ITAT Ahmedabad Cancels Penalty On Cash Loans For Son’s Overseas Education: Genuine Need and Reasonable Cause Recognized

Overview of the Decision

The Income Tax Appellate Tribunal, Ahmedabad Bench, in the case of Neetaben Patel Vs ITO, examined whether penalties under Section 271D and Section 271E could be sustained where the assessee had accepted and repaid cash loans in excess of the monetary ceiling prescribed under Section 269SS and Section 269T.

The assessee, a widow with agricultural holdings, had taken cash assistance from close relatives and friends to create fixed deposits required as margin money for sanction of a term loan for her son’s higher education in Australia. These cash amounts were deposited into bank accounts, used to create fixed deposits, the bank thereafter sanctioned an education loan, and subsequently the assessee withdrew the cash and repaid the lenders.

While the Joint Commissioner of Income Tax (JCIT) levied penalties under Section 271D and Section 271E, and the CIT(A) confirmed those penalties, the ITAT ultimately held that the assessee had demonstrated a reasonable cause within the meaning of Section 273B. Therefore, the penalties were deleted.

Background Facts

Personal Profile of the Assessee

  • The assessee is an individual, a widow, living with her two sons after the demise of her husband.
  • She owns agricultural land and derives agricultural income along with pension/salary income.
  • For Assessment Year (AY) 2011-12, she did not originally file a return of income.

Trigger for Reassessment

  1. The department gathered information that during the period from 01-09-2010 to 02-11-2010, the assessee had deposited cash aggregating Rs. 11,58,000/- in three bank accounts:

    • Allahabad Bank
    • Bank of Baroda
    • State Bank of India

  2. Since no return was filed for AY 2011-12, the Assessing Officer (AO) issued notice under Section 148 on 27-03-2018 to reopen the assessment.

  3. In response, the assessee filed a return on 26-04-2018, declaring:

    • Income from salary/pension: Rs. 16,090/-
    • Agricultural income: Rs. 2,94,000/-

Explanation for Cash Deposits

The assessee explained that:

  • She had taken cash loans from family members and friends to meet the requirement of margin money / fixed deposit demanded by the bank for sanctioning an education loan for her son’s studies in Australia.
  • These cash loans were deposited into her bank account and used to create a fixed deposit of Rs. 22,00,000/- on 16-08-2010.
  • Against this fixed deposit, Allahabad Bank issued a term loan of Rs. 19,80,000/- as per sanction order dated 16-08-2010.
  • Once the bank sanctioned the loan, the assessee withdrew cash and repaid the amounts to the friends and relatives from whom she had borrowed.

Despite this explanation, the AO treated Rs. 10,00,000/- as unexplained cash deposits and brought it to tax in the reassessment. The assessee’s appeal against that reassessment was stated to be pending.

Initiation of Penalty Proceedings

Penalties Proposed and Levied

  • Based on the AO’s information, the JCIT initiated penalty proceedings:

    • Under Section 271D for contravention of Section 269SS (acceptance of loans in cash above Rs. 20,000/-).
    • Under Section 271E for contravention of Section 269T (repayment of loans in cash above Rs. 20,000/-).

  • Show cause notices were issued asking the assessee to justify why:

    • Penalty under Section 271D should not be imposed for accepting cash loans.
    • Penalty under Section 271E should not be imposed for repaying these loans in cash.

Assessee’s Defence Before JCIT

In reply dated 18-10-2019 (letter undated but received on that date), the assessee submitted:

  • The funds were sourced from:
    • Farmers,
    • Relatives, and
    • Friends.