ITAT Mumbai Clarifies: No Section 271D Penalty Without Clear Evidence of Section 269SS Violation

1. Background of the Dispute

The Mumbai Bench of the Income Tax Appellate Tribunal, in the case of ACIT Vs AL Global Beverages Private Limited (ITAT Mumbai), examined whether unexplained cash deposits made during the demonetization period could, by themselves, justify penalty under Section 271D for alleged breach of Section 269SS of the Income Tax Act 1961.

The matter pertained to Assessment Year 2017-18, where cash had been deposited into the bank account of the assessee-company during the demonetization window. An assessment under Section 144 had earlier resulted in an addition under Section 68 read with Section 115BBE, followed by separate penalty proceedings under Section 271D.

The Tribunal ultimately upheld the order of the CIT(A) deleting the penalty of Rs.72,89,500/-, holding that the Revenue failed to demonstrate how the essential conditions of Section 269SS were met.

2. Assessment Proceedings and Quantum Addition

2.1 Best Judgment Assessment Under Section 144

The Assessing Officer completed the assessment under Section 144 vide order dated 17.12.2019. In that order:

  • Cash deposits made during the demonetization period were examined.
  • A sum of Rs.70,97,000/- was brought to tax as unexplained cash credits under Section 68 read with Section 115BBE.
  • The Assessing Officer held that the assessee had not satisfactorily explained the nature and source of the cash deposits.

Following this, the Assessing Officer referred the matter to the Joint Commissioner of Income Tax (JCIT), Range-14, for initiating penalty under Section 271D, alleging contravention of Section 269SS.

2.2 Initiation of Penalty Proceedings

The JCIT issued:

  • Notice under Section 274 read with Section 271D on 23.09.2021, and
  • Another notice on 23.03.2022.

There was no response or compliance from the assessee to these notices.

Subsequently, the JCIT passed an order dated 30.03.2022 under Section 271D, invoking:

  • Section 269SS, which restricts acceptance of any loan, deposit or specified sum in cash above Rs.20,000/-.
  • Section 271D, which provides for a penalty equal to the amount of loan, deposit or specified sum taken or accepted in violation of Section 269SS.

The JCIT concluded that:

  • The assessee failed to explain the source of cash deposits aggregating to Rs.72,89,500/-.
  • This failure was interpreted as acceptance of cash in violation of Section 269SS.
  • A penalty equal to Rs.72,89,500/- was imposed under Section 271D.

3. Assessee’s Case Before the CIT(A)

3.1 Explanation of Cash Deposits

In appeal before the CIT(A), the assessee contended:

  • It had opening cash-in-hand of Rs.52,33,974/- as per its audited balance sheet and return of income for AY 2016-17.
  • A detailed breakup of cash available:
    • At different retail outlets/shops, and
    • With the director,
      had been furnished to the Assessing Officer in the assessment proceedings.
  • The director, Shri Rahul Leekha, appeared in response to summons under Section 131 and:
    • Explained that cash deposits during demonetization were made from cash-in-hand already recorded in the books.
    • Produced the cash account to substantiate the explanation.

On this basis, it was asserted that:

  • Out of total deposits of Rs.72,82,000/- (as per assessee’s working), an amount of Rs.52,33,974/- was directly traceable to opening cash-in-hand.
  • The assessee had therefore discharged its burden of explaining the source of cash; both during assessment proceedings and in response to summons.

3.2 Challenge to Penalty Under Section 271D

The assessee also argued that:

  • Penalty has been initiated on the footing that there is a violation of Section 269SS.
  • However, the penalty order only records that the assessee was unable to explain the source of cash deposits; it does not show that:
    • Any “loan”, “deposit” or “specified sum” was accepted from another person in cash, and
    • The conditions of Section 269SS were actually fulfilled.

Thus, according to the assessee, the pre-conditions for invoking Section 271D were not satisfied.

4. Findings of the CIT(A)

The CIT(A) examined the penalty order vis-à-vis Section 269SS and Section 271D and made the following key observations: