ITO, WARD -6 (1), HYDERABAD vs. BHANU PRASAD RAO THANIPARTHY, HYDERABAD

आदेश / ORDER

PER VIJAY PAL RAO, VICE PRESIDENT :

This appeal is filed by the Revenue against the Order dated 14.11.2025 of the Ld. CIT(A)-National Faceless Appeal Centre [in short "NFAC"], Delhi, arising from the penalty Order passed u/sec.271D of the Income Tax Act [in short "the Act"], 1961, for the assessment year 2016-17.

1) The Ld. CIT(A) erred in law and on facts in deleting the penalty imposed under Section 271D of the Income Tax Act, 1961, on the ground that satisfaction was not recorded in the assessment order, without appreciating that satisfaction can be recorded at the time of initiation of penalty proceedings and is not mandatory to be recorded only in the assessment order. 2) The Ld. CIT(A) erred in law in relying upon the decision in CIT v. Jai Laxmi Rice Mills (379 ITR 521) without considering the facts of the present case, wherein the AO had sufficient material and formed satisfaction regarding contravention of Section 269SS, as evidenced by CASS selection, assessment records, and subsequent penalty initiation.

3) The Ld. CIT(A) failed to appreciate that penalty proceedings under Section 271D are independent proceedings and can be initiated after completion of assessment, if the AO forms satisfaction at any stage and proper opportunity is given to the assessee, which is the case herein. 4) The Ld. CIT(A) erred in holding that the initiation of penalty proceedings is invalid merely because the satisfaction was not recorded in the assessment order, without appreciating that the assessee was given full opportunity to file reply and contest the penalty and no prejudice has been caused to the assessee. 5) The Ld. CIT(A) erred in not appreciating that the CASS selection itself is an indication of the AOs satisfaction regarding the cash receipt and the contravention of Section 269SS, and therefore the penalty proceedings are valid and sustainable 6) The Ld. CIT(A) erred in ignoring the legislative intent and deterrent purpose of Section 271D, as deletion of penalty on technical grounds would defeat the purpose of the provision and encourage non compliance. 7) The appellant craves leave to add, alter, amend OR withdraw any of the above grounds of appeal at the time of hearing.

“4.0 Decision :

4.1. The grounds of appeal, assessment order, submissions of the appellant and the relevant judicial pronouncements have been carefully considered and adjudicated as under:

4.2. The appellant is an Individual and has filed his return of income for the A.Y. 2016-17 by declaring a total income of Rs.7,89,020/-. The case was selected for limited Scrutiny under CASS for receipt of sale consideration of Rs.1,08,35,600/- as cash deposit in his account. The assessment proceedings were completed u/s 143(3) of the Act on 28.12.2018 by accepting the returned income. Penalty under section 2710 has not been initiated in the assessment order.

4.3. Subsequently, penalty proceedings were initiated u/s 271D of the Act on 07.11.2019 and necessary opportunities were provided to the appellant for submission of his response. The appellant submitted his reply but the AO has not found the submission as tenable. Therefore, the AO has imposed the penalty of Rs. 1,08,35,600/- under section 271D of the Act. 4.4. Since no satisfaction was recorded in the assessment order, the penalty initiation may be invalid in law. Reference is placed on the case law of CIT v. Jai Laxmi Rice Mills (379 ITR 521, SC), wherein it is held that the Penalty proceedings are invalid if satisfaction not recorded in assessment order. Recording of satisfaction by AO is sine qua non for Initiating the penalty under section 2710.

