2023 (11) TMI 116 - AT - Income Tax

Tribunal Overturns Rs. 1.6 Lakh Penalty for Cash Loan Violation, Stresses Consistency in Income Assessment and Penalties.

The Appellate Tribunal vacated the penalty of Rs. 1,60,000 imposed under section 271D of the Income-tax Act for allegedly receiving a cash loan in ... Penalty u/s. 271D - assessee had raised a cash loan from his nephew for making an investment towards purchase of property - AO treated it as undisclosed investment and rejected the claim of the assessee that the investment made by him towards purchase of properties was sourced out of the cash loan as raised from his relative - HELD THAT:- Once the A.O had rejected the claim of the assessee, there was no justification for the department to infer that the assessee had raised any such cash loan from the aforementioned person. Once the AO had concluded that no part of investment in the properties was sourced out any cash loan, but in fact it was the latters undisclosed income that was so utilized for sourcing the same, then, it is beyond comprehension that after having rejected the aforesaid explanation of the assessee how the department could have adopted a view to the contrary and saddled the assessee with penalty u/s 271D. Once the source of money invested by the assessee has been given the color as that of unexplained income and accordingly brought to tax by the AO, thereafter the department could not have taken a contrary view and held that part of the said investment was sourced out of a cash loan raised by the assessee. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271D can be sustained where the assessing officer has disbelieved the assessee's claim of receipt of a cash loan and has held the amount to be the assessee's unexplained income and added it to income. 2. Whether the revenue can adopt internally inconsistent findings - disallowing the cash-loan explanation for assessment purposes and, nonetheless, imposing penalty under section 271D on the basis that such a cash loan was received - in the absence of independent evidence of a cash transaction. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustenance of penalty under section 271D where AO has rejected existence of cash loan and assessed amount as unexplained income Legal framework: Section 269SS prohibits acceptance of loans or deposits otherwise than by an account payee cheque or account payee bank draft and section 271D prescribes penalty for contravention of section 269SS. A penalty under section 271D can be imposed only if a loan/deposit was accepted in contravention of section 269SS. Precedent treatment: No precedents were relied upon or applied in the judgment; the Tribunal decided the matter on facts and principles of consistency and statutory requirements for imposing penalty. Interpretation and reasoning: The assessing officer (AO), in making the assessment, rejected the assessee's claim that part of the investment was financed by a cash loan of Rs.1.60 lakh from a relative and treated the investment as unexplained income, bringing it to tax. Given that the AO had expressly disbelieved the existence of a cash loan and assessed the amount as unexplained income, there was no factual foundation in the assessment record for treating the transaction as a cash loan attracting penalty under section 271D. The Tribunal emphasized that imposition of penalty under section 271D necessarily presupposes the existence of a loan/deposit taken in contravention of section 269SS; where the AO has reached the opposite factual finding and taxed the amount as unexplained income, the department cannot thereafter impose penalty on a contrary factual premise absent independent corroborative material. Ratio vs. Obiter: Ratio - where the AO has rejected the existence of a cash loan and assessed the amount as unexplained income, a penalty under section 271D cannot be sustained in the absence of independent material proving that a cash loan was in fact received. Obiter - observations on the impropriety of department adopting contradictory positions are ancillary to the main reasoning but underscore the principle of consistency in revenue proceedings. Conclusion: The Tribunal held the penalty under section 271D cannot be sustained on the facts because the AO had already rejected the cash-loan explanation and assessed the amount as unexplained income; accordingly, the penalty was vacated. Issue 2: Permissibility of inconsistent departmental findings and the requirement of independent material to support a penalty for receipt of cash loan Legal framework: Administrative and adjudicatory decisions must be factually consistent; imposition of a statutory penalty requires proof of the factual predicate for the penal provision. The revenue cannot, in the same assessment cycle, take mutually inconsistent positions without independent evidence supporting each alternative finding. Precedent treatment: No prior authorities were cited to modify or distinguish; the Tribunal applied the logical and evidentiary requirement that independent material must exist if the department wishes to adopt a view contrary to the AO's finding. Interpretation and reasoning: The Tribunal reasoned that once the AO had characterized the impugned amount as the assessee's unexplained income (i.e., the AO did not accept that it represented a loan accepted in cash), the department lacked justification to subsequently hold that the same amount represented a cash loan attracting penalty under section 271D. The record contained no independent material proving the receipt of Rs.1.60 lakh in cash from the relative; the only basis for the claim of a cash loan was the assessee's own explanation, which the AO had rejected. The Tribunal concluded that it was impermissible for the Addl. CIT to adopt a contrary factual stance absent fresh evidence corroborating the cash transaction. Ratio vs. Obiter: Ratio - the revenue cannot sustain a penalty predicated on a factual finding that contradicts the AO's assessment unless independent evidence exists; such internal inconsistency requires rejection of the penalty. Obiter - general observations on the need for coherence in departmental approaches and the absence of independent corroboration are explanatory but supportive of the main holding. Conclusion: The Tribunal held that in absence of independent material corroborating receipt of a cash loan, and given the AO's prior rejection of that explanation and taxation of the amount as unexplained income, the imposition of penalty under section 271D was unsustainable and therefore vacated. Cross-Reference: The conclusions on both issues are interdependent - the finding that the AO rejected the cash-loan explanation (Issue 1) directly precludes a contrary penal finding by the Addl. CIT in the absence of independent evidence (Issue 2); the Tribunal set aside the penalty for both reasons.