Shevam Jugalkishor Kothari Vs ITO (ITAT Pune)
Cash paid to firm in partner’s capacity does not attract Section 271E penalty: ITAT
Legal principle and decision
The Income Tax Appellate Tribunal deleted a ₹4 lakh penalty under section 271E, finding that the disputed cash payment was made by the assessee to a partnership firm in his capacity as a partner. The transaction had inadvertently been included in a list of unsecured loans furnished during assessment.
The Tribunal examined the partnership deed, the assessee’s ledger account in the firm’s books and the firm’s income-tax return. These records established the partner–firm relationship and the nature of the account. On those facts, it held that section 271E could not be invoked and reversed the CIT(A)’s order.
Background of the penalty proceedings
The assessee was an individual and a partner in M/s Ramchandra Ramgopal Financial Services (RRFS). For assessment year 2015-16, he filed his return on 31.08.2015, declaring total income of ₹6,51,290.
The case was selected for scrutiny, during which the assessee furnished details sought by the AO. Assessment was completed under section 143(3) on 21.09.2017, determining total income at ₹6,52,250.
While responding to a request for unsecured loan particulars, the assessee included RRFS in the list supplied. The details disclosed a cash payment of ₹4 lakh against the outstanding amount. The AO treated this as a default warranting penalty under section 271E.
Initial description treated as loan repayment
The penalty order dated 28.07.2023 proceeded on the basis that the assessee had repaid an unsecured loan in cash. The amount of penalty imposed was ₹4 lakh, corresponding to the disputed payment.
Before the CIT(A), the assessee explained that the payment was made as a partner dealing with his partnership firm. He contended that the transaction should not be treated as an ordinary unsecured loan repayment merely because of its placement in the earlier submission.
The CIT(A), however, confirmed the penalty, relying on the assessee’s initial description. The assessee challenged that confirmation before the Tribunal.
Partner status established through records
The Tribunal examined an 18-page paper book containing the relevant partnership and accounting documents.
The partnership deed established that the assessee was a partner in RRFS. The Tribunal also noted that the firm’s income-tax return had been signed by him in that capacity.
These documents supported the assessee’s explanation that his dealings with RRFS arose within an existing partnership relationship. The Tribunal therefore considered the underlying evidence rather than treating the unsecured-loan list as conclusive. The nature of the payment had to be understood together with the relationship and the account through which it was recorded.
Ledger showed a running debit account
The assessee’s ledger in the firm’s books showed an opening debit balance of ₹27,72,225.65. During the year, he paid ₹4 lakh in cash and ₹19 lakh by cheque to the firm.
The account also recorded withdrawals. At year-end, remuneration and share of profit were credited, leaving a closing debit balance of ₹18,70,013.66.
The Tribunal considered these entries alongside the partnership documents. The account reflected ongoing transactions involving a partner, including payments, withdrawals and credits connected with partnership income. This evidence was material to deciding whether the cash payment could properly be treated as the unsecured loan repayment alleged in the penalty proceedings.
Unsecured-loan disclosure found inadvertent
After examining the documents, the Tribunal accepted that the assessee had inadvertently mentioned the firm and its transactions in the unsecured-loan list furnished during scrutiny.
That finding directly addressed the basis on which the AO had initiated the penalty action. The initial categorisation did not accurately establish the transaction’s character when tested against the complete records.
The Tribunal was satisfied that the disputed ₹4 lakh had been paid to RRFS in the assessee’s capacity as a partner. It therefore declined to sustain the penalty merely because the earlier assessment submission had described the transaction differently.
Section 271E penalty held inapplicable
The Tribunal concluded that, once the partner-capacity payment was established, the provisions of section 271E could not be invoked in the present case.
It reversed the CIT(A)’s findings and deleted the entire penalty. The decision rested on the substantive nature of the relationship and transaction demonstrated by the documentary evidence.