4.5. It was abundantly clear that neither such proposal for imposition of penalty under section 2710 was proposed by AO nor any satisfaction for initiation of penalty was recorded in the assessment order. Accordingly, penalty levied by AO was liable to be quashed. 4.6. In the light of the Hon'ble SC judgement, the jurisdictional High Court passed order in favour appellant in the case of Srinivasa Reddy Reddeppagari Vs Joint Commissioner of Income Tax [TS-6219-HC-2022(Telangana)-O), (2023) 224 DTR 178 (Telangana), (2023) 332 CTR 614, Similarly jurisdictional ITAT in the case of Assistant Commissioner of Income Tax Vs Shri Bapu Reddy Jala, [TS-6198-ITAT-2023 (Hyderabad)-O] held the issue in favour of the appellant. The key principles and rulings followed by the Hon'ble Supreme Court, various ITAT and Jurisdictional Courts were noted in this case are as follows:  Foundation of Penalty: The court ruled that the "satisfaction" recorded by the assessing Officer (AO) to initiate penalty proceedings under section 271D is foundational to the penalty proceedings.  Requirement for Satisfaction: For a penalty to be validly imposed after the assessment, the AO must explicitly record the necessary satisfaction regarding the contravention of the relevant provisions (e.g., Section 269SS or 269T) within the assessment order itself.  Procedural Mandate: The court emphasized that the requirement to record satisfaction is a mandatory procedural step. A penalty imposed without this explicit satisfaction in a valid, existing assessment order is legally unsustainable. 4.7. Considering the facts and circumstances of the case and also respectfully following the case laws discussed above, the addition made by the AO u/s.271D of the act amounting Rs.1,08,35,600/- is hereby deleted. The appellant succeeds in these grounds of appeal and allowed.”

“9. We have considered the rival submissions as well as relevant material on record. In the case in hand, the Assessing Officer has completed the assessment vide Order dated 03.12.2019 as under: xxxxx xxxxx xxxxx

9.1. Thus, it is clear that in the assessment proceedings the Assessing Officer issued notice u/sec.142(1) of the Act. In response to the same, the assessee filed details called for. The Assessing Officer has noted that the assessee has made some cash deposits during the demonetization period and was asked to furnish the source of the cash deposits made. The assessee explained the source that during the last 03 years he has sold some residential plots and admitted capital gains in his return of income filed for the assessment years 2015-2016 to 2017-2018 and therefore, the deposits were made from the cash available in his hand out of the sales of the plot of land. The Assessing Officer was satisfied with the explanation of the assessee which was also supported by the return of income filed by the assessee in the preceding two years as well as current year showing the capital gain from sale of the plot of lands. The Assessing Officer has not recorded any satisfaction for initiation of the penalty proceedings u/sec.271D of the Act for violation of the provisions of sec.269SS of the Act. Thereafter, the JCIT initiated the penalty proceedings by issuing a show cause notice dated 18.02.2020 and levied the penalty u/sec.271D of the Act vide Order dated 17.03.2022 by considering the entire cash deposits in the bank account as cash received by the assessee during the year under consideration against the sale of plot of lands. In the case in hand, the levy of penalty u/sec.271D of the Act is based on presumption of the fact that the entire deposits in the bank account was the sale proceeds received in cash by the assessee during the year which is contrary to the facts recorded and accepted by the Assessing Officer in the assessment order that the source of the cash deposit is the sale of plot of land by the assessee during three years and not only during the year under consideration. Further, undisputedly the Assessing Officer has not recorded any satisfaction in the assessment order for initiation of the proceedings for levy of penalty u/sec.271D of the Act. The Hon’ble Jurisdictional High Court in the case of Srinivasa Reddy Reddeppagari, Kadapa, Andhra Pradesh vs. JCIT, Central Circle, Central Range-2, Hyderabad & Anr. Vide Order dated 26.12.2022 in WP.No.44285 of 2022 reported in 332 CTR 614 (Tel.-HC) has considered an identical issue in Para nos.18 to 25 as under:

