Penalty u/s 271D can’t be imposed unless AO recorded satisfaction in assessment order

Penalty u/s 271D can’t be imposed unless AO recorded satisfaction in the assessment order that alleged transaction of acceptance of loan would attract penal consequences.

In a recent judgment, Hon’ble High Court of Andhra Pradesh has quashed penalty u/s 271D of the Income Tax Act, 1961 (the Act) observing that in the assessment order AO did not record any finding that there had been any violation of the provisions of Section 269SS of the Act, nor was any satisfaction recorded to the effect that the alleged transaction of acceptance of loan would attract penal consequences.

ABCAUS Case Law Citation:
4450 (2025) (03) abcaus.in HC

In the instant case, the Petitioner/assessee had filed a Writ Petition challenging the action on the part of the Joint Commissioner of Income Tax (JCIT) in levying penalty u/s 271D of the Act.

It was the contention of the assessee that the penalty under Section 271D of the Act, was levied without recording any satisfaction in contemplating levy of penalty.

A search and seizure operation was conducted under Section 132 of the Act, the case of a Business Group and one creditor of the assessee. During the search proceedings, certain incriminating documents relating to the petitioner were found.  Applying the provisions of Section 153C of the Act, the petitioner was asked to submit his return of income. Pursuant thereto, the petitioner furnished his return of income.

Notice under Section 143(2) of the Act was issued to the assessee for making assessment under Section 143(3) read with Section 153C of the Act. Simultaneously notice under Section 142(1) of the Act was issued requiring the petitioner to produce certain copies of bank accounts, explain the cash transaction with the said person.

Pursuant to the same, the petitioner submitted his reply stating that he did not take any loans in cash as alleged that said transactions were received through Banking channels. Thereafter another notice was issued requesting the petitioner to furnish the information. The petitioner submitted his explanation reiterating his previous explanation regarding loans stated to have obtained in cash.

A similar notice was issued to the creditor of the petitioner under Section 133(6) of the Act who, after requesting for time did not respond to the notice issued, therefore, summons under Section 131 of the Act was issued. In response to the same, the said creditor submitted his reply.  After examining his reply, with reference to the seized material, the department issued show cause notice requiring the petitioner to submit reply. In the said notice, it was observed that on cross verification of the details furnished by the petitioner and creditor, there were no discrepancies, however, the seized material contained document(s), which included a letter dated stated to have been issued by the petitioner to creditor, acknowledging the availment of cash loan and pledging of immovable properties as collateral security.

Relying on the seized material, the AO concluded that the petitioner had financial transaction with the creditor outside the books and outside banking channels for the subject assessment year.

Replying to the show cause, the Petitioner submitted that that the said letter was given in anticipation of obtaining the loan subject to mortgage of the properties. However, the petitioner had not availed the loan nor pledged the property.

However, not accepting the reply of the assessee, the AO treated the said amount of loan as unexplained money under Section 69A of the Act and added to the income of the assessee.

After passing of the assessment order, the Assessing Officer, referred the file to the Joint Commissioner of Income-tax, intimating the violations said to have been committed by the petitioner and for appropriate action. The Joint Commissioner of Income-tax, initiated the penalty proceedings under Section 271D of the Income Tax Act, and levied the impugned penalty.

The main contention of the petitioner was that no satisfaction was recorded in the assessment order with regard to levy of penalty under Section 271D of the Act.  The petitioner relying on the decision of the Apex Court contended that there was no evidence before the Assessing Officer to show that the petitioner has accepted the loans in cash. 

The Revenue contended that against the order impugned an alternative remedy of appeal is provided under the provisions of the Act. Without availing such remedy, the assessee had filed the present Writ Petition, which would not be maintainable.

The Hon’ble High Court noted that the assessee was put on notice as regards the loans received in cash. The petitioner stated that he had not received any cash loans and he had denied to have received any cash loans, what all taken as loans were through banking channels alone. There was never any element any element of cash involved in the transaction.

The Hon’ble High Court further observed that the Assessing Officer, except to base his addition on the letter of the assessee did not recorded any finding that there had been any violation of the provisions of Section 269SS of the Act by the assessee, nor was any satisfaction recorded to the effect that the alleged transaction of acceptance of loan would attract penal consequences. 

The Hon’ble High Court opined that in the absence of any finding to the said effect, the penalty cannot be levied.   A presumption can be drawn, in the absence of a finding by the Assessing Officer to the effect that the petitioner had violated the provisions of Section 269SS of the Act, that the department had accepted the explanation furnished by the petitioner denying allegation of loan in cash. Therefore, it can be said that, having satisfied with the explanation of the assessee, the Assessing Officer did not record any satisfaction in the assessment order to the effect that the provisions of Section 269SS of the Act, are violated and did not contemplate levy of penalty under Section 271D of the Act.

The Hon’ble High Court further opined that the satisfaction of the Assessing Officer is required to be recorded because the officer, who passed the assessment order would not be levying the penalty under Section 271D of the Act, unless it is recorded in the assessment order, he cannot refer the file to superior officer i.e., Joint Commissioner, for initiating levy of penalty.  Unless the Assessing Officer, who is the primary authority, based on the material before it, during assessment proceedings, arrives at a finding that there has been a violation of the provisions, like in the present case, of Section 269SS, there will not be any occasion to the Joint Commissioner, who is not the Assessing Officer, to exercise his jurisdiction to levy Penalty under Section 271D.

Accordingly, following the decision of the Hon’ble Supreme Court the High Court set aside the order passed under Section 271D of the Act. 

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