Penalty Under Section 271D Invalid Without Assessment Proceedings: ITAT

Somireddy Sudhakar Reddy has filed the present appeal against the ITO in the Income Tax Appellate Tribunal (ITAT) in Hyderabad “A” Bench, challenging an order passed by the CIT(E), Delhi, dated July 22, 2025 for assessment year 2017-18.

In the relevant assessment year, the assessee did not file any return of income. The AO levied a penalty on the allegation that the assessee accepted the entire sale consideration for an immovable property in cash, which allegedly violated Section 269SS of the Act.

The assessee then approached CIT(A). However, the CIT(A) upheld the AO’s penalty. Being aggrieved with the CIT(A) order, the assessee further approached ITAT Hyderabad. During the hearing, AR argued that there were no assessment proceedings or any other proceedings pending in his case at the time when the penalty proceedings were initiated.

He further added, for imposing a penalty under Section 271D, it is mandatory that the Assessing Officer (AO) record satisfaction about the violation during assessment or other proceedings. Since no such proceedings existed, the penalty itself was invalid.

The assessee also relied on CBDT Circular No. 9/2016, which clarifies that before initiating a penalty under Sections 271D or 271E, the Assessing Officer must refer the matter to the Joint Commissioner (JCIT) during assessment or other proceedings.

The assessee further cited judicial decisions, including the Telangana High Court judgement in Srinivasa Reddy Reddappagari vs. JCIT, which held that recording of satisfaction by the AO is a compulsory requirement.

After considering all the facts, the tribunal noted that the penalty was imposed directly without any prior assessment proceedings or recorded satisfaction.

The Tribunal also relied on the Supreme Court decision in Jai Laxmi Rice Mills and the Telangana High Court judgement, which clearly state that penalty proceedings under Sections 271D/271E cannot survive without satisfaction recorded in assessment proceedings.

As the result, the ITAT held that the penalty of Rs. 43.50 lakh was invalid and liable to be quashed. ITAT allowed the appeal of the assessee.