"271D. Penalty for failure to comply with the provisions of s. 269SS (1) If a person takes or accepts any loan or deposit or specified sum in contravention of the provisions of s. 26955, 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-s. (1) shall be imposed by the Jt. CIT. 19. Thus, what sub-s. (1) of s. 271D provides for is that if a person takes or accepts any loan or deposit or specified amount in contravention of the provisions of s. 26955, 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. Sub-s. (2) clarifies that any penalty imposable under sub-s. (1) shall be imposed by the Jt. CIT. 20. It would be useful to refer to s. 271E of the Act also at this stage which deals with penalty for failure to comply with the provisions of s. 269T of the Act. Be it stated that s. 269T of the Act provides that no branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit made with it or any specified advance received by it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who had made the loan or deposit or who had paid the specified advance or by use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, if such an amount is twenty thousand rupees or more. As in the case of s. 269SS, s. 269T of the Act also does not apply to the Government, banking company, post office savings bank etc. Sec. 271E of the Act reads as under: "271E. Penalty for failure to comply with the provisions of s. 269T.-(1) If a person repays any loan or deposit or specified advance referred to in s. 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified advance so repaid. (2) Any penalty imposable under sub-s. (1) shall be imposed by the Jt. CIT." 21. Thus, sub-s. (1) of s. 271E of the Act provides that if a person repays any loan or deposit or specified advance referred to in s. 269T of the Act otherwise than in accordance with the provisions of that section, he shall be liable to pay by way of penalty a sum equal to the amount of the loan or deposit or specified advance so repaid. Sub-s. (2) clarifies that any penalty imposable under sub-s. (1) shall be imposed by the Jt. CIT. 22. From an analysis of ss. 271D and 271E of the Act, it is seen that both the provisions are pari materia to each other. While s. 271D of the Act would be attracted on a person accepting loan or deposit or specified sum in contravention of s. 26955 of the Act, penalty under s. 271E of the Act would be imposable on a person who makes or repays the loan or deposit or specified advance in contravention of s. 269T. Therefore, in a way, the two provisions are complimentary to each other. 23. In Jai Laxmi Rice Mills Ambala City (supra). Supreme Court considered the question as to whether penalty proceedings under s. 271D of the Act is independent of the assessment proceeding? In the facts of that case, it was found that the penalty order was issued following the assessment order. However in appeal, CIT(A) had set aside the original assessment order with a direction to frame assessment de novo. In the fresh assessment order, no satisfaction was recorded by the AO regarding initiation of penalty proceedings under s. 271E of the Act. It was noticed that the penalty order was passed before the appeal of the assessee was allowed by the CIT(A). It was in that context that Supreme Court held as follows:

"The Tribunal as well as the High Court has held that it could not be so for the simple reason that when the original assessment order itself was set aside, the satisfaction recorded therein for the purpose of initiation of the penalty proceeding under s. 271E would also not survive. This according to us is the correct proposition of law stated by the High Court in the impugned order. As pointed out above, insofar as, fresh assessment order is concerned, there was no satisfaction recorded regarding penalty proceeding under s. 271E of the Act, though in that order the AO wanted penalty proceeding to be initiated under s. 271(1)(c) of the Act. Thus, insofar as penalty under s. 271E is concerned, it was without any satisfaction and, therefore, no such penalty could be levied. These appeals are, accordingly, dismissed." 24. Reverting back to the facts of the present case, we find that petitioner had submitted reply to the show-cause notice on 2nd June, 2022. In his reply, petitioner mentioned that no satisfaction was recorded by the AO in the assessment order as to infraction of s. 269SS of the Act. Therefore, no penalty. could be levied under s. 271D of the Act without recorded satisfaction. In this connection, reference was made to the decision of the Supreme Court in Jai Laxmi Rice Mills Ambala City (supra) wherein it was clarified that provisions of s. 271E are in pari materia with the provisions of s. 271D of the Act. However, this aspect of the matter was not considered by respondent No. 1 while passing the impugned order. respondent No. 1 relying upon the Kerala High Court decision in Grihalaxmi Vision (supra) noted that competent authority to levy penalty is the Jt. CIT. He has also referred to an earlier decision of the Supreme Court in CIT vs. Mak Data Ltd. (2013) 263 CTR (Del) 6: (2013) 87 DTR (Del) 172: (2013) 352 ITR 1 (Del) wherein it was observed that AO has to satisfy himself as to whether penalty proceedings should be initiated or not. AO is not required to record his satisfaction in a particular manner or reduce it into writing. Therefore, respondent No. 1 imposed the penalty under s. 271D of the Act.

xxxxx xxxxx xxxxx

[[9.3. Thus, the Hon’ble High Court has reiterated this view that the levy of penalty u/sec.271D of the Act without satisfaction being recorded in the assessment order is not sustainable and the same was set aside. By following the Judgment of Hon’ble High Court this Tribunal has also taken a consistent view on this issue in a series of decisions as relied upon by the learned Authorised Representative of the Assessee. In the case of Somireddy Sudhakar Reddy vs. ITO this Tribunal vide Order dated 24.12.2025 in ITA.No.1505/ Hyd./2025 has considered this issue in Para nos.5 to 8 as under:

