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The Income Tax Appellate Tribunal in Hyderabad made a decision in the case of Hari Krishna Leela Prasad Paladugu, R/o. Hyderabad. Versus The Income Tax Officer, Ward-6 (1), Hyderabad. - 2025 (12) TMI 1712 - ITAT HYDERABAD. They said that the government cannot impose penalties under Section 271D of the Income Tax Act 1961. This is because the people got the cash as part of agreements they made before the law was changed. The Income Tax Appellate Tribunal decision is important because it shows that the government has to consider when the law was made when it decides to impose penalties. The Hari Krishna Leela Prasad Paladugu case also shows that the government has to think about the doctrine of cause under Section 273B. This means that the government cannot just impose penalties without thinking about the situation. The Income Tax Appellate Tribunal decision, in the Hari Krishna Leela Prasad Paladugu case is a deal because it helps protect people from getting penalties when they do not deserve them. The ruling is about questions regarding the use of anti-black money rules for deals that are based on contracts that already exist especially when it comes to the transfer of land and buildings. The ruling is important for understanding how anti-black money provisions apply to these kinds of transactions. The anti-black money provisions are being used to look at transactions that involve property transfers, which is a big deal. This is about the anti-black money provisions and how they work with existing contracts, for land and buildings.
Factual Background of the Case
The person who is appealing a taxpayer made a deal to sell a piece of land on May 15 2015. When this happened he got some money upfront Rs. 5,00,000 In cash from the person who wanted to buy the land. On April 11 2016 the final papers, for the sale were signed in front of a Sub-Registrar and the rest of the money Rs. 15,78,000 Was paid in cash while some people were watching. The whole deal, including the money paid in advance and the rest of the money was completely shown in the appellants income tax return, for the year 2017-18. All the taxes that had to be paid were paid on time. Everything was done honestly without hiding anything. The appellant paid all the taxes for the advance and the balance consideration. The officer in charge of checking taxes started a process to punish the person under Section 271D of the Income Tax Act. This was because the person got Rs. 15,78,000 In cash when they registered the sale deed. The officer said this was against the rules of Section 269SS, which was changed on June 1 2015. The change in the rules meant that for deals related to property Section 269SS would apply. This meant that people could not accept more than Rs. 20,000 In cash for these deals which's what the Income Tax Act said. The officer was looking at the receipt of Rs. 15,78,000 In cash during the registration of the sale deed. Said it was, against the rules of the Income Tax Act specifically Section 269SS. The Assessing Officer said the person had to pay a penalty that was the same as the amount of money they got in cash. The Commissioner then agreed with the Assessing Officer. The person who had to pay the penalty did not like this decision so they went to the Income Tax Appellate Tribunal to appeal. The person was unhappy, with the decision of the Assessing Officer and the Commissioner so they took their case to the Income Tax Appellate Tribunal.
Legal Framework: Understanding Section 269SS and Its Amendment
Pre-Amendment Position
Before June 1 2015 the Income Tax Act 1961 had a rule. This rule was in Section 269SS. It said that people could not accept more than Rs. 20,000 In cash for loans or deposits. The Income Tax Act, 1961 wanted people to use account payee cheques or account payee bank drafts, for these transactions. They could also use clearing systems. The main goal of the Income Tax Act 1961 was to get people to use banks. This would help keep track of money transactions. The Income Tax Act, 1961 wanted to stop money from being made and used in the economy.
The 2015 Amendment
The Finance Act, 2015 made a change to Section 269SS that started on June 1 2015. This change made the rules apply to situations by including what are called 'specified sums'. The Finance Act 2015 said that a 'specified sum' is any amount of money that someone gets either as a payment before something happens or for some reason when it comes to selling or buying a house or land even if the sale does not actually happen in the end. The Finance Act, 2015 wanted to make sure that the rules, about 'specified sums' are clear. This change was made to deal with people paying cash when they buy and sell estate. The real estate business has always had a problem with people not telling the truth about their money and not paying all the taxes they owe. The amendment was specifically designed to address cash transactions, in real estate dealings.
The new rule changed everything about how people buy and sell property. From June 1 2015 onwards if someone gives you more, than Rs. 20,000 For a property you have to put that money in a bank. You cannot take the money directly from the person. This rule applies to all property transactions even if the sale does not happen in the end. So if someone pays you money to buy a property and then decides not to buy it you still have to follow this rule. The property transactions have to go through the bank that is what the new rule says about property transactions and how people deal with property transactions.
Section 271D: The Penalty Provision
Statutory Text and Interpretation
Section 271D of the Income Tax Act 1961 says that people who break the rules of Section 269SS will have to pay a penalty. The rules say that if someone takes a loan or accepts money in a way that is not allowed by Section 269SS then that person will have to pay a penalty. This penalty is the amount as the loan or the money they took. The Income Tax Act 1961 is very clear about this. The penalty for breaking the rules of Section 269SS is really high. It is one hundred percent of the money that was taken which's a lot. The penalty is equal, to the amount of money that was received which means it is a severe penalty. Sub-section (2) of Section 271D vests the power to impose such penalty with the Joint Commissioner of Income Tax.
Prerequisites for Imposing Penalty
The Supreme Court made a decision in the case of Commissioner of Income Tax, Panchkula Versus M/s Jai Laxmi Rice Mills - 2015 (11) TMI 1453 - Supreme Court. They said that penalty proceedings, under Section 271D are connected to assessment proceedings. The Court said the Assessing Officer has to write down that they think Section 269SS was broken in the assessment order. This has to happen before penalty proceedings can start.
The Supreme Court wants to make sure that penalties are not given out automatically. The Assessing Officer has to think about it during the assessment process. If the Assessing Officer does not write down that they think Section 269SS was broken then the penalty proceedings are not valid. The penalty proceedings will not be supported by law if this is missing. The Commissioner of Income Tax and Jai Laxmi Rice Mills Ambala City case is important because it talks about Section 271D and Section 269SS.
Section 273B: The Reasonable Cause Exception
Purpose and Scope
The Income Tax Act of 1961 has a section called Section 273B. This Section 273B is really important because it helps protect people from getting penalties that're too harsh or unfair. The Income Tax Act of 1961 and its Section 273B make sure that penalties are imposed in a manner. The rule says that no matter what sections 271271A, 271AA, 271B, 271BB, 271C, 271CA, 271D, 271E or parts of section 273 say the person or the assessee will not have to pay a penalty for not doing something they were supposed to do. This is only if they can show that there was a reason for not doing it. The person or the assessee has to prove that they had a cause, for not doing what sections 271271A271AA, 271B, 271BB, 271C, 271CA, 271D, 271E or parts of section 273 said they should do.
The tax laws say that people do not always break the rules on purpose. Sometimes things just go wrong. That is not the persons fault. Tax laws can be really hard to understand. People can make honest mistakes. If someone can show that they had a reason, for not following the tax laws then they might not get in trouble. The person who owes taxes has to prove that they had a reason. They have to show evidence and explain what happened. The courts want to make sure that people are treated fairly so they look at each situation carefully. The courts think that the idea of having a reason should be understood in a way that helps people not hurts them. Tax laws are complicated. The concept of having a good reason or what we call reasonable cause is important to understand.
Judicial Interpretation of Reasonable Cause
The term ' cause' is not clearly explained in the Income Tax Act. However judges have made decisions that help us understand what it means.
In the case of Azadi Bachao Andolan v. Union of India the Delhi High Court said that 'reasonable cause' is when something stops a person from following the rules. This person is someone who's fairly smart and careful and is acting like a normal person would. They are not being lazy or neglecting things on purpose.
In another case Price Waterhouse Coopers (P.) Ltd, the idea of ' cause' is important too. The concept of ' cause' is used to figure out if someone has a good reason, for not doing something they were supposed to do. The Supreme Court said that the Court of International Trade or CIT for short understands that people make mistakes. These mistakes are real. They happen by accident. The Supreme Court thinks that these kinds of mistakes are a reason, for not doing what you are supposed to do. The Court of International Trade or CIT sees that everyone makes errors sometimes.
The Tribunal's Reasoning and Decision
Analysis of Contractual Timeline
The Income Tax Appellate Tribunal started looking at what happened one step at a time. They saw that the agreement to sell was signed on May 15 2015. This was before the Income Tax Act was changed on June 1 2015 the part, about Section 269SS. At that time the Income Tax Act did not say that people could not use cash when buying or selling property. So when the buyer gave the seller Rs. 5,00,000 On the day they signed the agreement it was okay because that is what the law allowed at that time. The Income Tax Appellate Tribunal looked at the Income Tax Act. The agreement to sell to understand what was going on with the Income Tax Act and the agreement to sell. The Tribunal saw that the parties had made a promise to each other that they had to keep, which was agreed on before the law was changed. When they got the rest of the money it was just to complete what they had already promised to do. The Tribunal said that getting this balance of the money was part of the agreement that the parties had made before the law changed. This agreement was very important. The parties had to follow it.
Bona Fide Belief and Good Faith
The Tribunal agreed with the appellant that people really believed cash payments made according to an agreement signed before the law changed would not be affected by the rule. This belief made sense because the agreement was made before the law changed and the people involved were just doing what they promised to do in the agreement. The Tribunal saw that the deal was real everything was reported in the income tax return and all the taxes that were supposed to be paid were paid. The Tribunal looked at the cash payments made under the agreement. Said they were okay. The agreement was the thing here and the Tribunal thought it was fair that the people involved did not think the new rule would apply to the cash payments they made according to the agreement. The people involved did not try to hide anything or report money than they actually made. This situation is different from the cases that the laws against black money are meant to deal with. The laws against money are supposed to stop people from hiding their income but in this case there was no attempt to do that. The black money laws are, in place to prevent people from cheating. This case does not fit the typical pattern of cheating that these laws are meant to address.
Application of Section 273B
The Tribunal said that the situation with the case clearly showed that there was a reason for what happened as explained in Section 273B. The fact that there was already an agreement and the timing of this agreement with the law and that everything about the deal was out in the open and that the right taxes were paid, all of these things together showed that the person who appealed the decision was acting honestly.
The Tribunal also made it clear that the rules, about penalties should not be applied without thinking about the details of the situation and whether or not someone was trying to do something on purpose with the Tribunal focusing on the person who appealed the decision and Section 273B.
Precedential Support
The Tribunal looked at what other courts had decided in the past to come to its decision. It mentioned a case called Jai Laxmi Rice Mills where the Supreme Court said that you cannot punish someone without following the steps. The Tribunal also talked about National Thermal Power Co. Ltd. V. CIT. In this case the Supreme Court said that if someone makes a mistake or does something wrong, by accident and they really did not mean to they should not be punished. The Tribunal used these cases to support what it was saying about penalties. The Tribunal was saying that penalties should not be given if the rules were not followed correctly and it used the Jai Laxmi Rice Mills case to make this point. The Tribunal also used the National Thermal Power Co. Ltd. V. CIT case to show that penalties should not be given for mistakes that are made in good faith. The Tribunal got support from the decisions it made earlier in cases. These cases include Srinivasa Reddy Reddappagari v. Jt.. Ramkumar Reddy Satty v. JCIT. In these Tribunal cases penalties were removed because there was a cause. The Tribunal looked at these cases. Made its decision. The Tribunal decisions were important to the Tribunal. The Tribunal used its decisions to make a new decision. The Tribunal cases of Srinivasa Reddy Reddappagari v. Jt. CIT and Ramkumar Reddy Satty v. JCIT were helpful, to the Tribunal.
Implications of the Ruling
Protection for Pre-Amendment Agreements
The decision is very important because it says that changes to laws that impose penalties should not be applied to contracts that were made before these changes. People who made agreements to buy or sell property before June 1 2015 and then got cash for these agreements can get protection under Section 273B if they can show a reason for what they did. This means that people who did things that were legal at the time will not be punished on. It is fair to protect people who were doing the thing and it stops bad things from happening to them because of something they did a long time ago. The decision is, about protecting people who made contracts for property before the law changed.
Emphasis on Bona Fides
The tax people should not be too harsh. They need to think about the situation and what the taxpayer did. If the taxpayer really believed they were doing the thing told the truth and paid their taxes that is very important when the tax people want to punish them. The court says the tax people should look at what happened and how the taxpayer acted before they automatically give them a penalty, for making a small mistake with the rules. The tax administration should be fair. Not just follow the rules without thinking. The taxpayers good faith and honesty are what matter when the tax people decide what to do.
Procedural Safeguards
The decision is in line with what the Supreme Court said in Jai Laxmi Rice Mills. They said it is necessary to record why they think something is wrong before they start penalty proceedings against the taxpayer. This is a thing because it means the penalties are not given out without a good reason. The Supreme Courts guidance in Jai Laxmi Rice Mills is important because it helps taxpayers, like the Jai Laxmi Rice Mills get a deal. The taxpayers get a chance to explain their side of the story during the assessment process itself which is a big part of the Jai Laxmi Rice Mills decision.
Practical Guidance for Taxpayers and Practitioners
Documentation and Disclosure
People who pay taxes and are in situations should make sure they have all the papers in order. This means they need to write down the date they agreed on something and what they agreed on. The date they made this agreement is really important when it comes to the date the new rules started. If you want to show that you have a reason, for not paying something you need to have all your receipts and you need to pay your taxes on time. This will help your case if you need to use Section 273B to protect yourself. You should also keep all the letters and emails that show you had a contract before the new rules started and show these to the people who collect taxes.
Demonstrating Reasonable Cause
When you get a penalty notice under Section 271D you should say that Section 273B applies to your situation. You need to give an explanation of what happened. This explanation should talk about what happened and when what the law said at the time you made the agreement what you believed was right when you took action and that you did not try to avoid paying taxes. You should also show that you told the truth about everything and that you paid your taxes. Make sure to point out that you were honest. Followed the tax rules.
You have to show that you have a reason for what you did so you need to provide a lot of details. This is important for Section 271D penalty notices. You are trying to show that you meet the rules of Section 273B.
The explanation you give should be clear and easy to understand. It should show that you did not try to cheat on your taxes. You should talk about Section 273B. How it applies to you. This is the key, to responding to penalty notices under Section 271D.
Challenging Penalty Orders
If the government imposes penalties even when taxpayers have a reason for what they did taxpayers should go ahead and appeal the decision. The taxpayer has to show that they have a reason but if they can provide believable evidence the tax people have to think about it in a fair way. This current decision really helps taxpayers who want to challenge penalties when they had an agreement before the rules changed. It affects the money they get later on. The decision is a help for taxpayers who want to challenge penalties in these situations and it supports the idea that penalties should not be imposed when pre-amendment agreements are, in place and control what happens with the money that comes in later.
Comparative Analysis with Other Jurisdictions
The main idea behind this decision is similar to things we see in tax laws in places. The idea that people should not be punished if they have a reason for not following tax laws is something that many countries with similar legal systems agree on. In the United Kingdom people can avoid getting penalties if they have an excuse for filing their taxes late or paying late. The United Kingdom tax system is more forgiving if people have an excuse. In the United States the tax people, the Internal Revenue Service also think that if someone has a reason for not following tax laws they should not get penalties. The Internal Revenue Service, in the United States uses the idea of cause to decide if someone should get penalties for breaking tax laws. The main idea is always the same: tax penalties should be for people who do not follow the rules on purpose or who are very careless not for people who make mistakes or try to do the right thing based on what they think the law says. Tax penalties should punish people who're willful and do not comply, not people who are just trying to follow the law in good faith. The law is complicated. People can make mistakes so tax penalties should be for people who are really trying to cheat, not, for people who are just trying to do their best with tax law.
Policy Considerations
The Tribunal made a decision that's fair from a policy point of view. It balances two things: making sure people pay their taxes and being fair to them. The government wants to stop money and make real estate deals transparent which is a good thing.. The government has to be careful when it comes to punishing people. If people did what they were supposed to do and told the government about their deals it is not right to punish them. This is because they were just doing what they had already agreed to do. Punishing them would be very unfair. Could make people lose trust in the tax system. The tax system and the Tribunals decision on the tax system are important. The Tribunals decision, on tax enforcement is fair. The decision is right because it knows that the main goal of rules against money is to find people who are really avoiding taxes not to punish people who pay their taxes honestly but got stuck in situations when the rules were changing. The rules, against money are supposed to catch genuine tax evaders.
The Income Tax Appellate Tribunal made a decision in the case of Hari Krishna Leela Prasad Paladugu v. Income-tax Officer. This decision is fair to everyone. The Tribunal looked at the Income Tax Act. Decided that some people should not have to pay a penalty. They thought about agreements that people made before the law was changed. They also thought about the idea that people should not be punished if they had a reason for not following the law. This is stated in Section 273B of the Income Tax Act. The Tribunals decision helps people who were stuck in a situation because the law was changed. These people are taxpayers who did not know what to do after the law was changed. The Income Tax Appellate Tribunals decision in Hari Krishna Leela Prasad Paladugu v. Income-tax Officer is a help, to these taxpayers. The decision reminds us of some ideas about taxes. Taxes should not be collected in an automatic way. We need to be able to tell the difference between people who are really trying to do the thing and those who are not. We also need to make sure we follow the steps when dealing with taxes. This ruling is important for people who pay taxes for the professionals who help them and, for the people who collect taxes. It reminds us all that what really matterss what is actually happening with a transaction and what the person paying taxes intended to do not just whether they followed all the rules exactly. Going forward, this precedent will undoubtedly assist similarly situated taxpayers in defending against harsh penalty impositions and will guide tax authorities in exercising their discretion more judiciously.