Bengaluru ITAT Quashes Penalty U/s 271D as Time-Barred – Six-Month Limitation U/s 275(1)(c) Strictly Enforced

Kodiambadi Subrahmanya Rai Vs ACIT (ITAT Bangalore)

Bengaluru ITAT Quashes Penalty U/s 271D as Time-Barred – Six-Month Limitation U/s 275(1)(c) Strictly Enforced

Summary: The Bengaluru ITAT allowed the assessee’s appeals for AYs 2016-17, 2017-18, 2018-19 and 2020-21 by quashing penalties imposed under Section 271D of the Income-tax Act, 1961 as barred by limitation under Section 275(1)(c). The penalties arose from alleged violation of Section 269SS based on statements recorded under Section 132(4) during scrutiny proceedings in the case of another person, leading to notices issued under Section 274 read with Section 271D on 14.08.2024. The Assessing Officer passed penalty orders on 19.03.2025, which were upheld by the CIT(A). The ITAT held that no assessment proceedings had been initiated for the relevant assessment years of the assessee and, therefore, the first limb of Section 275(1)(c) was inapplicable. It held that the second limb of Section 275(1)(c), prescribing six months from the end of the month in which penalty proceedings were initiated, governed the limitation period. Since the penalty proceedings commenced on 14.08.2024, the limitation expired on 28.02.2025, making the penalty orders dated 19.03.2025 time-barred. Having quashed the penalties on this jurisdictional ground, the ITAT kept the remaining grounds open as academic and allowed all the appeals.

The Bengaluru ITAT deleted penalties levied u/s 271D for alleged violation of section 269SS, holding that the penalty orders were barred by limitation prescribed under section 275(1)(c). The penalty proceedings had been initiated based on statements recorded during the scrutiny assessment of another person and not during any assessment proceedings of the assessee.

The Tribunal observed that where no assessment or other quantum proceedings are pending against the assessee, the first limb of section 275(1)(c) has no application. In such cases, the limitation is governed exclusively by the second limb, which mandates that the penalty order must be passed within six months from the end of the month in which penalty proceedings are initiated.

In the present case, the show-cause notice u/s 274 r.w.s. 271D was issued on 14.08.2024, whereas the penalty order was passed only on 19.03.2025. Since the limitation expired on 28.02.2025, the Tribunal held that the penalty order was time-barred and consequently quashed it. The same reasoning was applied to all the assessment years under appeal.

Author’s Comments:

This decision reiterates that the limitation provisions governing penalty proceedings are mandatory and jurisdictional. Where penalty proceedings are initiated independently and are not linked to any assessment proceedings of the assessee, the Revenue cannot rely upon the first limb of section 275(1)(c). The ruling serves as an important reminder that even where the merits may favour the Revenue, a penalty order passed beyond the prescribed statutory period is liable to be struck down. It also underscores the need for assessees to carefully examine limitation issues before contesting penalty proceedings on merits.

Cases Discussed: None.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. The assessee has filed the present appeals against the separate impugned orders of even date 19/09/2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], which in turn arose from the separate penalty orders passed under section 271D of the Act, for the assessment years 2016-17 to 2018-19 and 2020-21.

2. Since all the appeals pertain to the same assessee involving similar issues arising out of the similar factual matrix, these appeals were heard together as a matter of convenience and are being decided by way of this consolidated order. With the consent of the parties, the assessee’s appeal for the assessment year 2016-17 is considered as a lead case, and the decision rendered therein shall apply mutatis mutandis to the other appeals.

3. As the assessee has raised similar grounds in all the appeals, the grounds raised in the appeal for the assessment year 2016-17 are reproduced as follows for ready reference: –

1. The order of the learned Assessing Officer and confirmed by the Learned Commissioner of Income-tax (Appeals), in so far as it is against the Appellant, is opposed to law, equity, natural justice, weight of evidence, probabilities, facts and circumstances of the case.

2. The authorities below are not justified in levying penalty u/s.271D of the Act for INR 52,56,000/- for the year under appeal, under the facts and in the circumstances of the appellant’s case.

3. The authorities below are not justified in levy of penalty u/s 271D of the Act in as much as the appellant has demonstrated reasonable cause u/s 273B of the Act for accepting cash deposit of INR 52,56,000/- as part of advance for sale of site and under the facts and in the circumstances of the appellant’s case.

4. Without prejudice to the above, the authorities below have erred in not appreciating that the assessment order of Mr. Pranaam Rai did not record any satisfaction regarding the imposition of penalties under Section 271D on the appellant under the facts and in the circumstances of the appellant’s case.

