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

Background and Appeal Context

The dispute in Bhowmick Raj Singh Vs JCIT (ITAT Raipur) arose from an order of the Commissioner of Income Tax (Appeals)-II, Raipur dated 26.02.2016, affirming a penalty of ₹27,00,000 levied under Section 271D of the Income Tax Act 1961 for alleged contravention of Section 269SS in Assessment Year 2010-11.

The assessee, a sole proprietor operating under the name M/s Rajashree Traders, was engaged in wholesale trading of gutka, pan masala and various Reliance Telecom products. A return of income was filed on 30.09.2010 declaring ₹21,08,410. The assessment was concluded under Section 143(3) on 25.03.2013, determining total income at ₹34,73,630.

Subsequently, penalty proceedings were initiated by the Joint Commissioner (Jt. CIT) under Section 271D, concluding in a penalty order dated 31.10.2013, on the ground that the assessee had accepted cash amounts exceeding the threshold prescribed in Section 269SS.

Before the Tribunal, the assessee not only challenged the merits of the penalty but also raised additional legal grounds, assailing:

  • The very validity of the penalty on the ground that the Assessing Officer (AO) had not recorded any satisfaction in the Section 143(3) assessment order regarding initiation of penalty under Section 271D; and
  • The penalty being time-barred under Section 275(1)(c).

The Raipur Bench of the ITAT focused primarily on the jurisdictional question – whether a penalty under Section 271D can validly stand if the AO does not record satisfaction about violation of Section 269SS in the assessment order itself.

Facts Leading to Penalty under Section 271D

Nature of Business and Assessment

  • The assessee carried on wholesale trading of gutka, pan masala and Reliance Telecom products.
  • Return of income for A.Y. 2010-11 was filed on 30.09.2010.
  • Assessment under Section 143(3) was completed on 25.03.2013, enhancing income to ₹34,73,630.
  • In the assessment order, the AO recorded initiation of penalty only under Section 271(1)(c), with no reference at all to alleged violation of Section 269SS or to Section 271D.

Cash Receipts from Buyers

Post assessment, the Jt. CIT, Range Bhilai, examined the assessee’s records and noticed substantial cash receipts from the following five parties, treated as “deposits”/advances:

  1. Bansilal and Sons – from 01.12.2009 – ₹5,00,000
  2. Choudhari Enterprises – from 01.12.2009 – ₹7,00,000
  3. Dhapriya Trading Co. – from 21.12.2009 – ₹5,00,000
  4. Hariom Traders – from 01.12.2009 – ₹5,00,000
  5. H.P & Sons – from 01.04.2009 – ₹5,00,000

Total cash received: ₹27,00,000.

According to the Revenue, each of these amounts was received in cash, exceeded ₹20,000 and thus attracted the prohibition under Section 269SS.

Assessee’s Explanation before Jt. CIT

The assessee consistently maintained that:

  • These were trade advances from prospective buyers, taken only once during the year from each party.
  • The amounts were deposited into the assessee’s bank account and thereafter remitted to the principal supplier for procurement of goods.
  • On receipt of goods from the principal, supplies were made to these parties and their accounts were squared up.
  • The sums were not “loans” or “deposits” within the meaning of Section 269SS, but commercial advances linked to supply of goods.

The written reply supplied to the Jt. CIT clearly described the receipts as “advance against order”.

Rejection by Jt. CIT and Imposition of Penalty

The Jt. CIT rejected the explanation on two broad lines:

  • The assessee’s claim that these were trade advances was not in sync with past business patterns, where over-the-counter cash sales were the normal mode.
  • There was a significant time gap between receipt of alleged advances and the actual sale of goods to the concerned parties, which, in the Jt. CIT’s view, undermined the trade advance theory.

Treating the transactions as acceptance of cash loans/deposits exceeding ₹20,000 in violation of Section 269SS, the Jt. CIT imposed a penalty of ₹27,00,000 under Section 271D by order dated 31.10.2013.

Findings of the Commissioner (Appeals)

The assessee challenged the penalty before the Commissioner (Appeals), who upheld the levy. Key observations of the Commissioner (Appeals) were: