SOME INTERESTING ASPECTS OF PENALTY U/S 271D r.w.s 269SS OF THE INCOME-TAX ACT, 1961

Penalty under section 271D the Income-tax Act, 1961  is imposed upon contraventions of provisions of section 269SS of the Act. In this article, an attempt has been made to touch upon certain aspects not usually discussed but at the same time are of utmost importance for imposition of penalty u/s 271D of the Act. The questions discussed are as under,

Q.1 Who can initiate penalty proceedings ?

Q.2 Is there any time limit for initiation penalty proceedings u/s 271D ?

Q.3 What is the time limit as per section 275 for imposing penalty u/s 271D ?

Q.4 Whether journal entries covered by section 269SS ?

Q.5 Whether advances covered by section 269SS ?

Q.6 Whether money received from members of co-operative society or partners of firm partake the nature of loan ?

Q.7 Whether, in case of penalties above Rs. 20,000/-, penalty be reduced by Rs.20,000 ?

Q.8 Whether penalty can be imposed in case of amount to be taxed as undisclosed income ?

Q.9 Whether penalty can be levied on mere surmises or incomplete evidences ?

Q.10 Whether provisions of section 269SS r.w.s 271D and 273B will apply in case of genuine transaction ?

Q.11 Whether mere existence of genuine or bonafide transaction is sufficient to attract relief u/s 273B of the act or whether it has to be established that on account of some bonafide reasons the assessee could not get loan/deposit by account payee cheque or account payee bank draft ?

Before starting analysis of above select aspect of section 271D lets first go through the provision of section 271D and section 269SS of the Act.

Section 271D

271D. (1) If a person takes or accepts any loan or deposit or specified sum in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified sum so taken or accepted.

(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.

From the provision of section 271D following aspects can be observed.

a. Contravention of section 269SS is must

b. Person contravening shall pay Penalty

c. Amount of penalty is equal to loan taken or deposit accepted

d. No income-tax authority other than JOINT COMMISSIONER (‘JCIT’) CAN IMPOSE PENALTYe. penalty proceedings under these section will be before Joint Commissioner.

Section 269SS

269SS. No person shall take or accept from any other person (herein referred to as the depositor), any loan or deposit or any specified sum, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, if,—

(a)  the amount of such loan or deposit or specified sum or the aggregate amount of such loan, deposit and specified sum; or

(b)  on the date of taking or accepting such loan or deposit or specified sum, any loan or deposit or specified sum taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or

(c)  the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b), is twenty thousand rupees or more: 

Provided that the provisions of this section shall not apply to any loan or deposit or specified sum taken or accepted from, or any loan or deposit or specified sum taken or accepted by,—

(a)  the Government;

(b)  any banking company, post office savings bank or co-operative bank;

(c)  any corporation established by a Central, State or Provincial Act;

(d)  any Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013);

(e)  such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette:

Provided further that the provisions of this section shall not apply to any loan or deposit or specified sum, where the person from whom the loan or deposit or specified sum is taken or accepted and the person by whom the loan or deposit or specified sum is taken or accepted, are both having agricultural income and neither of them has any income chargeable to tax under this Act.

Explanation.—For the purposes of this section,—

 (i)  “banking company” means a company to which the provisions of the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;

(ii)  “co-operative bank” shall have the same meaning as assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949) ;

(iii)  “loan or deposit” means loan or deposit of money;

(iv)  “specified sum” means any sum of money receivable, whether as advance or otherwise, in relation to transfer of an immovable property, whether or not the transfer takes place.

From the provision of section 269SS following aspects must be observed.

a. Loan or deposit should have been taken or accepted from ANOTHER PERSON

b. LOAN OR DEPOSIT OR SPECIFIED SUM IS TAKEN by mode other than an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account.

c. ALLOWABLE LIMIT of taking cash loan/ deposit / Specified Sum IS 20,000/-

d. Loan or deposit means Loan or deposit of MONEY

e. Provisions not applicable where paying and receiving party have agricultural income and have no other income chargeable to tax.

NOW, LET’S MOVE AHEAD TOWARDS SOME INTERESTING ASPECTS OF THESE TWO PROVISIONS AND RELATED SECTIONS LIKE 275 AND 273B.

Q.1 Who can initiate penalty proceedings under section 271D?

For penalties pertaining to section 271(1) of the Act, there is a specific requirement that the AO, CIT(A), PCIT or CIT only can initiate the penalty proceedings in the course of any proceedings under the act. But, with regard to initiation of penalty under section 271D of the Act there is no such categorical requirement expressly provided in the Act. However, there is a requirement that penalty u/s 271D can only be imposed by JCIT. Since there is no condition stipulated for initiation but only for imposition there have been contradictory views and rulings as under,

  • Some courts are of the view that penalty proceedings u/s 271D initiated by assessing officer is also valid, the justification put forward are as under:
    • There is no specific provision in the Act with regard to initiation of penalty proceedings u/s 271D. So, if an AO has sent the show cause notice u/s 271D r.w.s 274 it will be considered as initiation of penalty proceedings.
    • It has been argued that the words ‘Initiation’ does not mean ‘to impose’, so power to initiate can be with Assessing officer also. [Hissaria Brothers v. Jt. CIT(2001) 73 TTJ (Jd) 1. &  Dillu Cine Enterprises (P) Ltd. v. Addl. CIT (2002) 80 ITD 484 (Hyd) ]
    • Levy of penalty was held to be barred by limitation .[ S. 153A, 269SS, 269T, 271D, 271E, 275 (1) (c) ] Dismissing the appeal of the revenue, the Court held that; under section 275 (1) (c) of the Income-tax Act, 1961, the starting point of “initiation” of penalty proceedings, would be the date on which the Assessing Officer wrote a letter to the Additional Commissioner recommending the issuance of the notice. Though the Additional Commissioner had the discretion whether or not to issue a notice, if he did decide to issue a notice, the limitation would begin to run from the date of the letter sent by the Assessing Officer recommending “initiation” of the penalty proceedings. In the assessee’s case, the limitation under section 275 (1) (c) began to run on July 23, 2012 and the last date for passing the penalty orders was January 31, 2013. Therefore, the penalty orders issued on February 26, 2013 were barred by limitation. No question of law arose. (AY. 2009-10) PCIT v. Mahesh Wood Products Pvt. Ltd. (2017) 394 ITR 312/154 DTR 154 (Delhi) (HC)
  • Whereas, some courts are of the view that since the power to impose penalty is with the JCIT the power to initiate the penalty proceedings automatically rests with JCIT.
    • If AO cannot impose penalty the satisfaction recorded by the AO to initiate is of no use. It is the satisfaction of JCIT only which would have weightage in imposing penalty
    • If AO initiates the penalty proceedings and if he makes delay in referring the matter to JCIT for imposing penalty, then the time period provided by section 275 of the Act may get adversely affected.
    • In case of Youth Development Co-op. Credit Society Ltd. v. Jt. CIT in ITA No. 1529/Pn/2002 and ITO vs Ramnivas Agrawal (2004) 89 TTJ Nag 795 it was held that it is only the JCIT who can initiate the proceedings for levy of penalty u/s 271D as he only has the power to impose the same. To justify this, Hon’ble Nagpur bench had stated that, satisfaction recorded by the AO to initiate the penalty proceedings u/s 271D is of no use when the penalty is not to be levied by him but by someone else i.e. JCIT. Thus, initiation could be made only be JCIT. Thus the time period to check the limitation for completing penalty proceedings starts from the end of the month in which JCIT issues show cause notice u/s 274 r.w.s 271D of the Act.
    • Further, Hon’ble Chandigarh ITAT in case of Dewan Chand Amrit Lal v/s. DCIT (2006) (AT) 2003 Chandigarh (SB) have negated the decisions in case of Hissaria brother (Supra) and Dillu Cine enterprises (Supra), Hon’ble court has held as under,

“28. In the final analysis, we hold that the authority competent to impose penalty under Sections 271Dand 271E is vested with the Dy. CIT (now Jt. CIT) and the AO does not have the power either to initiate the penalty proceedings or impose the same. There is no procedure for reference by the AO to the competent authority for imposition of penalty under Section 271D or 271E. Therefore, the limitation for completion of penalty proceedings as provided under Section 275(1)(c) has got to be computed from the date of issue of show-cause notice by the competent authority, which in the present case, is the Dy. CIT (now Jt. CIT). Since the respective orders under Section 271D have been passed within a. period of six months from the date of initiation by the competent authority, the penalty orders passed in the cases of the appellants herein are not barred by limitation.

29. In the light of our decision, for the detailed reasons given earlier, we hardly need to mention that whereas we agree with the view expressed by Tribunal, Chandigarh Bench, in the case of Asstt. CIT v. Shree Nivas Chemicals(supra) and the Nagpur Bench of the Tribunal in the case of ITO v. Ramnivas Agrawal(supra), we do not agree with the view expressed by Hyderabad Bench of the Tribunal in the case of Dillu Cine Enterprises (P) Ltd. v. Addl. CIT (supra) and Jodhpur Bench of the Tribunal in the case of Hissaria Brothers v. Jt. CIT (supra) and the Delhi Bench of the Tribunal in the case of Farrukhabad Investment (I) Ltd. v. Jt. CIT (supra).”

Looking at the controversy, CBDT came out with the following circular wherein it was stated that penalty proceedings u/s 271D be construed to have been initiated only after the JCIT issues Show cause notice  u/s 274 r.w.s 271D of the Act. (the circular is as under)

Circular No. 09/DV/2016
(Departmental View)
F.No.279/Misc./M-116/2012-IT J
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes

New Delhi, 26th April , 2016

Subject:- Commencement of limitation for penalty proceedings under sections 271D and 271E of the Income tax Act, 1961 – reg.

It has been brought to the notice of the Central Board of Direct Taxes (hereinafter referred to as the Board) that there are conflicting interpretations of various High Courts on the issue whether the limitation for imposition of penalty under sections 271D and 271E of the Income tax Act, 1961 (hereafter referred to as the Act) commences at the level of the Assessing Officer (below the rank of Joint Commissioner of lncome Tax.) or at level of the Range authority i.e. the Joint Commissioner of Income Tax./Addl. Commissioner of Income Tax.

Some High Courts have held that the limitation commences at the level of the authority competent to impose the penalty i.e. Range Head while others have held that even though the Assessing Officer is not competent to impose the penalty, the limitation commences at the level of the Assessing Officer where the Assessing Officer has issued show cause notice or referred to the initiation of proceedings in assessment order.

2. On careful examination of the matter, the Board is of the view that for the sake of clarity and uniformity, the conflict needs to be resolved by way of a “Departmental View”.

3. The Hon’ble Kerala High Court in the case of Grihalaxmi Vision Addl. Commissioner of Income Tax, Range 1, Kozhikode, vide its order dated 8.7.15 in ITA Nos. 83 & 86 of 2014, observed that, “Question to be considered is whether proceedings for levy of penalty, are initiated with the passing of the order of assessment by the Assessing Officer or whether such proceedings have commenced with the issuance of the notice issued by the Joint Commissioner. From statutory provision, it is clear that the competent authority to levy penalty being the Joint Commissioner. Therefore, only the Joint Commissioner can initiate proceedings for levy of penalty. Such initiation of proceedings could not have been done by the Assessing Officer. The statement in the assessment order that the proceedings under Section 271D and E are initiated is inconsequential. On the other hand, if the assessment order is taken as the initiation of penalty proceedings, such initiation is by an authority who is incompetent and the proceedings thereafter would be proceedings without jurisdiction. If that be so, the initiation of the penalty proceedings is only with the issuance of the notice issued by the Joint Commissioner to the assessee to which he has filed his reply.”

4. The above judgment reflects the “Departmental View”. Accordingly, the Assessing Officers (below the rank of Joint Commissioner of Income) may be advised to make a reference to the Range Head, regarding any violation of the provisions of section 269SS and section 269T of the Act, as the case may be, in the course of the assessment proceedings (or any other proceedings under the Act). The Assessing Officer, (below the rank of Joint Commissioner of Income Tax) shall not issue the notice in this regard. The Range Head will issue the penalty notice and shall dispose/ complete the proceedings within the limitation prescribed u/s 275(1)(c) of the Act.

5. Where any High Court decides this issue contrary to the “Departmental View”, the “Departmental View” thereon shall not be operative in the area falling in the jurisdiction of the relevant High Court. However, the CCIT concerned should immediately bring the judgment to the notice of the Central Technical Committee. The CTC shall examine the said judgment on priority to decide as to whether filing of SLP to the Supreme Court will be adequate response for the time being or some legislative amendment is called for.

6. The above clarification may be brought to the notice of all officers.

Sadhana Panwar
DCIT (OSD) (ITJ)
CBDT, New Delhi

Q.2 Is there any time limit for initiation penalty proceedings u/s 271D ?

Given the legal matrix that the power to impose penalty is with JCIT so power to initiate also rests with JCIT and the Assessing officer has no intrusion in initiating penalty. Unlike proviso to section 143 (2) or section 149 wherein time limits for initiating assessment are enshrined, there is no provision in the act which stipulates time limit for time limit for initiating penalty proceeding u/s 271D.

That is to say, JCIT at his own sweet-will can initiate the penalty proceedings u/s 271D at any time for any assessment year even after indefinite period. It is only the imposition of penalty which has time barring once initiated [as per section 275]

Above stated legal position was even highlighted by Hon’ble Nagpur ITAT in case of ITO vs Ramnivas Agrawal (2004) 89 TTJ Nag 795  whereby Hon’ble bench made following comment,

It is true that this interpretation adopted by us would also lead to a situation where an officer imposing penalty can initiate penalty even after an indefinite period of time. But in view of the language of the provisions, we have no other option but to uphold such a power. We, therefore, hold that the penalty proceedings were initiated only on 2-5-2000, when the Addl. CIT issued a show-cause notice.’

Also, Hon’ble Mumbai tribunal in case of ACIT Vs. Shri. Parag Doshi (ITA no.1836/Mum/2009 had held the same relying on Special bench’s decision in case of Dewan Chand Amrit Lal v/s. DCIT (2006) (AT) 2003 Chandigarh (SB) wherein it was held that no time limit has been prescribed for initiating penal action in respect of acceptance and return of loan in Shri Parag A. Doshi cash infringing Sec. 269SS and Sec. 269T of the I.T. Act. The Hon’ble Special Bench has considered the issue and held that: –

“Thus, it appears that the Legislature has not considered it necessary to provide limitation for initiation of penalty proceedings under sections 271D and 271E. It becomes more probable when one considers the intention of the Legislature behind incorporation of provisions of sections 268SS and 269T. The intention behind incorporation of these provisions Shri Parag A. Doshi was to counter the proliferation of black money, which when found in the course of search is sought to be explained by cash loans from various persons. As such, there is no time-limit for conducting searches. When in the course of search, some information is found about cash loans or deposits or repayment of loans or deposits or such claims are made, the necessity for initiating proceedings under section 271D or 271E arises. If one were to compute the limitation with reference to the assessment proceedings, then in no case, penalty under section 271D and 271E could be initiated in the case where the information is gathered in the course of search. That would defeat the very purpose of the legislating the provisions of sections 271 and 271E. Looking from the background which gave rise to incorporation of sections 269SS269T271D and271E, the Legislature has consciously not prescribed any limitation for initiation of penalty proceedings under sections 271D and 271E. The limitation, of course has been prescribed for imposition after its initiation by the competent authority”

Q.3 What is the time limit as per section 275 for imposing penalty u/s 271D ?

As discussed above that the power to initiate penalty proceedings u/s 271D rests with JCIT only. Accordingly, the time limit for imposing penalty as provided by section 275 of the Act will be reckoned from the point when JCIT initiates the penalty proceedings.

Further, section 275 provides time limits for different situations, Viz.

  • Where appeal is preferred against the relevant assessment order or other order in the course of which penalty proceeding is initiated (clause a) or
  • Where the assessment order is subject matter of revisions u/s 263 or 264 of the Act (clause b) or,
  • In other matters (clause c)

In the instant case, where question is with regard to imposing penalty u/s 271D, there is no as such connection with the assessment of the income as assessee; as penalty under this section is independent of the income being assessed. Thus, no matter the assessment order of the assessee is in appeal, penalty under this section i.e. 271D is to be levied as per clause (c) of section 275(1) i.e.

  • within the end of financial year in which proceedings, during the course of which action for imposing penalty were initiated, gets completed
  • within the end of six months from the end of the month in which penalty proceedings were initiated, whichever is later

To this effect CBDT came out with the circular (reproduced herein under) wherein it was directed that provision of clause (c) of section 275(1) be made applicable in penalty matters of section 271D & 271E, and had further instructed to withdraw related appeals.

CIRCULAR NO.10/2016
[F.NO.279/MISC./M-140/2015-ITJ],
DATED 26-4-2016

The issue whether the limitation for imposition of penalty under sections 271D and 271E of the Income-tax Act, 1961, (hereinafter referred to as the Act) is determined under section 275(1)(a) or section 275(1)(c) of the Act, has given rise to considerable litigation.

2. The Hon’ble Delhi High Court in the case of Commissioner of Income Tax v. Worldwide Township Projects Ltd.1, vide its order dated 21-5-2014 in ITA No. 232/2014, considered the issue and observed that, “It is well settled that a penalty under this provision is independent of the assessment. The action inviting imposition of penalty is granting of loans above the prescribed limit otherwise than through banking channels and as such infringement of Section 269SS of the Act is not related to the income that may be assessed or finally adjudicated. In this view Section 275(1)(a) of the Act would not be applicable and the provisions of Section 275(1)(c) would be attracted. ” The judgment has been accepted by the Central Board of Direct Taxes.

3. In view of the above, it is a settled position that the period of limitation of penalty proceedings under sections 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. The limitation period is not dependent on the pendency of appeal against the assessment or other order referred to in section 275(1)(a) of the Act.

4. Accordingly, no appeals may henceforth be filed on this ground by the officers of the Department and appeals already filed, if any, on this issue before various Courts/Tribunals may not be pressed upon.

5. The above may be brought to the notice of all concerned

The aspect which should also be looked is, whether ‘relevant assessment order’ means assessment order of same assessee or of someone else also. The relevance could be easily drawn from following example, say penalty proceeding u/s 271D is initiated, and imposed within 6 months, against Mr. X during the course of assessment proceedings of Mr. A wherein it was alleged that Mr. A has given cash loan to Mr. X out of his unaccounted income. However, in appeal preferred by Mr. A, against the addition made in his case, appellate authorities deleted said addition after two years. In such cases, it would be in the interest of justice that penalty proceedings should have been kept in abeyance till disposal of appeal matter of Mr. A since penalty is directly dependent on the assessment of Mr. A.

As mentioned in example if said allegations are not proved against Mr. A then question of lending money does not arise and accordingly subsequent question of Mr. X accepting cash loan cannot arise i.e. penalty order become infructuous. Thus, in such cases, it would be of utmost importance that the time barring should be as per clause (a) which would serve the true purpose of section 275(1)(a).

NOW, BEFORE APPROACHING TOWARDS OTHER ASPECTS OF PENALTY FOR BREACH OF SECTION 269SS LETS LOOK INTO THE MEMORANDUM FOR INTRODUCING THIS SECTION VIDE FINANCE ACT 1984

 “Unaccounted cash found in the course of searches carried out by the Income tax department is often explained by tax payers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits and tax payers are also able to get confirmatory letters from such persons in support of their explanation.

