AO fails to record satisfaction before imposing section 271D penalty, order quashed following Jai Laxmi Rice Mills precedent

The ITAT Visakhapatnam held that penalty under section 271D was improperly levied without the AO recording satisfaction as mandated by SC precedent in CIT vs. Jai Laxmi Rice Mills. The AO imposed penalty for alleged contravention of section 269SS regarding cash acceptance by the company from its director, finding no reasonable cause. However, the Tribunal noted that quantum proceedings favored the assessee in both the company's case and the director's case, with additions deleted as creditworthiness and genuineness were established. The penalty order was quashed for lack of proper satisfaction recording.

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Issues involved:
The appeal filed by the Revenue against the penalty order passed under section 271D for the AY 2017-18.

Facts of the case:
The assessee, engaged in manufacturing detergent products, faced a search and seizure operation leading to the discovery of cash deposits during the demonetization period. The source of the cash deposits claimed to be a loan from one of the Directors was disputed by the Ld. AO. The Ld. CIT(A) later deleted the addition after the genuineness of the transactions was proven. Subsequently, a penalty u/s. 271D was proposed by the Ld. AO, which was upheld by the Ld. CIT(A) based on the violation of section 269SS. The Revenue appealed the decision before the ITAT, Visakhapatnam Bench.

Decision on penalty under section 271D:
The Ld. AO levied a penalty of Rs. 1.74 Crs u/s. 271D without recording proper satisfaction, leading to the quashing of the penalty order by the ITAT. The Tribunal held that since there was no satisfaction report recorded in the assessment record, the penalty could not be levied. The decision was supported by the principles of consistency and judicial pronouncements, as the creditworthiness and genuineness of the source of funds were proven beyond doubt. Consequently, the order of the Ld. CIT(A) was upheld, and no interference was required.

Cross Objections by the assessee:
The Cross Objection raised legal issues, asserting that the penalty order was invalid due to the absence of written satisfaction in the assessment order. The Ld. AR argued that since the quantum appeal favored the assessee, penalty u/s. 271D could not be imposed. Legal precedents were cited to support this argument. The Ld. DR contended that penalty proceedings and quantum proceedings are separate, emphasizing the contravention of section 269SS as the basis for penalty imposition.

Conclusion:
The legal issue raised by the assessee in the Cross Objection was allowed in favor of the assessee, leading to the dismissal of the Revenue's appeal and the allowance of the Cross Objection. The ITAT's decision highlighted the importance of recording proper satisfaction before imposing penalties under section 271D, ensuring consistency and adherence to judicial principles.

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