Prosecution under cash receipt rules fails where sanction ignored dropped penalty proceedings and was held vitiated.

Prosecution for alleged violation of section 269SS of the Income-tax Act was found unsustainable where the penalty proceeding arising from the same cash transaction had already been dropped by the competent authority. Because the sanction for prosecution was issued without disclosing that material fact, the sanction was treated as having been granted in ignorance of a relevant circumstance, vitiating the basis for prosecution; the prosecution was therefore quashed as bad in law.

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Issues: Whether prosecution for alleged violation of section 269SS of the Income-tax Act, 1961 could be maintained after the penalty proceeding based on the same transaction had been dropped by the competent authority.

Analysis: The assessment and penalty proceedings arose out of the same alleged cash receipts. The competent authority had dropped the penalty proceeding, yet the sanction for prosecution was issued without disclosing that material fact. Since the sanction order was passed in ignorance of the dropping of the penalty proceeding, the basis for launching prosecution was vitiated.

Conclusion: The prosecution was held to be bad in law and was quashed.

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