With a view to countering this device, which enables taxpayers to explain away unaccounted cash or unaccounted deposits, the Finance Act has inserted a new section 269SS in the Income tax Act debarring persons from taking or accepting, after 30th June, 1984, from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft……” 

So basically the purpose behind introducing this provision was to curb the practise of giving false explanation about the cash or unaccounted deposits found during the search actions. This being the intention for inserting this new section in FA 1984, lets move ahead toward other aspects.

Q.4 Whether journal entries covered by section 269SS?

As highlighted above that the loans or deposits means loan or deposits of money (same in case of specified sum), any loan entry reflecting by mode of Journal entry should not attract the provisions of this section. Further, as can be observed from the memorandum (reproduced above) the intention behind bringing such provision was to curb the practise of raided parties to give false explanation regarding the Money or deposits found. That is to say, there should be actual real money flowing in.

Relevant case law:

The premises of K, a director of the assessee company were searched by the Income Tax Authorities. During the course of search, incriminating documents regarding unaccounted expenditure incurred by K were seized. In the proceedings initiated under section 153C, K offered for tax the undisclosed expenditure incurred by him for and on behalf of the company for construction activities. Accordingly journal entries were passed in the books of the company. Assessing Officer was of the opinion that the assessee company has violated section 269SS and accordingly levied the penalty but the Tribunal deleted the penalty. High Court confirmed the order of Tribunal. CIT v. Motta Construction P. Ltd. (2011) 338 ITR 66 (Bom.)(High Court) 

Q.5 Whether advances covered by section 269SS?

Provisions of section 269SS covers loans, deposits and specified sum whereby advances are not covered. However, advances against immovable properties are duly covered as ‘specified sum’. Barring advances against immovable properties there is no restriction u/s 269SS upon acceptance of cash advance. However, provisions of section 269ST should be considered while transacting in cash advances.

Relevant case law:

‘Provisions of section 269SS are applicable only in case of loans and deposits received by the assessee in contravention of the provision. Thus, when the assessee receives advance from his customers for supply of goods in cash exceeding the limits prescribed in section 269SS, penalty under section 271D was held to be not leviable. (A.Y. 1990-91) CIT & Anr. v. Kailash Chandra Deepak Kumar (2009) 32 DTR 336 / 317 ITR 351 (All.)(High Court)’ 

Q.6 Whether money received from members of co-operative society or partners of firm partakes the nature of loan?

As highlighted above, that the provisions of section 269SS gets triggered only when the loan, advances or specified sum is received from ANOTHER PERSON. Since one cannot transact with himself. Similarly merely owing to legal fiction cash received from the members of co-operative societies, partners of partnership firm wherein tax evasion is not the motive does not partake the nature of Loan or deposits as the payers and recipient represent each other.

Relevant case laws:

‘Money received by assessee co-operative society from its member/director and their relatives by way of deposits and loans given to them as part of its banking activities cannot be considered as “loan” or “deposit” so as to attract section 269SS or 269T, as the assessee is working on the concept of mutuality and its directors or members are not covered by the expression “any other person” occurring in section 269SS, more so when the assessing officer has accepted the genuineness of such deposits and the assessee was under bonafide belief the provisions of section 269SS and 269T are not applicable. (A.Ys. 2006-07 and 2007-08) Citizen Co-operative Society Ltd. v. Addl. CIT (2010) 41 DTR 305 (Hyd.)(Trib.)’ 

‘In case of CIT Vs M/s Muthoot Financiers (ITA 336/2002) Hon’ble Delhi High Court allowed the argument of assessee (respondent in the case) that cash payments received from partners do not partake the nature of loan and the transaction should not be taken as independent transaction as partner and partnership firm don not have separate identification then one another.’ 

Q.7 Whether, in case of penalties above Rs. 20,000/-, penalty be reduced by Rs.20,000?

‘If any loan is there exceeding Rs.20,000 and any penalty is to be imposed, permissible amount of Rs.20,000 has to be adjusted. CIT v. Ajanta Dyeing & Printing Mills (2003) 130 Taxman 442 / 164 ITR 505 (Raj.)(High Court)’ 

That is, in case penalty is for accepting cash loan of Rs.50,000/- then in such case penalty of Rs.30,000/- should only be levied, as Rs.20,000/- is allowed amount of accepting cash loan.