“5. We have considered the rival submissions as well as relevant material on record. The JCIT, Range Head-9, Hyderabad has levied the penalty u/sec.271D vide order dated 10.12.2019 as under:

xxxxx xxxxx xxxxx

Thus, it is clear from the impugned order 6. u/sec.271D that there was no Reference by the Assessing Officer and also there were no assessment proceedings or any other proceedings in the case of the assessee prior to issuing the show cause notice u/sec.271D r.w.s.274 of the Act. An identical issue has been considered by the Indore Bench of the Tribunal and one of us is the Judicial Member/Vice President is party to the Order in the case of Shri Umakant Sharma vs. JCIT, Ratlam in ITA.No.364 to 366/Ind./2022 dated 19.07.2023 wherein the Tribunal has held in Para Nos.8 to 11 as under:

“8. We have considered rival submissions and carefully perused the relevant material on record. There is no dispute that the assessee has not filed any return of income for the assessment year under consideration. The penalty u/s 271D of the Act has been levied on 23.01.2017 which is after 8 years from the end of the assessment year under consideration. The limitation for the penalty levied under chapter XXI has been provided in section 275 of the Act which reads as under: “275. Bar of limitation for imposing penalties (1) No order imposing a penalty under this Chapter shall be passed- in a case where the relevant assessment or (a) other order is the subject- matter of an appeal to the Deputy Commissioner (Appeals) or the Commissioner (Appeals) under section 246 or an appeal to the Appellate Tribunal under section 253, after 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 the order of 4 the Deputy Commissioner (Appeals) or] the Commissioner (Appeals) or, as the case may be, the Appellate Tribunal is received by the Chief Commissioner or Commissioner, whichever period expires later; [Provided that in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals) under section 246 or section 246A, and the Commissioner (Appeals) passes the order on or after the 1st day of June, 2003 disposing of such appeal, an order imposing penalty shall be passed before the expiry of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed, or within one year from the end of the financial year in which the order of the Commissioner (Appeals) is received by the "[Principal Chief Commissioner or] Chief Commissioner or "[Principal Commissioner or] Commissioner, whichever is later. (b) In a case where the relevant assessment or other order is the subject- matter of revision under section 263, after the expiry of six months from the end of the month in which such order of revision is passed; (c) in any other case, after 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.] (IA) In a case where the relevant assessment or other order is the subject- matter of an appeal to the Commissioner (Appeals) under section 246 or section 246A or an appeal to the Appellate Tribunal under section 253 or an appeal to the High Court under section 260A or an appeal to the Supreme Court under section 261 or revision under section 263 or section 264 and an order imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition of penalty is passed before the order of the Commissioner (Appeals) or the Appellate Tribunal or the High Court or the Supreme Court is received by the "Principal Chief Commissioner or] Chief Commissioner or the "[Principal Commissioner or] Commissioner or the order of revision under section 263 or section 264 is passed, an order imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition of penalty may be passed on the basis of assessment as revised by giving effect to such order of the Commissioner (Appeals) or, the Appellate Tribunal or the High Court, or the Supreme Court or order of revision under section 263 or section 264: Provided that no order of imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition of penalty shall be passed- (a) unless the assessee has been heard, or has been given a reasonable opportunity of being heard; (b) after the expiry of six months from the end of the month in which the order of the Commissioner (Appeals) or the Appellate Tribunal or the High Court or the Supreme Court is received by the "[Principal Chief Commissioner or] Chief Commissioner or the "[Principal Commissioner or] Commissioner or the order of revision under section 263 or section 264 is passed; Provided further that the provisions of sub-section (2) of section 274 shall apply in respect of the order imposing or enhancing or reducing penalty under this sub-section] 2. The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any action initiated for the imposition of penalty on or before the 31st day of March,1989.] Explanation. - In computing the period of limitation for the purposes of this section, - (i) the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129. (ii) any period during which the immunity granted under section 245H remained in force; and (iii) any period during which a proceeding under this Chapter for the levy of penalty is stayed by an order or injunction of any court, shall be excluded.