5. Without prejudice to the above, the authorities below have erred in not appreciating that the impugned order is bad in law and passed without jurisdiction in as much as there were neither any assessment proceedings of the appellant nor any other proceedings in which satisfaction was reached / recorded by the Jurisdictional Assessing Officer for the learned Assessing Officer to invoke his power and initiate penalty proceedings, under the facts and in the circumstances of the appellant’s case,

6. The learned CIT(A) as erred in not appreciating that the penalty proceedings were barred by limitation under section 275(1)(c) of the Income-tax Act, 1961, under the facts and circumstances of the appellant’s case.

4. During the hearing, the learned Authorised Representative (“learned AR”), by addressing the arguments in respect of Ground No. 6, at the outset, submitted that the penalty order passed under section 271D of the Act is barred by limitation in light of the provisions of section 275(1)(c) of the Act.

5. As this is a jurisdictional issue, which goes to the root of the matter, we are considering the same at the outset. The brief facts of the case pertaining to this issue are that during the assessment proceedings in the case of Shri Pranaam Rai, who was managing the business of the assessee, for the assessment year 2023-24, it was revealed through statements recorded of Shri Pranaam Rai under section 132(4) of the Act that the assessee has received cash amounting to INR 52,56,000 in advance for sale of immovable property from several customers during the relevant financial year, i.e. 2015-16, which was in violation of the provisions of section 269SS of the Act. Consequently, a show cause notice dated 14/08/2024 was issued under section 274 read with section 271D of the Act. After considering the submissions of the assessee, the Assessing Officer (“AO”), vide order dated 19/03/2025 passed under section 271D of the Act, levied a penalty of INR 52,56,000, being the sum equivalent to the amount received in cash for violation of the provisions of section 269SS of the Act.

6. In its appeal before the learned CIT(A), the assessee raised an additional ground challenging the penalty order under section 271D on the basis that the same is barred by the limitation period provided under section 275(1)(c) of the Act. The assessee submitted that in the absence of any ongoing assessment proceedings, during which action for imposition of penalty was initiated, the time limit provided in the second limb of section 275(1)(c) of the Act shall be applicable, and therefore, the AO had time only till 28/02/2025 to pass the penalty order. However, since the AO passed the penalty order under section 271D of the Act on 19/03/2025, the same is barred by limitation and thus not sustainable.

7. The learned CIT(A), vide impugned order, held that the penalty levied under section 271D in the present case is within the limitation as per the provisions of section 275(1)(c) of the Act. The relevant findings of the learned CIT(A), vide impugned order, are reproduced as follows: –

“In judgment of Hon’ble Punjab & Haryana in 163 taxmann.com. 44(Punjab and Haryana) Hon’ble High Court held that…

• • The pledging of old jewellery to a pawn broker as a security for loan would come within the meaning of section 269SS. [Para 9]
  • “Thus, the Assessing Officer has correctly treated the amount disclosed through search and seizure by way of additional income through pawning and the provisions of section 269SS were not complied with as section 269SS specifically bar such accepting or giving loans or allowing deposit otherwise than by account payee cheque or bank draft for the amount of Rs. 20,000 or more. The logical corollary from above automatically invites action under section 271D. The question of law as determined herein above is, therefore, answered in favour of the revenue and their order are upheld. [Para 10]

• • The aforesaid appeals are therefore, dismissed. [Para 11]”

Further, it is observed that show cause notice u/s 274 read with section 271D of the Act was issued and served upon the appellant on 14/08/2024 and penalty order u/s 271D of the Act was passed on 19/03/2025. The period of limitation of penalty proceedings under section 271D and 271E of the Act is governed by the provisions of section 275(1)(c) of the Act. Therefore, the limitation period for the imposition of penalty under these provisions would be the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later. In view of above judgment and facts and circumstances of present appeal, imposition of penalty by the Addl. CIT was well within limitation as per provisions of section 275(1)(c) of the Act. Therefore, the penalty levied by the Addl. CIT U/s.271D of the I.T. Act for Rs.52,56,000/- is hereby confirmed. The grounds of appeal of the appellant nos. 1 to 06 are hereby dismissed.”

The learned CIT(A) also upheld the levy of penalty under section 271D of the Act on merits. Being aggrieved, the assessee is in appeal before us.

8. Having considered the submissions of both sides and perused the material available on record, before proceeding further, it is relevant to note the provisions of section 275(1), which lays down the limitation period for levying penalty under Chapter – XXI of the Act, and the same reads as follows: –

“Bar of limitation for imposing penalties.

