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Facts
The assessee, a Sikkimese individual, claimed exemption under Section 10(26AAA) of the Income Tax Act for income earned within Sikkim. The AO disallowed this claim, and the CIT(A) upheld the disallowance. The assessee also received a substantial gift from their brother, which was added back to their income as unexplained cash credit. A penalty under Section 271D was also levied for an alleged violation of Section 269SS.
Held
The Tribunal, following the Supreme Court's decision in Association of Old Settlers of Sikkim vs. Union of India, allowed the exemption under Section 10(26AAA) by setting aside the CIT(A)'s order. For the cash credit addition, the Tribunal admitted additional evidence and restored the issue to the AO for fresh adjudication. The penalty under Section 271D was set aside as the transaction was through a cheque and constituted a journal entry, not attracting Section 269SS.
Key Issues
Whether the assessee is eligible for exemption under Section 10(26AAA) as an old settler of Sikkim. Whether the cash credit received from the brother is unexplained. Whether the penalty under Section 271D is leviable for the transaction.
Sections Cited
10(26AAA), 68, 271D, 269SS
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Income Tax Appellate Tribunal, “D” BENCH,KOLKATA
Date of concluding the hearing : 19.11.2025 Date of pronouncing the order : 13.01.2026
Roshan Agarwal O R D E R Per Rajesh Kumar, AM These are the batch of five appeals filed by the assessee arising from separate orders dated 05.06.2025 and 09.06.2025, passed u/s 250 of the Income Tax Act, 1961 (hereafter referred to as “the Act”) by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereafter referred to as “the Ld. CIT(A)]. Since all the appeals relating to one assessee and are involving common issues therefore, these are beings disposed of by this consolidated order for the sake of brevity and convenience.
Ground No. 1 is general in nature and no specific adjudication is required.
Ground No.2 is against the order of Ld. CIT(A) upholding the disallowance of exemption of Rs. 3,14,25,287/- by the AO rejecting the claim of the assessee u/s 10(26AAA) of the Act.
The facts in brief are that the assessee is an individual and filed return of income on 13.03.2022 by declaring total income at Rs. ‘Nil’. The assessee has claimed exemption of income of Rs. 3,14,25,287/- u/s 10(26AAA) of the Act. The case of the assessee was selected for scrutiny for verification of expenses and verification of suppliers who were not filer of IT returns. Accordingly, notices u/s 143(2) and 142(1) of the Act along with questionnaire were issued and duly served upon the assessee. The assessee furnished the reply on 13.07.2022 furnishing tax audit report computation of total income and Profit & Loss Account and balance sheet etc. as called for by the AO. Thereafter, the assessee complied with the direction of the AO from time to time during the assessment proceedings by furnishing all the details /information. Finally, the AO noted that the Roshan Agarwal assessee has claimed Rs. 3,14,25,287/- as exempt income u/s 10(26AAA) of the Act which according to the AO was not in accordance with the three conditions specified in Explanation to Section 10(26AAA) of the Act and hence the same was rejected.
The Ld. CIT(A) in the appellate proceedings upheld the order of AO.
After hearing the rival contention and perusing the material on record, we note that the assessee is Sikkimese individual assessed as such and has been residing in the state of Sikkim. We note that the assessee is carrying on his business activity within the geographical boundaries of Sikkim, and his income arises solely from the sources situated within the state. This is undisputed that the assessee is a member of bonafide domicile old settlor of Sikkim and is also member of association of old settlers of Sikkim and has been issued certificate to this effect by the said association. The Ld. AO disallowed the claim of the assessee u/s 10(26AAA) of the Act on the ground that the assessee did not furnish a ‘Sikkim Subject Certificate’ and therefore, assessee was not entitled to this exemption u/s 10(26AAA) of the Act. We also note that the association of old settlor of Sikkim has been in litigation before the Hon’ble Supreme Court to contest for the entitlement of the benefit u/s 10(26AAA) of the Act of Old Settlers of Sikkim and Hon’ble Supreme Court in the case of Association of Old Settlers of Sikkim vs. Union of India (2023 SCC Online SC 58) struck down the earlier definition of Sikkimese in section 10(26AAA) of the Act as unconstitutional because it excluded the old settlers from its ambit by holding that such exclusion was arbitrary, discriminatory and violative of Article 14. The Hon’ble Supreme Court has held that old settlers are fully entitled to exemption u/s 10(26AAA) of the Act and directed that they must be treated at par with other Sikkimese individuals. The Parliament by the Finance Act, 2023 amended section 10(26AAA) of the Act retrospectively from 01.04.1990 by adding explanation to amended section providing that Roshan Agarwal where it is established that an individual or its father or other specified relative was domiciled in Sikkim on or before 26.04.1975 then any individual whose name does not appear in the Register of Sikkim Subjects is entitled to the benefit. We respectfully following the decision of the Hon’ble Supreme Court, set aside the order of Ld. CIT(A) and direct to AO to allow exemption u/s 10(26AAA) of the Act to the assessee. The ground no. 2 is allowed.
The issue in ground No. 3 is against the confirmation of addition of Rs. 13,27,00,826/- by the Ld. CIT(A) as made by the AO on account of unexplained cash credit u/s 68 of the Act being gift received from relative.