“3. We have heard learned counsel for the appellant. The only point for consideration in 4. this appeal is whether the assessee had contravened the provisions of Section 269T of the Act by making repayment of loan/deposits of Smt. Kusum Lata Thakral, through account payee cheque or account payee drafts to M/s. Babyloan Builders Pvt. Ltd., Gurgaon and, therefore, penalty under Section 271E was leviable. The Assessing Officer had levied the 5. penalty amounting to Rs. 11,02,6107- which has been deleted by the Tribunal. The Tribunal while deleting the penalty recorded that the return of the assessee was processed as on 31.12.2003 and the notice u/s. 274 read with section 271E of the Act was issued on 12.06.2007. Such notice was issued when there was no proceedings pending before the Assessing Officer. Relying upon Delhi High Court judgment in CIT v. Standard Brands Ltd. [20061 285 ITR 295/155 Taxman 383, the Tribunal further observed that action for penalty may be permissible only after regular assessment has been framed and since no regular assessment order had been passed in this case, the recourse to penalty proceedings under Section 27IE were not justified. The findings recorded by the Tribunal read thus:- "Having heard the parties and having perused the material on record, we find the grievance of the assessee to be correct. In this case, the return of the assessee was processed u/s. 143(l)(a) of the Income-tax Act, on 31.12.2003. Notice u/s. 274 read with 271E of the Act was issued to the assessee on 12.06,2007. It being a case of processing the return of income, there is no finding in the AO's order with regard to the applicability or otherwise of section 269T of the IT Act to the assessee's case. It was within the purview of the AO to bring the assessee's case to scrutiny and to make regular assessment u/s. 143(3) of the Act. It was also within the power of the AO at the appropriate stage to initiate proceedings u/s. 147 of the Act against the assessee. No such action was taken. Rather, the penalty was imposed on the basis of the finding in the case of assessee's wife." 6. No error or perversity could be shown in the aforesaid findings recorded by the Tribunal. Moreover, the assessee had taken a plea before the Assessing Officer that there was a reasonable cause for the assessee to have made direct payment of Rs. 14,02,600/- to M/s. Babyloan Builders Private Ltd., Gurgaon. It was pleaded that some of the repayments made by the assessee were intercompany transfer for group housing and purchase of flat and at times payments were made after closure of banking hours. It was further submitted that the payments made were genuine and no tax evasion was involved and the default, if any, was of technical nature. The explanation being plausible one, it cannot be said that there was no reasonable cause within the meaning of Section 273B of the Act. No substantial question of law arises in this appeal. 8. We find substances in the submissions made by the Ld. A.R. particularly after considering the order passed by the Hon’ble Punjab and Haryana High Court as cited hereinabove. In fact, on the identical set of facts the penalty under Section 271E was deleted by the Tribunal and further upheld by the Hon’ble High Court. 9. Having regard to the facts and circumstances of the case and the ratio laid down in the order passed by the Punjab and Haryana High Court, we do not hesitate to hold that the impugned penalty under Section 271E is not permissible in the absence of regular assessment framed against the assessee by the Revenue. Hence, the same is not found to be sustainable in the eye of law and, thus, quashed. The appeal preferred by the assessee is, therefore, allowed.” 11. Therefore, it is pre-requisite condition that the initiation of penalty 271D/271E of the Act, there must be assessment proceedings or proceeding arising from assessment order are pending in the case of the assessee. Accordingly in the facts and circumstances of the case and following the judgment of Hon’ble Supreme Court as well as Coordinate Bench of the Tribunal in case of Vijayaben G. Zalavadia vs. JCIT (supra), we hold that the penalty levied u/s 271D of the Act without any assessment proceedings in the case of the assessee is not valid and liable to be quashed. We order accordingly.”

Order pronounced in the open court on 17.06.2026.

Sd/- Sd/- MANJUNATHA G VIJAY PAL RAO ACCOUNTANT MEMBER VICE PRESIDENT Hyderabad, dated 17th June, 2026. VBP Copy to: ITO, WARD -6 (1), ROOM NO 147, 1ST FLOOR, D 1 BLOCK, I.T. TOWERS,AC GAURDS, HYDERABAD- 500001, TELANGANA BHANU PRASAD RAO THANIPARTHY, 6-3-1118, FLAT NO 104, JM APARTMENTS, BESIDE BLUEMOON 2 HOTEL, BEGUMPET, HYDERABAD-500034, TELANGANA 3 THE Pr. CIT, Hyderabad. 4 THE D.R., ITAT, A-BENCH, Hyderabad. 5 GUARD FILE //TRUE COPY// Digitally signed VADREVU by VADREVU PRASADA RAO PRASADA Date: RAO ASSISTANT REGISTRAR / 2026.06.17 I.T.A.T., HYDERABAD 11:25:16 +05'30'