Q.8 Whether penalty can be imposed in case of amount to be taxed as undisclosed income?

The moment department contends that given amount is income, that means that said amount is neither loan nor deposit nor specified sum thus not qualifying to fall under the ambit of section 269SS. 

Relevant case law:

‘Penalty is not leviable when in a case the Revenue takes the stand that the alleged deposit was undisclosed income of the assessee. CIT v. Standard Brands Ltd. (2006) 204 CTR 48 / 285 ITR 295 / 155 Taxman 383 (Delhi)(High Court).’ 

Q.9 Whether penalty can be levied on mere surmises or incomplete evidences?

Penalties being strict in nature they cannot be automatic. Unless the fact of breach of provision is proved beyond doubt and the act or omission falls within four corners of the provision of law, penalty should not be levied.

Relevant Case laws:

In the absence of any definite material to establish that the assessee had received loan/deposit in contravention of the provisions of s. 269SS, except for the photocopies of statement of loan submitted by the alleged creditor which was contradicted by the assessee and which has been shown to be incomplete and had been rejected by the CIT(A). Penalty under section 271D could not be levied. (A.Ys. 1995-96, 1996-97) Navin Kumar v. Jt. CIT (2006) 99 TTJ 267 / 98 ITD 242 (TM)(Amritsar)(Trib.). 

In an identical case of Dy. CIT Cent. Cir. 2(2) Pune Vs. M/s. Sneh Builders [I.T.A. No. 520/PN/2008 : A.Y. 2004-05] Hon’ble Pune ITAT upheld the decision of CIT(A) in deleting penalty u/s 271D. Hon’ble Pune tribunal held as under

“The action of the Assessing Officer in imposing the penalty u/s 271D on the presumption that against the security of these cheques of Rs. 95,50,000/- the assessee must have taken equivalent amount of cash is not borne from the records. There is no concrete evidence to fact that such amount was in fact received in cash by the assessee except the statement of Shri B.H. Shah. General statement of third person cannot be valid basis for taking action against the assessee. As the penalty has been imposed only on the basis that against the security of cheques equivalent amount of cash might have been taken cash loans is not justified. Under the facts and circumstances penalty of Rs. 95,50,000/- was rightly deleted by the CIT(A). We uphold the same.’ (para no. 7 of the order)” 

Q.10 Whether provisions of section 269SS r.w.s 271D and 273B will apply in case of genuine transaction?

Upon perusal of the memorandum behind bringing the section 269SS it is clear that the legislative assembly intended to curb the practise of extending false explanation against the cash found during the search actions. Accordingly, the intention was bring down the non-genuine transactions. This being the background, the transactions contravening provisions of section 269SS if genuine and as per provisions of section 273B relief can be granted by not imposing penalty. 

Relevant Case laws:

‘Bona fide belief that share application money was neither loans or deposits, deletion of the penalty was held to be justified. [S. 271D] Dismissing the appeal of the revenue the Court held that; in the instant case also, the assessee was under the bona fide impression that the money received was only towards allotment of shares and it is not a loan or deposit. Hence, no question of law much less any substantial question of law arises for consideration in the instant appeal. (AY. 2002-03 to 2004-05) CIT v. Object Frontier Software (P.) Ltd. (2017) 244 Taxman 292 (Mad.) (HC)’ . 

Dismissing the appeal of the revenue, the Court held that the transaction was found to be genuine. The Assessing Officer had not doubted the transaction. In that view of the matter, both the Commissioner (Appeals) and the Tribunal had rightly deleted the penalty. (AY. 1994-95) CIT v. Panchsheel Owners Associations (2017) 395 ITR 380 (Guj.) (HC). 

Allowing the appeal the Court held that, penalty is not automatic under section 271D of the Income-tax Act, 1961 on mere violation of the provisions of section 269SS of the Act. The assessee explained that the amount received from his son was neither a loan nor a deposit within the meaning of section 269SS of the Act and it was received in cash in view of urgent necessity. A proper explanation had been rendered by the assessee for the transaction. Hence, the imposition of penalty under section271D was not valid. Dr. Rajaram L. Akhani v. ITO (2017) 395 ITR 497 (Guj.) (HC). 

