The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) on 15 May deleted a penalty of Rs. 1.01 crore imposed under Section 271D of the Income Tax Act, 1961, holding that penalty proceedings could not survive in the absence of any specific finding by the Assessing Officer regarding violation of Section 269SS. A Bench comprising Accountant Member Annapurna Gupta and Judicial Member Suchitra Kamble allowed the appeal filed by Patel Prakashchandra Ambalal HUF against the order passed by the National Faceless Appeal Centre (NFAC).

“Where Assessing Officer did not record any finding that there had been any violation of section 269SS by the assessee, the penalty could not be levied u/s. 271D.”

The assessee, a Hindu Undivided Family engaged in the business of finance and investment, had filed its return for AY 2017-18 declaring income of Rs 6.93 lakh. During scrutiny assessment under Section 143(3), the Assessing Officer made additions exceeding Rs. 2.06 crore under Sections 37 and 68 of the Act. Subsequently, based on a Revenue Audit objection, penalty proceedings under Section 271D were initiated, alleging acceptance of cash loans and deposits in contravention of Section 269SS.

The Revenue alleged that entries reflected in the cash book constituted acceptance of loans or deposits in cash beyond the permissible limit, attracting a mandatory penalty equal to the amount received. The Additional Commissioner ultimately imposed a penalty of Rs 1.01 crore under Section 271D, which was later affirmed by the CIT(A).

Before the Tribunal, the assessee contended that there was no contravention of Section 269SS and further argued that no finding regarding such a violation had been recorded during the assessment proceedings. It was also submitted that the transactions were already disclosed before the Assessing Officer during scrutiny and that penalty proceedings were initiated merely on the basis of a subsequent audit objection. The Tribunal observed that “merely having a second opinion cannot invoke section 271D.”

The ITAT relied upon the decision of the Supreme Court in Joint CIT vs. Grandhi Sri Venkata Amarendra [(2026) 183 taxmann.com 545], wherein it was held that penalty under Section 271D cannot be levied in the absence of a clear finding regarding violation of Section 269SS. The Tribunal also referred to the Supreme Court ruling in CIT vs. Sahara India Financial Corporation Ltd. [(2023) 153 taxmann.com 225], dealing with cash transactions in areas lacking adequate banking facilities.

Observing that the Assessing Officer had not recorded any categorical finding regarding violation of Section 269SS during assessment proceedings, the Tribunal held that the penalty imposed under Section 271D was unsustainable in law. Accordingly, the ITAT allowed the appeal and deleted the entire penalty of Rs. 1.01 crore imposed on the assessee.

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