s 68 towards unsecured loans. The Tribunal emphasized that penalty proceedings are quasi-criminal in nature and discretionary powers vested with the AO must be exercised judiciously.
The assessee, a civil works contractor engaged in Government contracts, had filed an updated return u/s 139(8A) declaring additional income after mismatch notices were issued. Subsequently, reassessment proceedings were initiated and additions were made u/s 68 in respect of unsecured loans due to non-submission of supporting details during ex parte proceedings u/s 144. Based on such addition, the AO levied penalty u/s 271AAC.
Before the Tribunal, the assessee argued that the unsecured loans were duly recorded in books of account and there was no concealment of income. It was contended that the word used in section 271AAC is “may” and not “shall,” thereby conferring discretion on the AO instead of mandating automatic levy of penalty.
Accepting the contention, the ITAT observed that the assessee had disclosed the unsecured loans in books and the addition was made primarily because the assessment was completed ex parte due to non-compliance arising from health issues. The Tribunal held that mere inability to satisfy the AO regarding genuineness of loans cannot automatically justify penalty proceedings.
The Tribunal strongly reiterated that penalty provisions cannot be invoked mechanically and that the legislature consciously used the word “may” to confer discretion upon tax authorities. The ITAT further held that technical breaches or inability to furnish documents in assessment proceedings cannot always be equated with concealment warranting penalty.
Importantly, the Tribunal also rejected the Department’s plea that the penalty proceedings should merely be restored to the AO because the quantum matter had already been remanded earlier. The ITAT observed that the degree of proof required for penalty is much higher than for making additions in assessment proceedings.
Accordingly, the Bangalore ITAT deleted the entire penalty levied u/s 271AAC.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 26/11/2025 in respect of the A.Y. 2020-21.
2. The brief facts of the case are that the assessee is a civil works contractor engaged in the business of execution of government contracts. The assessee filed his return of income and claimed deductions u/s. 80C and 80D of the Act. The return was processed u/s. 143(1) and the same has been accepted. Thereafter the return was selected for e-verification and due to the mismatch in the income from other sources shown in the ITR as well as the contractual receipts, notices were issued for verification. The assessee immediately filed the updated return u/s. 139(8A) of the Act and declared an additional income on account of interest received. The AO subsequently taken up the case for assessment u/s. 148 of the Act since the complete information was not provided by the assessee. The assessee had not responded to various notices and therefore an assessment order u/s. 147 r.w.s. 144 was made. The AO had also levied penalty u/s. 270A of the Act. The assessee had challenged both the quantum order as well as the penalty order before the Ld.CIT(A). The appeal was filed with a delay of 222 days. The Ld.CIT(A) not satisfied with the reasons stated in the petition for condonation of delay had dismissed the appeals on the ground of limitation. Thereafter the assessee had approached this Tribunal. The Tribunal after considering the medical reasons stated by the assessee, had condoned the said delay and remitted the issue to the file of the AO for denovo assessment. The penalty appeal was also disposed of.
3. In the meanwhile, the AO had imposed penalty u/s. 270AAC of the Act for the reason that the assessment has been made u/s. 68 of the Act. The AO was of the view that the unsecured loans were not properly explained and therefore treated the said sums as unexplained cash credit u/s. 68 of the Act and therefore consequently, the penalty has to be imposed u/s. 271AAC of the Act. The assessee initially responded that they are going to challenge the quantum appeal order before the Ld.CIT(A) but in view of the delay in filing the appeal, the AO had not accepted and passed an ex-parte order by confirming the penalty u/s. 270AAC of the Act. The assessee challenged the said penalty order before the Ld.CIT(A) and the Ld.CIT(A) had not adjudicated the appeal on merits but dismissed the appeal on the ground that the assessee had not appeared before him.
4. As against the said order, the present appeal has been filed by the assessee before this Tribunal.
5. At the time of hearing, the Ld.AR submitted that the AO had erred in imposing penalty u/s. 270AAC of the Act on the sole ground that he has made the addition u/s. 68 of the Act and therefore the penalty has to be imposed u/s. 270AAC of the Act which is not correct and also not in accordance with the said provision. The Ld.AR further submitted that the imposition of penalty is not an automatic one since the word used in section 271AAC is that the AO “may” impose the penalty. The Ld.AR relying on the said word submitted that the legislature had used the word “may” in the said section and therefore they gave complete discretion to the assessing officer for imposing the penalty in appropriate cases. The Ld.AR further submitted that on merits, the assessee had all evidences to show that the unsecured loans are genuine and could not be treated as unexplained cash credit u/s. 68 of the Act and even assuming that the explanation given by the assessee has not been accepted by the AO, the same would not be a reason for imposing a penalty since the penalty is a quasi criminal proceedings as held by the various courts. The Ld.AR finally submitted that the quantum appeal was already restored to the file of the AO by this Tribunal vide its order dated 30/04/2026 in ITA Nos. 311 & 312/Bang/2026 and therefore submitted that the penalty proceedings could not stand in the absence of any additions and therefore prayed that the appeal of the assessee may be allowed.
6. The Ld.DR submitted that the AO had correctly invoked the penalty provision and therefore the order requires no reconsideration by this Tribunal.
7. We have heard the arguments of both sides and perused the materials available on record.
8. We have considered the original assessment order as well as the order imposing penalty u/s. 271AAC of the Act. In the assessment proceedings, the assessee had recorded all the unsecured loans in their books of accounts and therefore there is no concealment of income by the assessee insofar as the unsecured loans are concerned. The only grievance provided by the AO is that the assessee had not furnished the details of the unsecured loans and therefore he has no other option except to make the addition u/s. 68 of the Act by treating the unsecured loans as unexplained cash credit u/s. 68 of the Act. Unfortunately, the assessment has been made u/s. 144 of the Act and therefore the addition made by the AO could be termed as a correct one. Even assuming that the assessee had participated in the assessment proceedings and filed his objections and documents, the non-consideration of the said objections as well as the documents by the AO for various reasons could not be termed as an unexplained cash credit u/s. 68 of the Act. At the best, it could be termed as the assessee was not able to satisfy the AO and it could not be a valid ground for the imposition of penalty.
9. We come across several judgments of the Hon’ble Supreme Court as well as the Hon’ble High Courts in which the courts had held that the penalty need not be imposed automatically when the assessee had explained the facts under which it could not be termed as concealment of any income. The courts also held that the penalty proceedings are quasi criminal proceedings and therefore it is not an automatic process to impose penalty when the assessee had committed some technical breach of the provisions of the Act. In the present case, the assessee had obtained unsecured loans due to the business exigencies and also recorded the said loans in their books of accounts and also brought to the notice of the AO about the unsecured loans and in that circumstances, at the best, we could term the action of the assessee as a technical breach of the provisions for which the quasi criminal proceedings that is penalty could be imposed. That is why the legislature had used the word “may” in the penalty provision. If the Statute has given discretionary powers to the authorities for levying the penalties, the authorities should exercise the said discretionary powers and they should not impose the penalties automatically consequent to the assessment order. This is because the penalty proceedings are quasi criminal in nature.
10. In the present case, there is no doubt that the assessee had not explained the unsecured loans because of the health issues and therefore the AO had made the addition u/s. 68 of the Act. If the assessee had appeared and produced the records, the AO might have taken a different view and in that circumstances, the addition could not be sustained u/s. 68 of the Act. Even if the AO had not accepted for one reason or another, the same could not be a valid reason for imposing the penalty. We were told by the Ld.DR that the quantum appeal has been remitted to the file of the AO for denovo consideration and therefore this penalty should also go to the AO for denovo consideration. We do not agree with the said proposition for the reason that the degree of proof required for imposing the penalty is much more higher than the proof required for making the additions. Therefore, we are not accepting the said proposition and decided this appeal on merits in spite of the fact that the Ld.CIT(A) had passed an order on the ground of non-appearance by the assessee.
11. We have already discussed the issue in detail in the earlier paragraphs and therefore the facts and circumstances as narrated above would indicate that there is no requirement of penalty to be levied u/s. 271AAC of the Act. We, therefore allow the appeal filed by the assessee by deleting the penalty levied u/s. 271AAC of the Act.
12. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 19thMay, 2026.
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