AO Can't Refer Assessee's File To Joint Commissioner For Levying Penalty U/S 271D Of IT Act Without Recording “Satisfaction”: Delhi HC

The Andhra Pradesh High Court has held that an Assessing Officer cannot refer an assessee's file to the Joint Commissioner of Income Tax for levying penalty under Section 271D of the Income Tax Act, 1961 without recording its “satisfaction”.

Section 271D of the Income Tax Act prescribes the penalty to be imposed on a taxpayer for taking loan or deposits in contravention of Section 269SS. 

As per Section 269SS, all loans or deposits of over Rs.20,000 must be taken through banking channels.

A division bench of Justices G.Narendar and Kiranmayee Mandava held,

“The satisfaction of the Assessing Officer is required to be recorded because the officer, who passed the assessment order would not be levying the penalty under Sec.271D of the Act, unless it is recorded in the assessment order, he cannot refer the file to superior officer i.e., Joint Commissioner, for initiating levy of penalty. 

Unless the Assessing Officer, who is the primary authority, based on the material before it, during assessment proceedings, arrives at a finding that there has been a violation of the provisions, like in the present case, of Section 269SS, there will not be any occasion to the Joint Commissioner, who is not the Assessing Officer, to exercise his jurisdiction to levy Penalty under Section 271D.”

In the case at hand, Petitioner had challenged penalty proceedings under Section 271D.

As per the AO, the Petitioner could not explain cash transactions amounting to Rs.6.65 crores with one Balakrishna Rao. The AO further reported that over Rs. 1 crore were paid by the Petitioner in excess, over and above the loans accepted.

The Petitioner on the other hand claimed that he did not take any loans in cash as alleged, and that the said transactions were received through Banking channels.

The AO however cited a letter dated stated to have been issued by the petitioner to Balakrishna Rao, acknowledging the availment loan of Rs.6 3 crores, and pledging of immovable properties as collateral security.

The AO concluded that the petitioner had financial transactions with Balakrishna Rao, outside the books and outside banking channels for the subject assessment year. Therefore, the AO referred the file to the Joint Commissioner of Income Tax, calling for appropriate action. The JC then initiated penalty proceedings under Section 271D.

Petitioner argued that no satisfaction was recorded in the assessment order with regard to levy of penalty under Section 271D of the Act. The petitioner relied on the Apex Court's decision in CIT Vs. Jai Laxmi Rice Mills, Ambala City (2015) to contend that there was no evidence before the AO to show that the petitioner had accepted the loans in cash.

The Department argued that an alternative remedy of appeal lies under Income Tax Act against the order impugned. Thus, the Writ Petition would not be maintainable.

The High Court however rejected Department's contention, stating that the AO, except for relying on Petitioner's letter, did not record any finding that there has been any violation of the provisions of Section 269SS by the assessee.

“...nor was any satisfaction recorded to the effect that the alleged transaction of acceptance of loan would attract penal consequences. In the absence of any finding to the said effect, in our considered view, the penalty cannot be levied.”

Court said in the absence of a finding by the AO to the effect that the petitioner had violated the provision, a presumption can be drawn that the department has accepted the explanation furnished by the petitioner denying allegation of loan in cash. 

“Therefore, it can unhesitatingly be said that, having satisfied with the explanation of the assessee, the Assessing Officer did not record any satisfaction in the assessment order to the effect that the provisions of Section 269SS of the Act, are violated and did not contemplate levy of penalty under Sec.271D of the Act.”

Accordingly, writ petition was allowed and order passed under Section 271D was set aside.

Appearance: Senior Standing Counsel Vijay Kumar Punna for Respondent

Case title: Grandhi Sri Venkata Amarendra v. Joint Commissioner Of Income

Case no.: WRIT PETITION NO: 32190/2023

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