Rejected Books of Account Cannot Be Selectively Relied Upon to Impose Section 271DA Penalty: ITAT Hyderabad Delivers Landmark Ruling in Vasavi Developers Case

Overview of the Dispute

The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has rendered a significant ruling in the matter of Vasavi Developers Vs ACIT, striking down penalties imposed under Section 271DA of the Income Tax Act, 1961, for alleged violations of Section 269ST. The Tribunal's ruling rests on a foundational principle of administrative fairness — the Revenue cannot simultaneously discard an assessee's books of account as unreliable for income computation purposes and then selectively resurrect those very same books to fasten a 100% monetary penalty for alleged cash receipt violations.

The five appeals, spanning assessment years 2019-20 through 2023-24, arose from identical penalty orders and were consolidated for adjudication through a single order, given the commonality of facts and legal issues across all years.

Background: Search Operations and Discovery of Parallel Tally Data

A search and seizure operation under Section 132 of the Income Tax Act, 1961 was carried out on 17.08.2022 across multiple business and residential premises of the Vasavi Group. The Investigation Wing seized a substantial volume of incriminating material — both physical documents such as loose sheets, original MOUs, and vouchers, and electronic data stored in hard disks and pen drives. These electronic devices were inventorised as Annexure A/VG/MS/51 and Annexure A/VG/CORP/ED/3, and were accompanied by certificates under Section 65B of the Indian Evidence Act, 1872.

The seized tally data allegedly revealed a parallel set of books capturing unaccounted cash receipts from customers in connection with the sale of flats, villas, and commercial units across various projects of the Vasavi Group.

Statements under Section 132(4) of the Act were recorded from several key individuals, including:

  • Shri Y. Vijay Kumar, Managing Partner (CMD) of Vasavi Group
  • Shri K.P. Durga Prasad, CFO
  • Shri G. Ramdev Reddy, GM (Admin)
  • Shri Masani Srinivas, Accounts Manager
  • Shri Abhishek Chanda, Partner

Shri Y. Vijay Kumar admitted that entries in the tally books reflected actual transactions of the group. The group subsequently offered additional income of Rs. 400 crores for the entire group across all entities, to settle discrepancies and avoid protracted litigation.

Assessment Proceedings and Rejection of Books

During assessment proceedings under Section 143(3) read with Section 147 of the Act, the Assessing Officer (AO) noted that the seized tally data revealed cash receipts not recorded in the regular books. The AO identified two categories of on-money receipts:

  1. Direct on-money receipts from customers
  2. On-money routed through partners under the head of partner's contribution

The AO concluded that both the regular books and the secondary tally data were incomplete and unreliable. The secondary tally data had multiple deficiencies — payables to landlords recorded under incorrect heads, unexplained inter-project and intra-project fund transfers, and inadequately explained partner transactions.

Consequently, the AO rejected the books of account under Section 145(3) of the Act and proceeded to estimate profit at 16% on gross receipts as quantified from the seized tally data, after factoring in the 15% on-money profit rate offered by the assessee.

Initiation of Penalty Proceedings Under Section 271DA

Following the assessment, the AO forwarded a proposal dated 09.08.2024 to the Additional Commissioner of Income Tax, Central Range-3, Hyderabad, for initiating penalty proceedings. A show-cause notice under Section 274 read with Section 271DA was issued on 22.08.2024, followed by a final show-cause notice on 14.02.2025.

The Addl. CIT, after examining the tally data, determined that the assessee had received Rs. 61,22,43,906/- in cash across multiple occasions. Upon further scrutiny during penalty proceedings, this figure was refined and reduced to Rs. 11,90,09,000/-, which represented transactions genuinely in excess of Rs. 2,00,000/- from individual customers on a single day, in a single transaction, or relating to a single event — in violation of Section 269ST.