2023 (4) TMI 892 - AT - Income Tax

Penalty under Income Tax Act voided by Appellate Tribunal due to procedural error

Shri Ramachandran Bandhuvula, Hyderabad Versus Income Tax Officer Ward 3 (1) Hyderabad

The Appellate Tribunal set aside the penalty imposed by the CIT (A) NFAC for the assessment year 2017-18 under section 271D of the Income Tax Act. The ... Levy of penalty u/s 271D - assessee has violated the provisions of section 269SS - assessee has received cash on different dates from two people regarding sale of immovable property - case was selected for limited scrutiny under CASS for examination of ‘cash deposited during the demonetization period’ - HELD THAT:- As during the year, there is no sale of property as is discernible from the assessment order and the assessment order refers to the deposit of cash during demonetization period which was accepted by the Assessing Officer himself being out of sale of immovable property on 20.01.2016 in cash. Therefore, provisions of section 269SS, if any, has been violated in the assessment year 2016-17 and not in A.Y 2017-8. Therefore, the very initiation of penalty proceedings u/s 271D for the A.Y 2017-18 is void abinitio and therefore, the order of the CIT (A) NFAC confirming the penalty u/s 271D of the Act has no legs to stand. We, therefore, set aside the order of the CIT (A) NFAC and direct the Assessing Officer to cancel the penalty. The grounds raised by the assessee are accordingly allowed. 1. ISSUES PRESENTED AND CONSIDERED Whether penalty under section 271D (for acceptance of cash in contravention of section 269SS) can be levied in assessment year 2017-18 where the alleged cash receipt (sale consideration) occurred on 20.01.2016 and was offered as long-term capital gain in the return for A.Y.2016-17. Whether initiation and adjudication of penalty proceedings for A.Y.2017-18 is valid where the assessing officer in the assessment for A.Y.2017-18 accepted the explanation that the cash deposit during the demonetisation period (7.12.2016) represented sale proceeds received on 20.01.2016 and income for that transaction was assessed in A.Y.2016-17. Whether the appellate authority correctly confirmed the penalty under section 271D despite (a) acceptance of returned income by the assessing officer in assessment proceedings, and (b) reliance on case law declared before the demonetisation period to reject the assessee's explanation. Whether penalty under section 271D is automatic on proof of contravention of section 269SS, or whether circumstances such as voluntary disclosure, payment of tax and bona fide belief furnish a reasonable cause negating penalty. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Temporal incidence of contravention and appropriate assessment year for section 269SS/271D liability Legal framework: Section 269SS prescribes the mode of receipt (account payee cheque/bank draft/ECS) for specified sums of Rs.20,000 or more; section 271D prescribes penalty equal to the amount of loan or deposit taken/accepted in contravention of section 269SS. Penal liability attaches to the act of accepting cash in contravention of section 269SS. Precedent treatment: Authorities were cited by the Revenue to uphold the constitutional and policy validity of sections 269SS/271D and to support imposition of penalty for contraventions; appellant relied on earlier decisions recognizing reasonable cause and bona fide conduct as mitigating against penalty. The Tribunal considered those precedents in context. Interpretation and reasoning: The Tribunal examined the factual matrix and the assessment records and found that the sale of immovable property for Rs.10,48,000/- occurred on 20.01.2016 and that the cash remained with the assessee until deposited on 07.12.2016 during demonetisation. The Tribunal noted that the long-term capital gain arising from that sale was declared and assessed in A.Y.2016-17. Since the prohibited mode of receipt (cash) and the receipt itself occurred in the previous year relevant to A.Y.2016-17, any contravention of section 269SS, if at all, occurred in A.Y.2016-17 and not in A.Y.2017-18. Ratio vs. Obiter: Ratio - the statute-based liability under section 269SS/271D is tied to the time of taking/accepting the cash; consequently, penalty proceedings must relate to the assessment year in which the contravention occurred. Obiter - remarks on policy behind sections 269SS/271D and demonetisation context. Conclusion: Penalty proceedings initiated and levied for A.Y.2017-18 were erroneously framed because the accepted facts established the event of receipt occurred in the earlier year (A.Y.2016-17); initiation of penalty for A.Y.2017-18 is therefore void ab initio on temporal grounds. Issue 2 - Effect of acceptance of explanation in assessment proceedings on initiation/continuation of penalty proceedings for a different year Legal framework: The assessing officer's acceptance of returned income in assessment proceedings is a factual and adjudicatory finding; penalty proceedings under section 271D require distinct notice and show-cause process but must be grounded on contravention in the relevant period. Precedent treatment: The appellate submissions pointed to authorities holding that penalty is not automatic and that bona fide disclosures and tax payment bear on penalty liability. The Revenue relied on precedents affirming the provisions' constitutionality and purpose of curbing unaccounted cash. Interpretation and reasoning: The