MURUGESAN THULASIMANI,SALEM vs. ITO, WARD-1(6), SALEM

Before the ld.CIT(A) the assessee submitted that the entire sale consideration received has been shown as receipt and the same has been accepted as income by the AO in the assessment order passed u/s.143(3) of the Act and hence the same cannot be held as violation by relying on various judicial precedents. However, the ld.CIT(A) rejected the plea of the assessee and confirmed the penalty levied by passing an order dated 31.01.2026 by holding as under:

Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us. The ld.AR for the assessee assailing the action of the ld.CIT(A), submitted that the authorities have erred in confirming the levy of penalty u/s.271D of the Act. The ld.AR submitted that the AO has given a finding in page 3 (Page no 42 of the paper book dated 05.06.2026) and the same re-produced below:

Further the ld.CIT(A) in quantum appeal has given a finding in page 17 Para (v) - (Page no 37 of paper book dated 05.06.2026) as below: "Respectfully following the decisions of the above mentioned Tribunals, I do not find any justification in the order of the AO. The appellant has deposited cash in Specified Bank Notes on 24.11.2016 & 25.11.2016. Regarding the source of cash deposit, the appellant stated that he had received advance money against the sale of his house. Even the AO, in the assessment order has stated that the source of :-5-: ITA. No:859/Chny/2026. cash deposit made during demonetization period seems to be genuine. The AO only made addition on the basis of the fact that the cash deposit were made in the old currency denominations of Rs. 500/- & Rs. 1000/-."

The ld.AR contended that the assessee has clearly established that there is a reasonable cause as stipulated u/s.273B of the Act for carrying on the transaction through cash. The ld.AR submitted as detailed below in explaining the situation to accept the cash.

The ld.AR further submitted that throughout the assessment and appellate proceedings, the lower authorities has accepted the genuineness of the transaction and the reasons for entering into such transaction in para 9 and 10 of written submissions in paper book dated 05.06.2026 filed before the tribunal. In this connection, reliance is placed on the decision of the Hon'ble :-6-: ITA. No:859/Chny/2026. 3162/Chny/2025 dated 16.04.2026. A copy of above decision is enclosed. (Encl-1)

Further the ld.AR placed a reliance on decision of Jurisdictional Madras High Court in the case of Commissioner of Income-tax vs. Balaji Traders [2008] 167 Taxman 27 (Madras)/[2008] 303 ITR 312 (Madras) [18-12-2006]. In light of the above arguments the ld.AR prayed for deleting the penalty by setting aside the order of the ld.CIT(A).

Per contra, the ld.DR relied on the orders of the authorities and contended that the assessee has accepted the during the proceedings before the authorities that the cash has been accepted in violation of provisions of section 269SS and hence there is no need to interfere in the order of ld.CIT(A) and prayed for confirming the same.

We have heard the rival submissions of both parties and perused the material available on record and gone through the orders of the authorities along with the paper book filed and judicial precedents relied on. The undisputed facts are that the assessee is an individual who had not filed his return of income for the assessment year 2017-18. During the demonetisation period, the assessee deposited cash of Rs.24,13,000/- into his bank account. In explaining the source of the said deposits, the assessee stated that he had received an advance of Rs.26,00,000/- in cash towards the sale of his residential house under an unregistered sale agreement dated 24.11.2016 entered into with Shri P.Palaniyappan, whose wife, Smt. P.Padmavathy, was the purchaser. The sale transaction was subsequently completed on 06.02.2017. The assessee further explained that he was a salaried employee having total income of Rs.3,41,168/- during the relevant assessment year and had an outstanding housing loan of Rs.25,37,571/- with Axis Bank, which had been availed on 26.11.2015. Since he had been attempting to sell the property

The assessment was completed u/s.144 of the Act by order dated 06.12.2019. During the assessment proceedings, the AO recorded the statements of the assessee and Shri P.Palaniyappan, both of whom confirmed the sale agreement and the subsequent sale transaction. Though the AO observed that the source of the cash deposits appeared to be genuine, the explanation was not accepted on the ground that the deposits were made in the specified bank notes of Rs.500/- and Rs.1,000/-. Subsequently, penalty proceedings were initiated u/s.271D of the Act for the alleged contravention of section 269SS, and a penalty of Rs.26,00,000/- was levied by order dated 26.03.2024. The ld.CIT(A), vide order dated 31.01.2026, upheld the levy of penalty. Aggrieved by the same, the assessee is in appeal before us.

The principal issue for our consideration is whether the penalty levied u/s.271D of the Act is sustainable in the facts and circumstances of the case, particularly in view of the reasonable cause pleaded by the assessee u/s.273B of the Act. At the outset, we observe that section 269SS, as applicable to the relevant period, includes a “specified sum”, defined to mean any sum of money receivable, whether as advance or otherwise, in relation to the transfer of an immovable property, whether or not the transfer takes place. Therefore, the fact that the amount of Rs.26,00,000/- was received as an advance under the sale agreement, rather than as the final sale consideration, does not by itself take the transaction outside the purview of section 269SS of the Act.

