Relief from Income Tax Penalty Section 271D: Grounds & Judicial Perspectives

Introduction

We should know the meaning of “Loan” or “Deposit”. In the case of “deposit”, the delivery of money is usually at the instance of the giver and it is for the benefit of the person who deposits the money and the benefit normally being the earning of interest from the party who customarily accepts deposit. In the case of “loan” it is the borrower at whose instance and for whose needs the money is advanced. The borrowing is primarily for the benefit of a borrower although the person who lends the money may also stand to gain thereby earning interest on the money lent.

Further words used in section 269SS “any other person” has also needs to be interpreted properly. The cash loans  received from near relatives cannot be said fall within the mischief of Sec.269SS of the Act as near relatives cannot be said to be “Other person” within the meaning of Sec.269SS of the Act. In any event in the circumstances of the case, there was reasonable cause for accepting loans in cash

The provisions of Section 271D of the Income Tax Act, 1961, are stringent in nature and were introduced with the objective of curbing the generation and circulation of unaccounted money through cash transactions. This section mandates penal consequences for accepting any loan or deposit of ₹20,000 or more otherwise than by account payee cheque, account payee bank draft, or through an electronic clearing system. However, over the years, the judiciary has recognized that the application of such penalty must be balanced with the bona fide intent and genuine circumstances of the taxpayer. Accordingly, several judicial precedents have evolved, laying down specific grounds and justifications under which assessee can seek relief from such penalties. This article trying to note down the key reasons and situations where relief from penalty under Section 271D may be justified , supported by relevant legal interpretations and case laws.

• Mumbai G bench of ITAT in the case of Zodiac Developers P Ltd (ITA No.31/Mum/2011 dated 10.10.2014), wherein the Bench has, inter alia, observed that if the Assessing Officer has not doubted the genuineness of the transaction and if no addition is madeu/s 68 of the Act, penalty cannot be imposed u/s 271D of the Act.
• CIT v. Sunil Kumar Goel (2009) 315 ITR 163 (Puj. &Har.), it has been held that cash transactions with sister concern which had no tax effect, established ‘reasonable cause’ under section 273B of the Act, therefore, no penalty under section 271D is leviable.
• Contention was rejected by the Division Bench in the decision in the case of  CIT Vs. Smt. M. Yesodha[reported in (2013) 351 ITR 265] wherein it was held that even though the assessee had not taken a specific plea of reasonable cause, it must be considered as applied to human action and where transactions were bona fide, penalty could not be imposed. Owing to urgent need of money, father-in-law of assessee paid purchase price of property directly to seller on assessee’s behalf, transaction did not attract provisions of section 269SS.
• In Shailesh Gopalbhai Akbari v. Addl. CIT, ITA No. 666/Rjt/2014 which gave the judgement that Provision of section 269SSwas brought under the statute to discourage the assessee to justify their unaccounted  money. However, in the instant case, there was no allegation that assessee had introduced unaccounted money in his business. Thus, keeping in view the object of the provision of section 269SS the cash transaction which was genuine could not be brought under the net of tax under the provision of section 269SS. Moreover, transactions between the relatives and sister concern were not subject to the provisions of section 269SS. Therefore, as the genuineness of cash transaction had not been doubted, the penalty levied under section 271D was not sustainable.
• Sri Rajiv Manharlal Duseja v. Asstt. CIT ITA No. 2323/Bang/2018 in which it was said that Tribunal has considered an identical issue in the case of  Deepika v. Addl. CIT in (L.T. A. No. 561/Bang/2017, dt. 13- 10-2017) and held that the transactions between family members would not attract penalty under section 271D. Assessee had taken loan from his father and paternal aunt, who were family members. Family transactions would fall within the meaning of “reasonable cause” under section 273B. Therefore, no penalty could be levied under section 271D.
• the Income-tax Appellate Tribunal, Amritsar Bench, would be squarely applicable to the facts of the assessee’s case. Here also, the daughter and member of the HUF have given money for certain specific purpose. The source and genuineness of the loan has been accepted by the AO. The cash loans in question therefore cannot be said fall within the mischief of 269SSof the Act as near relatives cannot be said to be “Other person” within the meaning of Sec.269SS of the Act. In any event in the circumstances of the case, there was reasonable cause for accepting loans in cash.
• In the case of CIT v. Sunil Kumar Goel[2009] 315 ITR 163/183 Taxman 53 , the Hon’ble Punjab and Haryana High Court held as under : “A family transaction, between two independent assessees, based on an act of casualness, especially in a case where the disclosure thereof was contained in the compilation of accounts, and which had no tax effect, established ‘reasonable cause’ under section 273B of the Act. Since the assessee had satisfactorily established ‘reasonable cause’ under section 273B of the Act, he must be deemed to have established sufficient cause for not invoking the penal provisions of sections 271D and 271E of the Act against him. The deletion of penalty by the Tribunal was valid.”
• In CIT(C) v. Adinath Builders (P) Ltd. (2019) 261 Taxman 168: 102 taxmann.com 57 (SC)/

SLP dismissed against High Court ruling that receipt of deposits/loans received through journal entries is in breach of section 269SS.  Section 269SS, read with sections 271D and 273B, of the Income-tax Act, 1961- High Court by impugned order held that receipt of any advance or loan by way of journal entries is in breach of section 269SS. – It further held that journal entries constitute a recognized mode of recording of transactions and in absence of any adverse finding by authorities that journal entries were made with a view to achieve purpose outside normal business operations or there was any involvement of money, there was a reasonable cause for not complying with section 269SS and penalty under section 271D was not to be imposed. Special Leave Petition filed against impugned order was dismissed.