Tribunal observed that the A.O. had, in the assessment order for A.Y.2017-18, accepted that the cash deposit during demonetisation (7.12.2016) represented sale proceeds received on 20.01.2016 and that the capital gain was declared for A.Y.2016-17. Given that acceptance, the factual foundation for levying penalty in A.Y.2017-18 was absent. The Tribunal concluded that where the assessment itself records that the cash relates to an earlier year and is reflected in returns/assessment, initiation of penalty for a subsequent year is untenable. Ratio vs. Obiter: Ratio - acceptance of factual position in assessment which fixes the date of receipt determines the correct year for penalty proceedings; omission to align penalty proceedings with the year of contravention renders those proceedings void. Obiter - discussion that acceptance in assessment proceedings weighs against a finding of deliberate contravention for a later year. Conclusion: The Assessing Officer erred in initiating and levying penalty for A.Y.2017-18 after having accepted that the transaction and receipt occurred in the earlier year; penalty proceedings for the later year are void and must be cancelled. Issue 3 - Merits of confirming penalty where appellate authority rejected the assessee's reliance on pre-demonetisation case law and emphasized strict liability under sections 269SS/271D Legal framework: While sections 269SS and 271D establish the mode of receipt and penal consequence, judicial decisions have recognized that penalty is not necessarily automatic and that reasonable cause/bona fide belief can constitute a defense to penalty; however, higher courts have also upheld the constitutionality and strict operation of these provisions. Precedent treatment: The CIT(A) relied on authorities upholding the legislative intent and constitutionality of sections 269SS/271D and distinguished the appellant's precedent reliance on the ground those decisions pre-dated demonetisation; the Tribunal treated such reliance as inapposite because the temporal locus of contravention, not the demonetisation context, was decisive. Interpretation and reasoning: The Tribunal did not endorse the CIT(A)'s reasoning that the earlier authorities are inapplicable merely because they pre-dated demonetisation. Rather, it focused on the fact that the assessing officer had already accepted the source, date and assessment-year treatment of the cash receipt. Given that acceptance and the absence of any contention that the contravention occurred in A.Y.2017-18, the CIT(A)'s confirmation of penalty for A.Y.2017-18 lacked a factual and legal foundation. On the broader question of bona fide belief and voluntary disclosure, the Tribunal observed these factors were relevant but did not need extensive treatment once the temporal error was established. Ratio vs. Obiter: Ratio - appellate confirmation of penalty cannot stand where the underlying assessment accepts the transaction as occurring in an earlier year; reliance on general precedents about strictness of provisions does not cure the fundamental temporal misplacement of penalty proceedings. Obiter - comments on applicability of pre-demonetisation authorities to cases arising in the demonetisation period. Conclusion: The CIT(A)'s confirmation of penalty for A.Y.2017-18 was unsustainable because it disregarded the accepted assessment finding on timing of receipt; confirming the penalty on that basis had no legs to stand and was set aside. Issue 4 - Whether penalty under section 271D is automatic irrespective of voluntary disclosure, payment of tax and bona fide belief Legal framework: Section 271D prescribes a penalty equal to the amount taken/accepted in contravention; jurisprudence recognizes that imposition of penalty requires consideration of circumstances and that reasonable cause or bona fide conduct may negate or mitigate penalty. Precedent treatment: Both sides relied on decisions - Revenue on decisions upholding the statutory scheme; assessee on decisions recognizing reasonable cause and bona fide belief as relevant to penalty. The Tribunal acknowledged these lines of authority but found them unnecessary to decide finally in view of the temporal misplacement of the penalty. Interpretation and reasoning: The Tribunal noted the assessee's voluntary declaration of capital gain in the earlier assessment year and acceptance by the A.O. as indicia of lack of mala fide or intent to defraud. While the Tribunal did not undertake a full exercise of balancing these factors because of the primary infirmity (wrong year), it recorded that penalty is not strictly automatic and that voluntary disclosure and payment of taxes are relevant considerations in penalty adjudication. Ratio vs. Obiter: Obiter - the Tribunal's observations that penalty is not mechanical and that bona fide conduct/disclosure merit consideration were not necessary to decide the appeal but provide guidance for proper adjudication where temporal issues do not preclude penalty proceedings. Ratio - where the contravention is established in a different assessment year, penalty proceedings for a subsequent year cannot be sustained. Conclusion: Even accepting that voluntary disclosure and bona fide belief are relevant to penalty assessment, the decisive ground for allowing the appeal is that the alleged contravention occurred in A.Y.2016-17; therefore penalty for A.Y.2017-18 cannot be sustained. The Assessing Officer is directed to cancel the penalty for A.Y.2017-18.