275. (1) No order imposing a penalty under this Chapter shall be passed—

(a) in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals) under section 246 or section 246A or an appeal to the Appellate Tribunal under section 253, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which the order of the Commissioner (Appeals) or, as the case may be, the Appellate Tribunal is received by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, whichever period expires later :

Provided that in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals) under section 246 or section 246A, and the Commissioner (Appeals) passes the order on or after the 1st day of June, 2003 disposing of such appeal, an order imposing penalty shall be passed before the expiry of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed, or within one year from the end of the financial year in which the order of the Commissioner (Appeals) is received by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, whichever is later;

(b) in a case where the relevant assessment or other order is the subject-matter of revision under section 263 or section 264, after the expiry of six months from the end of the month in which such order of revision is passed;

(c) in any other case, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later.

9. In the present case, it is undisputed that the assessment proceedings for the relevant assessment year were not initiated, and notice under section 274 read with section 271D of the Act was issued on the basis of the statement of Shri Pranaam Rai recorded under section 132(4) of the Act during the course of scrutiny proceedings of Shri Pranaam Rai for the assessment year 2023-24. This fact is further evident from the notice dated 14/08/2024 issued under section 274 read with section 271D of the Act, which is reproduced as follows for ready reference: –

“Notice under section 274 read with section 271D of the Income Tax Act, 1961

Sir/Madam,

1. During the course of scrutiny proceedings of Shir Pranaam Rai (PAN : BLOPR0430B) for Assessment Year 2023-24, it appears form the records sand the statement of Shri Pranaam Rai who is managing the business on behalf of you, recorded u/s 132(4) vide dated 01.05.2023, 26.06.2023 and 27.06.2023 that you have failed to comply with the provisions of section 269SS of the Income Tax Act, 1961 by receiving/accepting cash amounting to Rs. 52,56,000/- in advance/sale against Vardaman Nagar and King City Projects (Real Estate) from the various parties/customers during Financial Year 2015-16 relevant to Assessment Year 2016-17.

2. You are hereby requested to appear before me either personally or through a duly authorized representative at 12:15 p.m. on 30.08.2024 and show cause why an order imposing a penalty on you should not be made under Section 271D of the Income Tax Act, 1961 in contravention to the provision contained in Section 269SS of the Income Tax Act, 1961.

3. If your do not wish to avail yourself of this opportunity to being heard in person or through authorized representative, you may show cause in writing on or before the above said date & time which will be considered before nay such order is made under section 271D of the Income Tax Act, 1961.”

10. Therefore, the question of applicability of the provisions of section 275(1)(a) and section 275(1)(b) of the Act does not arise in the present case. Further, section 275(1)(c) has two limbs and provides two distinct periods of limitation for passing a penalty order, and the one that expires later shall apply. Firstly, it is the end of the financial year in which the quantum proceedings are completed in the first instance. Since no quantum proceedings were initiated for the relevant assessment year, the period of limitation under the first limb is not applicable in the present case. Insofar as the second limb of section 275(1)(c) of the Act is concerned, the period of limitation expires upon expiry of six months from the end of the month in which the action for imposition of penalty is initiated. In the present case, it is unequivocally evident from the record that the penalty proceedings under section 271D were initiated on 14/08/2024 vide notice under section 274 read with section 271D of the Act. Therefore, as per the second limb of section 275(1)(c) of the Act, the limitation period for passing the penalty order expired on 28/02/2025. As in the present case, the penalty order under section 271D was passed on 19/03/2025, we are of the considered view that the same is barred by the limitation period prescribed by section 275(1)(c) of the Act. Accordingly, the said penalty order is not sustainable under law and is quashed. As a result, Ground No. 6, raised in the assessee’s appeal, is allowed.

11. As relief has been granted to the assessee on this short issue, the other grounds raised by the assessee are rendered academic and therefore are kept open.

12. In the result, the appeal by the assessee for the assessment year 2016-17 is allowed.

13. From the perusal of the documents placed in the paper book, we find that the notice under section 274 read with section 271D of the Act for the assessment years 2017-18, 2018-19 and 2020-21 were issued separately on 14/08/2024 on identical basis, i.e. statement of Shri Pranaam Rai recorded under section 132(4) during the scrutiny proceedings in his case for assessment year 2023-24. Further, the penalty order under section 271D of the Act was passed on 19/03/2025, i.e. after the expiry of six months from the end of the month in which the action for imposition of penalty was initiated. Therefore, our findings/conclusions as rendered in assessee’s appeal for the assessment year 2016-17 shall apply mutatis mutandis to the other appeals before us for the assessment years 2017-18, 2018-19 and 2020-21. Accordingly, the penalty orders passed under section 271D of the Act in these years are also quashed as being barred by limitation in view of the provisions of section 275(1)(c) of the Act. As a result, the respective ground on this issue in other appeals are allowed, and the remaining grounds are kept open as they have been rendered academic.

14. In the result, the appeals by the assessee for the assessment years 2017-18, 2018-19 and 2020-21 are allowed.

15. To sum up, all appeals by the assessee are allowed.

Order pronounced in the open court on 8^thJuly, 2026