ITAT Delhi quashes Section 271D penalty where AO failed to record satisfaction in assessment order

Background of the dispute

The Delhi Bench of the Income Tax Appellate Tribunal dealt with an appeal in the case of Anglican India Consultancy Pvt. Ltd. Vs ACIT (ITAT Delhi) concerning Assessment Year 2011-12. The central question was whether a penalty imposed under Section 271D of the Income Tax Act 1961 for alleged infringement of Section 269SS could stand when the Assessing Officer had not recorded any satisfaction in the assessment order regarding such violation.

The assessee, a private limited company, had filed its return declaring income of ₹16,04,765. The assessment was completed under Section 143(3) on 27th February 2014, determining total income at ₹49,86,116. During the course of assessment, the Assessing Officer examined cash transactions reflected in the assessee’s bank account and the related cash book.

Facts noted during assessment

Cash deposits and withdrawals

The Assessing Officer observed substantial movement of cash through the assessee’s bank account. As explained by the assessee:

  • Total cash withdrawals during the year amounted to ₹1,08,45,348
  • Total cash deposits during the year were ₹74,25,348

To clarify the cash trail, the assessee submitted a detailed cash flow statement. According to that statement, when the assessee faced a deficit for day-to-day operational expenses, funds were infused in cash by its Director, Shri Randeep Singh, through a running account styled as “Due to Director”.

Source and nature of funds from Director

The assessee explained that the Director’s cash contributions were sourced from:

  • Agricultural income
  • Cash withdrawals from his proprietary concern
  • Withdrawals from his personal savings bank account, aggregating to ₹21,07,080

The cash flow statement produced before the authorities showed:

  • Cash received from Director during the year: ₹27,00,000
  • Cash repaid to Director during the year: ₹26,00,000

Both inflows and outflows were recorded on various dates during the relevant previous year in the running “Due to Director” account.

AO’s characterization of the transactions

On the basis of the cash flow statement and the accounting treatment, the Assessing Officer concluded that:

  • The assessee company had accepted cash loans or cash deposits from its Director aggregating to ₹27,00,000
  • It had repaid ₹26,00,000 in cash to the same Director during the year

The Assessing Officer viewed these as clear violations of:

  • Section 269SS – acceptance of loans or deposits in cash
  • Section 269T – repayment of loans or deposits in cash

Consequently, the matter was referred to the Additional Commissioner for initiating penalty proceedings under Section 271D in respect of the alleged Section 269SS violation.

A notice under Section 274 read with Section 271D dated 22.08.2014 was issued to the assessee, and hearing was conducted through its authorised representative.

Assessee’s defence in penalty proceedings

Plea of current account / running account

In response, the assessee argued that the cash infusions by the Director were purely temporary funding arrangements to bridge short-term cash gaps for routine business expenditure. Key points highlighted included:

  • The amounts were routed through a running current account titled “Due to Director”
  • Funds were brought in when cash was short and were repaid as and when the assessee’s own cash position improved
  • The pattern was one of frequent receipts and repayments, characteristic of current account transactions rather than distinct, time-bound loans or deposits

Reliance on Companies (Acceptance of Deposits) Rules

The assessee also relied on the Companies (Acceptance of Deposits) Rules, drawing attention to Rule 2(b)(ix), which provides that:

Amounts received from a Director or a shareholder of a private limited company are not treated as “deposits” for the purposes of those Rules.

Based on this, the assessee contended: