Shaikh Sujayat Shaikh Islam Vs ITO (ITAT Nagpur)
A cash transaction may invite the attention of the Income-tax Department, but a penalty u/s 271D cannot be imposed merely because some information about the transaction has reached the AO. The mandatory jurisdictional foundation must first be laid through a valid satisfaction recorded by the AO during assessment proceedings. Where there were no assessment proceedings at all, the Nagpur Bench of the ITAT held that the penalty proceedings initiated u/s 271D were invalid from their inception.
The assessee, Shaikh Sujayat Shaikh Islam, was subjected to a penalty of ₹12,10,000 u/s 271D for the alleged violation of section 269SS for AY 2017-18. The allegation arose from a registered sale deed under which the assessee was stated to have received ₹12,10,000 in cash as part of the sale consideration.
The Addl./JCIT, Range-Amravati, passed the penalty order on 19 November 2019. The CIT(A)/NFAC confirmed the penalty, compelling the assessee to approach the Tribunal.
The assessee challenged the penalty primarily on a jurisdictional ground. It was submitted that no assessment proceedings had been initiated or were pending for AY 2017-18. Consequently, there was no occasion for the AO to examine the material during assessment, arrive at a finding that section 269SS had been violated & record the satisfaction necessary for initiating penalty proceedings u/s 271D.
Instead of discovering the alleged violation during assessment proceedings and recording a satisfaction based upon such examination, the Department had directly initiated the penalty proceedings merely on the strength of information available with it. According to the assessee, such direct initiation was contrary to the statutory scheme and the binding judicial precedents governing penalty u/s 271D.
The assessee also disputed the transaction on merits. It was argued that the registered sale deed did not specify the date on which the alleged cash amount had been received. Nevertheless, the AO presumed that the cash had been received during the relevant previous year. Thus, even the factual foundation of the penalty was said to rest upon presumption and conjecture rather than definite evidence.
Reliance was placed upon the Supreme Court’s decision in CIT v. Jai Laxmi Rice Mills Ambala City [2015] 379 ITR 521 (SC) and several other decisions, including Pawan Kumar v. JCIT, Lal Singh Chouhan v. JCIT & the Andhra Pradesh High Court’s judgment in Grandhi Sri Venkata Amarendra v. JCIT [2026] 183 taxmann.com 323.
The Revenue supported the order of the CIT(A) and contended that the penalty had been validly imposed for the violation of section 269SS.
The Tribunal observed that there was no evidence to show that the assessee’s case for AY 2017-18 had been selected for scrutiny assessment. Admittedly, no assessment proceedings had been initiated for the relevant year. In the absence of assessment proceedings, there was no occasion for the AO to examine the transaction and record the requisite satisfaction for initiating the penalty proceedings.
The crucial question before the Tribunal was whether the recording of satisfaction by the AO was a sine qua non, or an indispensable condition, for the valid initiation of penalty proceedings u/s 271D.
The Tribunal referred to the decision of the Andhra Pradesh High Court in Grandhi Sri Venkata Amarendra, wherein it was held that the AO must record proper satisfaction before penalty proceedings u/s 271D can be initiated. This requirement assumes additional significance because the officer completing the assessment is not necessarily the authority competent to levy the penalty u/s 271D.
The jurisdiction to impose the penalty is exercised by the Joint Commissioner. However, the Joint Commissioner’s jurisdiction cannot arise automatically merely upon receipt of some information. The AO, being the primary authority examining the assessee’s affairs during assessment proceedings, must first arrive at a finding, on the basis of the material before him, that there has been a violation of section 269SS. That finding or satisfaction provides the necessary jurisdictional trigger for the competent authority to initiate and levy the penalty u/s 271D.
Significantly, the Andhra Pradesh High Court’s decision in Grandhi Sri Venkata Amarendra had subsequently been affirmed by the Supreme Court through the dismissal of the Revenue’s SLP on 6 February 2026.
The Tribunal also relied upon the decision in Lal Singh Chouhan v. JCIT, where the Indore Bench, after considering Jai Laxmi Rice Mills and the Chandigarh Bench’s ruling in Baldev Singh v. ACIT [2018] 93 taxmann.com 212, held that the authority lacked jurisdiction to levy penalty when no assessment proceedings were pending and, consequently, no satisfaction had been recorded by the AO.
Applying these principles, the Tribunal held that the penalty proceedings in the present case had been initiated without any assessment proceedings and without the AO recording a valid prior satisfaction. The proceedings were therefore not valid in the eyes of law.
The order of the CIT(A) was reversed & the entire penalty of ₹12,10,000 levied u/s 271D was deleted. Since the penalty was quashed on the jurisdictional ground, it became unnecessary for the Tribunal to decide whether the alleged receipt of cash was factually established or whether there was a reasonable cause for the transaction.
Author’s Comments
This decision reinforces that penalty proceedings u/s 271D do not operate as an entirely independent machinery capable of being activated merely upon the receipt of third-party information. The statutory jurisdiction must be properly triggered.
The distinction is important. The authority competent to levy the penalty may be the Joint Commissioner, but the satisfaction regarding the apparent violation must ordinarily emerge from the AO’s examination during assessment proceedings. The subsequent penalty order cannot cure the complete absence of this foundational satisfaction.
The ruling does not mean that every suspected cash transaction escapes scrutiny when no regular assessment has been made. It means that the Department must follow the procedure recognised by law before imposing a serious civil penalty equal to the amount of the transaction.
Penalty provisions are stringent, but procedural safeguards are equally stringent. When the law demands satisfaction before punishment, information cannot be treated as satisfaction & suspicion cannot be treated as jurisdiction.
FULL TEXT OF THE ORDER OF ITAT NAGPUR