The facts in brief are that the AO during the course of assessment proceedings observed that the assessee has received Rs. 13,27,00,826/- from his real brother during the year. Accordingly, show cause notice was issued to the assessee to prove the genuineness of the said gift, source of the donor with documentary evidences, confirmation letter and proofs of relationship failing which as to why the same should not be added u/s 68 of the Act to the income of the assessee. Assessee replied the said show cause notice on 22.11.2022 and 23.11.2022 submitting that the assessee has received gift from Sri Mahabir Prasad Agarwal bearing PAN ANQPA9433Q residing at Namchi Bazar, South Sikkim, Namchi and also attached the gift deed and copy of ledger account. The assessee also attached the proofs of the relationship attaching the PAN Card of the person. However, the AO was not satisfied with the evidences furnished by the assessee and treated the money received as unexplained cash credit in the books of the assessee and added the same to the income of the assessee.
In the appellate proceedings, the Ld. CIT(A) dismissed the appeal of the assessee by upholding the assessment on this issue.
Roshan Agarwal 10. After hearing the rival contentions and perusing the material on record, we find that the assessee received gift from his real brother which was added by the AO u/s 68 of the Act on the ground of the assessee has failed to prove the necessary ingredients of section 68 of the Act and treated the same as unexplained cash credit. We observe that the assessee has filed some additional evidences before us which were not available before the before the AO as well as well as before the Ld.CIT(A). The assessee has filed an application for admission of these additional evidences comprising ITR Acknowledgement and final accounts of the donor brother, ledger copy in the books of the assessee etc. He was also submitted the gift deed dated 25.03.2021 in the favour of the assessee by his brother Shri Mahabir Prasad Aggarwal. We have examined these evidences and find that these evidences go to the root of the matter for correct adjudication of the issue.
We have examined these evidences and find that the brother of the assessee has full source and creditworthiness to make the gift in favour of the assessee. The assessee has also proved the identity and relation of the donor by filing these evidences. Therefore, we admit these evidences and restore this issue back to the file of AO with the direction to decide the issue afresh after taking into account the additional evidences evidence furnished by the assessee. Needless to say that if the gift is made by the brother of the assessee and source is proved by the supporting evidences, then no addition is called for. Thus, we restore this issue to the file of the AO with the above observations. Accordingly, Ground no. 3 is allowed for statistical purposes.
The issue raised in Ground No. 4 is against the order of CIT(A) confirming the addition of Rs. 2,05,40,127/- as made by the AO by estimating 8 % on the undisclosed turnover.
Roshan Agarwal 13. The issue is consequential to Ground No. 2 and therefore, our findings in Ground No. 2 would be mutatis mutandis apply to Ground No. 4 as well. Therefore, income derived by the assessee from the activities in the State of Sikkim is eligible for exemption u/s 10(26AAA) of the Act as it does not the case of the AO that income was earned from the activities carried outside the state and therefore, the AO is directed to allow the exemption u/s 10(26AAA) of the Act. Accordingly, Ground No. 4 is allowed.
, 1741 & 1742/Kol/2025 14. Since issue involved in the appeal is identical, except different in figures or calculations, therefore, our findings/directions given above in will, mutatis mutandis, apply to 1741 & 1742/Kol/2025. The issues raised in & 1742/Kol/2025 in respect of short-term capital gain and disallowance u/s 14A of the Act are also covered in favour of the assessee as the income from all sources in the State of Sikkim is exempt. Consequently, the appeals are allowed.
The only issue raised by the assessee is against the confirmation of penalty of Rs. 35,00,056/- as made by the AO u/s 271D of the Act.
The facts in brief are that in the case of the assessee that the assessment was framed u/s 147 of the Act vide order dated 28.03.2022 by NFAC. On the same date, the NFAC issued show cause notice u/s 271D of the Act alleging the violation of section 269SS in respect of an amount of Rs. 35,00,056/-. The notice was replied by the assessee vide written submission submitting that section 269SS has no application because no cash loan or deposit has been accepted by the assessee. The amount reflected in the books was only a journal entry passed to record a cheque payment made by Shri Mahabir Prasad Agarwal to M/s Gawar
Roshan Agarwal Constructions on behalf of the assessee. However, the Ld. Addl. CIT(A), Range 2, Siliguri passed an order imposition penalty u/s 271D of the Act vide order dated 08.09.2022 treating the journal entry as a cash transaction without taking into account the evidences placed on record.
In the appellate proceedings, the Ld. CIT(A) confirmed the penalty by holding that the assessee failed to give any justification for making payment in cash.
After hearing the rival contention and perusing the material on record, we find that in this case the assessee has not received any payment in violation of section 269SS of the Act as the amount stated to be repaid on 19.02.2013 was by way of account payee cheque to M/s Gawar Constructions which was paid by Shri Mahabir Prasad Agarwal directly to the said construction company on behalf of the assessee. We have also examined the copy of bank statement of Central Bank of India in the case of Mahabir Prasad Agarwal which is extracted as page no. 7 of the appellate order and find that there is no cash involved and is only just journal entry to which provisions of section 269SS of the Act are not applicable. The case of the assessee is squarely covered by the decision of Hon’ble Delhi High Court in the case of CIT Vs. Noida Toll Bridger Co. Ltd. (2013) 213 Taxman 333 (Del), wherein it has been held where transactions are effected only through books adjustment and no cash passes between the parties, section 269SS of the Act is not attracted. Similarly, The Hon’ble Bombay High Court in the case of Triumph International Finance (I) Ltd. Vs ACIT (2012) 345 ITR 270 (Bom) that no penalty is to be imposed in case of journal entries. Therefore, we are inclined to set aside the order of CIT(A) and direct the AO to delete the penalty.
Order pronounced on 13.01.2026