Q.11 Whether mere existence of genuine or bonafide transaction is sufficient to attract relief u/s 273B of the act or whether it has to be established that on account of some bonafide reasons the assessee could not get loan/deposit by account payee cheque or account payee bank draft?

Many times the cash loan accepted by the persons would be genuine but contravening the provisions of section 269SS in such cases though the transaction is genuine courts have held that along with the genuineness the bonafide reason behind accepting loan or advance in cash needs to be established. 

To adjudicate the validity of said requirement division bench of Mumbai Tribunal in the matter of Deepak Sales & Properties Pvt Ltd vs. ACIT (ITAT Mumbai) (Special Bench) I.T.A. No. 6304/Mum/2012 had referred the matter to Hon’ble President of ITAT to constitute a special bench. Relevant text of the order stating the reason behind referring the matter is reproduced as under,

The appeal initially came up before “Mumbai G Bench” of ITAT (referred to as “Division Bench”) and the members constituting therein referred the issue to the Hon’ble President for constituting a Special Bench. The back ground of the same is discussed in brief. The Division Bench noticed that the assessee has contended before it that if a transaction of accepting deposits in violation of sec. 269SS is found to be bonafide one, then the penalty u/s 271D of the Act should not be levied. In this regard, the assessee had placed reliance on the decision rendered by 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 made u/s 68 of the Act, penalty cannot be imposed u/s 271D of the Act. The Division Bench was of the view that the decision so rendered by G bench in the case of Zodiac Developers P Ltd (supra) is directly contrary to the decision rendered by Hon’ble Apex Court in the case of Kum. A.B.Shanti (255 ITR 258), wherein it was observed that existence of genuine or bonafide transaction is not sufficient to attract relief u/s 273B of the Act and it has to be established that on account of some bonafide reasons the assessee could not get loan/deposit by account payee cheque or account payee bank draft. The Division Bench has expressed the view that the provisions of sec. 271D & 271E come into play only in respect of genuine transactions, with an exception provided u/s 273B whereby an assessee can establish bonafide reasons so as to bring the case out of a sweep of provisions of section 271D & section 271E of the Act.

Accordingly the Division Bench was of the opinion that the view taken by ITAT “G” Bench (supra) needs to be reconsidered. Accordingly, the Division Bench has requested that the Hon’ble President may constitute a Special Bench, in exercise of power vested in him u/s 255(3) of the Act.

The end result of this appeal was against the assessee as Hon’ble bench held that the bonafide reason for accepting cash could not be established. While adjudicating the matter the the case of Kum. A.B.Shanti (255 ITR 258) as adjudicated by Hon’ble Supreme court was duly considered. 

Hon’ble Pune tribunal in the case of ITO v. Sunil M. Kasliwal (2005) 94 ITD 281 / 80 TTJ 01 / (2004) 2 SOT 596 (TM)(Pune)(Trib.) had adjudicated on identical footings, 

It is not sufficient to say simply that transaction was genuine; circumstances under which cash was accepted are to be explained; where assessee took cash loan from two ladies for purchasing machinery, since urgent requirement of machine was not known and machine was not purchased soon after taking loan from ‘ladies’, it indicated that the assessee could have complied with requirement of section 269SS without much difficulty and, as such, penalty in respect of loan was justified. (A.Y. 1990-91). 

To sum up, penalty under section 271D has to be initiated by JCIT for which there is no time limit however there is time limit to impose the penalty upon initiation (as per section 275 of the Act). Further, penalty should not be levied in case the transaction is genuine and bonafide reason for accepting the cash amount is established. Whereas, while determining the amount of penalty adjustment of Rs. 20,000 be made, i.e. allowed limit to transact in cash. There wont be any penalty in case loan amount reflecting due to Journal entries.

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I am a Chartered Accountant in Practise. My focused area of practise is Income-tax litigation and advisory View Full Profile

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