However, the existence of a technical contravention does not conclude the matter. Section 273B of the Act expressly provides that no penalty shall be imposable u/s.271D if the assessee proves that there was reasonable cause

On examining the facts of the present case, we find that the assessee has advanced a specific explanation for accepting the amount in cash. The assessee was a salaried employee with a total income of Rs.3,41,168/- during the relevant assessment year, whereas the outstanding housing loan against the property amounted to Rs.25,37,571/-. The assessee had been attempting to sell the property for several months with a view to discharging the said liability. In the circumstances prevailing after the announcement of demonetisation, the purchaser and her husband came forward to purchase the property, and the assessee accepted the advance in cash in order to facilitate the sale and discharge the outstanding housing loan.

We find that the assessee’s explanation is not a mere general assertion made to avoid the consequences of a statutory default. It is supported by the existence of a substantial housing loan, the sale agreement dated 24.11.2016, the subsequent completion of the sale on 06.02.2017 and the confirmation of the transaction by the assessee and Shri P.Palaniyappan in their statements recorded during the assessment proceedings. These circumstances lend support to the assessee’s explanation that the receipt arose in connection with a genuine property transaction undertaken to meet an existing financial liability.

We further note that the ld.AR specifically drew our attention to the findings recorded by the ld.CIT(A) in the quantum appellate proceedings, wherein it was observed that the source of the cash deposits appeared to be genuine and that the addition had been made primarily because the deposits were made in the old currency denominations of Rs.500/- and Rs.1,000/-. The :-9-: ITA. No:859/Chny/2026. assessment record also contains the observation of the AO that the transaction was confirmed by the seller and the purchaser’s husband, and that the source of the cash deposits appeared to be genuine, although the explanation was not accepted on account of the demonetisation notification.

While the findings in the quantum proceedings do not, by themselves, establish reasonable cause for the mode of receipt, they are relevant in evaluating the assessee’s bona fides. The fact that the transaction was supported by an agreement, confirmed by the parties and subsequently completed assumes significance when considered along with the assessee’s outstanding loan liability and the explanation furnished for accepting the cash advance. In this regard, we draw support from the decision of the Hon’ble Madras High Court in CIT v. Balaji Traders [2008] 303 ITR 312 (Madras), wherein the Hon’ble High Court upheld the deletion of penalty u/s.271D in circumstances where the authorities had found genuine transactions, a bona fide business exigency and reasonable cause for the acceptance of cash. The Hon’ble High Court recognised that the question of reasonable cause has to be examined in the light of the exigency faced by the assessee and the actual circumstances in which the transaction was undertaken.

Though the facts of the said decision arose in the context of cash borrowings for meeting business commitments, the principle that reasonable cause must be assessed objectively with reference to the circumstances of the assessee is relevant to the present case. Applying the same principle, we find that the assessee’s explanation regarding the outstanding housing loan, the efforts made to sell the property and the circumstances in which the purchaser came forward to acquire the property deserves consideration in its proper perspective. We also consider the decision of the Coordinate Bench of this Tribunal in Sreenivasan Ramya v. ACIT, ITA No. 3162/CHNY/2025, dated 16.04.2026. In the said case, the Tribunal examined the levy of penalty

We are conscious that the principal issue concerning the scope of section 269SS in Sreenivasan Ramya related to cash received as part of the completed sale consideration, whereas the present case concerns an advance received under a sale agreement. The said distinction has already been taken into account by us. Nevertheless, the decision supports the proposition that the levy of penalty must be considered in the light of the actual circumstances and the reasonable cause established by the assessee. We, therefore, apply the said decision to the limited extent relevant to the examination of reasonable cause u/s.273B of the Act.

We now turn to the application of the aforesaid principles to the facts before us. We are of the considered view that the assessee’s explanation cannot be rejected merely on the ground that he accepted the amount in cash in excess of the prescribed monetary limit. At the same time, we are not treating the genuineness of the transaction or the assessee’s limited knowledge of the provisions of the Act as sufficient grounds, by themselves, for deleting the penalty. It is the cumulative effect of the circumstances that assumes importance in the present case. The assessee had a substantial housing loan outstanding against the property, his annual income was comparatively modest, and he had been attempting to sell the property for several months in order to discharge the loan liability. The subsequent sale, the confirmation of the transaction by the concerned parties and the observations recorded in the quantum proceedings lend support to the explanation furnished by the assessee. The Revenue has not brought any material on record to establish

Considering the totality of these circumstances, we find that the assessee has demonstrated a bona fide financial exigency for undertaking the transaction in the manner explained before the authorities. We are, therefore, satisfied that the assessee has established reasonable cause for the failure to comply with the prescribed mode of receipt. The case accordingly falls within the protective ambit of section 273B of the Act. In view of the foregoing discussion, respectfully following the principles laid down by the Hon’ble Madras High Court in CIT v. Balaji Traders (supra) and the relevant reasoning of the Coordinate Bench in Sreenivasan Ramya (supra), we hold that the penalty levied under section 271D of the Act is not sustainable, having regard to the reasonable cause established by the assessee u/s.273B of the Act. Accordingly, we set aside the order of the ld.CIT(A) and direct the AO to delete the penalty levied u/s.271D of the Act by allowing the grounds raised by the assessee.

In the result, the appeal filed by the assessee is allowed.