Although the assessee’s submissions referred generally to sections 271D and 271E, the adjudication concerned the ₹4 lakh penalty under section 271E. The order did not separately decide any penalty proceeding under section 271D or examine a different transaction.
Final outcome and scope of ruling
The assessee’s appeal was allowed outright, and the ₹4 lakh penalty was deleted. The matter was not remanded for further verification because the Tribunal considered the partnership deed, return and ledger sufficient to establish the relevant facts.
The ruling highlights that an inadvertent accounting or submission label cannot override the transaction established by supporting records. Its conclusion concerns the payment proved to have been made in the assessee’s capacity as a partner. The decision should therefore be understood with reference to those findings, rather than as an examination of every possible cash transaction involving a firm and its partners.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal by the assessee is directed against the order of Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi (for short, “CIT(A)”) dated 18.05.2026 passed u/sec. 250 of the Income Tax Act, 1961 (for short, “Act”) which is arising out of penalty order dated 28.07.2023 passed u/sec. 271E of the Act for the Assessment Year (A.Y.) 2015-16.
2. The only issue for consideration is against the finding of Ld.CIT(A) confirming the penalty levied by the Ld. AO u/sec. 271E of the Act at Rs. 4,00,000/- for the alleged repayment of unsecured loan taken by the assessee from partnership firm M/s. Ramchandra Ramgopal Financial Services (RRFS).
3. I have heard the rival submissions and perused the material placed before me. I observe that assessee is an individual and partner with M/s.RRFS, copy of partnership deed is placed on record at page No. 10-12 of the paper book and ITR of the partnership firm is also signed by the assessee in the capacity of partner. The assessee filed his return of income for A.Y. 2015-16 on 31.08.2015 declaring total income at Rs.6,51,290/-. After the case selected for scrutiny, during which assessee furnished the details, assessment was completed on 21.09.2017 u/sec. 143(3) determining the total income at Rs. 6,52,250/-. During the course of assessment proceedings, when the assessee was asked to furnish the details of unsecured loans, assessee also included the name of partnership firm-M/s. RRFS to which assessee has repaid Rs.4,00,000/- cash against the outstanding amount. Based on this submission, Ld. AO treated the assessee in default and levied penalty u/sec. 271E of the Act.
4. When the matter travelled to the Ld.CIT(A), assessee contended that repayment made in cash is in the capacity of partner and that the provisions of section 271D or 271E are not applicable to such cash transactions between the partnership firm and its partners. However, Ld.CIT(A) ignored these contentions and confirmed the action of the Ld. AO based on the first submission filed by the assessee. Before this Tribunal, assessee has filed a detailed paper book running into 18 pages and on perusal of the same, I find that ledger account of the assessee in the books of the partnership firm M/s. RRFS is available at page No.8. It indicates that assessee is having debit balance in the books of partnership firm and opening balance is Rs. 27,72,225.65 ps. During the year, assessee has paid Rs. 4,00,000/- in cash and Rs. 19,00,000/- by cheque to the firm and there are certain withdrawals also during the year and at the end of the year remuneration are share of profit has been credited leaving behind the closing debit balance at Rs. 18,70,013.66 ps. I note that the partnership deed placed at page No. 10-12 also proves that assessee is partner and income tax return of the partnership firm-M/s. RRFS has been signed by the assessee in the capacity of partner. I am, therefore, satisfied that during the course of assessment proceedings, assessee inadvertently mentioned the name of partnership firm and transactions carried out with it in the list of unsecured loans furnished before the Ld. AO. Since, it is proved that the alleged sum of Rs. 4,00,000/- in cash has been paid by the assessee to the partnership firm in capacity of partner, I am of the considered view that the provisions of section 271E of the Act could not be invoked. Thus, findings of Ld.CIT(A) is reversed and the impugned penalty levied u/sec. 271E is hereby deleted. Grounds of appeal raised by the assessee are allowed.
5. In the result, appeal of the assessee is allowed.