• R. Associates v. ACIT (2019) 70 ITR 469 (ITAT Pune) ; Assessee’s business was closed and inoperative for last 7 years and had borrowed money from private lenders and banks for last 10 years, to meet business liabilities he had raised cash loans from the unorganised sector. Assessing Officer opined that there was violation of S. 269SS in respect of cash loan in respect of assessee, a penalty for the same loan amount was imposed by the Assessing Officer and further enhanced by the Commissioner (Appeals). In Appeal held, that the Assessee had specifically submitted to the Assessing Officer that his business was inoperative for years and had taken loans for several years to meet financial requirements as lenders were pressing hard. Assessee even had Rs. 50 crore mortgaged against assets worth Rs. 5 crore only. When this fact was seen in the light of return filed by the assessee declaring loss of Rs. 4.35 lakhs, it clearly emerged that the loans were taken by the assessee in cash in violation of the provisions of section 269SS to meet the financial liabilities. This constituted a reasonable cause warranting non-imposition of penalty under section 271D in terms of section 273B. Therefore, the penalty of Rs. 88,18,000 was deleted.

Section 269SS not applicable to transactions between relatives :

Tribunal rendered in the case of Manisha Prakash Amin v. JCIT vide its order dated 24.05.2011 passed in ITA No. 1839/Kol/2010, wherein it was held that the transactions between relatives involving receipt of loan in cash are not in the nature of loans or deposits as envisaged in section 269SS of the Act and the penalty imposed under section 271D was accordingly cancelled by the Tribunal.

• Tribunal in the case of Anant Himatsingka v. Addl. CIT (ITA Nos. 331 & 332/Kol/2010) dated 25.11.2011) held that the loan transaction between son-in-law and father-in-law for giving a support and help was not a loan or deposit in stricter sense of section 269SS of the Act and the same having been given only as a financial support, the relevant transaction did not fall in the ambit of section 269SS of the Act.
• Snehalata Sitani v. JCIT – Date of Judgement : 24.04.2019 (ITAT Kolkata) in the present case, where the loans in question were received by the assessee in cash from her daughter and son-in-law, we hold that the penalty imposed by the assessing officer under section 271D and confirmed by the learned Commissioner (Appeals) is not sustainable.
• Nikhil Banik Mazumder v. JCIT (2018) TaxPub(DT) 635 (ITAT Kolkata): To support and help the family members assesssee was transferring money from one family member to another family, in law, is not a loan or deposit in stricter sense of sections 269SS and 269T and it is only a financial support. Hence, imposition of penalty under sections 271D and 271E on said transfer of money between family members was not justified. During the course of assessment proceedings, AO observed that the assessee had accepted loan in cash on an unspecified date from his son, in contravention of sections 269SS had repaid loans in cash to various family members in contravention of section 269T. Tribunal held that the  assessee had accepted the loan in cash from his son and repaid the same to his son, his wife and his another son. All these transactions were between husband and wife, and between father and son, being close relative of one family. It was also noted that assessee was a salaried employee and not a businessman. Therefore, based on the facts narrated above, these transactions do not fall within the ambit of sections 269SS and 269T as the said transaction between son and father and wife and husband, for giving a support and help, in law, was not a loan or deposit in stricter sense of section 269SS and it was only a financial support. Hence, penalty imposed by the Assessing Officer was not justified.
• DCIT v. Akhilesh Kumar Yadav (2013) 56 SOT 2 : (2012) 26 taxmann.com 264 (ITAT Agra) : Assessee could prove genuineness of accepting cash loan and no involvement of unaccounted or black money was traceable, penalty under section 271D could not be levied for violation of section 269SS
• Credit entries made in books of account of assessee are by way of transfer entries, there being no deposit as per mode of section 269SS hence no penalty . In CIT v. Lala Murari Lal and Sons (2004) 2 SOT 543 (ITAT Lucknow) it was to be held that for violation of section 269SS, it necessarily requires involvement of transfer of money which was not so in the assessee’s case. There being no deposit as per the mode prescribed under section 269SS, violation of the said provisions could not be accepted. Even assuming that the assessee violated the provisions of section 269SS, the penalty could not be sustained because there was nothing to show that the violation of the provisions had been done by the assessee knowingly or in stark defiance of the provisions. As a result, the revenue’s appeal was dismissed.
• In Karnataka Ginning And pressing factory v. JCIT (2001) 77 ITD 478 (ITAT Mumbai) : it has been held that where genuineness of the borrowings were not doubted by Assessing Officer and Assessing Officer was satisfied with the assessee’s explanation regarding the nature & source of the amount, the transactions of deposits do not fall within the mischief of section 269SS .

Conclusion

While Section 271D serves as a deterrent against unaccounted cash transactions, it is equally important to ensure that penal provisions are not applied mechanically or in disregard of genuine hardships or bona fide circumstances. The safeguard provided under Section 273B—that no penalty shall be imposable if the assessee proves a “reasonable cause”—acts as a critical relief mechanism against undue hardship. Judicial forums across the country have time and again emphasized the need to evaluate the intention and surrounding circumstances before confirming such penalties. Therefore, with proper representation and substantiated justification, an assessee can effectively contest the levy of penalty under Section 271D and secure relief in deserving cases.