ITAT deletes penalty under section 271D due to defective notice switching from section 271DA violating fair hearing rights

The ITAT Chennai allowed the assessee's appeal and deleted the penalty levied under section 271D. The tribunal found the penalty notice fundamentally defective as the JCIT initially initiated proceedings under section 271DA in January 2022 but later corrected to section 271D just 13 days before imposing penalty. This procedural error violated Article 14 and denied the assessee fair hearing rights under section 274. The tribunal held that sections 271D and 271DA are distinct provisions with different applications, and the defective notice vitiated all subsequent proceedings, making the penalty legally unsustainable.

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Issues Involved
1. Validity of the penalty notice issued under Section 271DA instead of 271D.
2. Whether the sale consideration received in cash of Rs. 1,14,00,000/- attracted penalty under Section 271D.
3. Whether penalty should have been levied only on advances of Rs. 4.20 lakhs received in cash.

Issue-Wise Detailed Analysis

1. Validity of the Penalty Notice Issued under Section 271DA Instead of 271D

The assessee challenged the penalty notice on the grounds that it was issued under Section 271DA instead of Section 271D. The Appellate Tribunal noted that the JCIT initiated the penalty proceedings under Section 271DA due to a typographical error, which was later corrected. However, the Tribunal found that this error was not merely typographical but a significant mistake that affected the validity of the penalty notice.

The Tribunal emphasized that Section 271DA pertains to violations of Section 269ST, while Section 271D pertains to violations of Section 269SS, and both sections are distinct. The Tribunal cited several judgments, including CIT vs. Jai Laxmi Rice Mills [379 ITR 521(SC)], to support the argument that the penalty notice was invalid due to the initial incorrect section. Consequently, the penalty levied was deemed unsustainable in law.

2. Whether the Sale Consideration Received in Cash of Rs. 1,14,00,000/- Attracted Penalty under Section 271D

The assessee argued that the sale consideration received in cash did not attract penalty under Section 271D because the cash transactions occurred in an earlier assessment year (AY 2014-15) and were adjusted in the relevant year (AY 2017-18). The JCIT did not accept this explanation and imposed a penalty of Rs. 1,18,20,000/-.

The Tribunal found that the JCIT did not address the assessee's assertion that there were no cash transactions in the relevant year. The Tribunal also noted that the term "any specified sum" was inserted in Section 269SS only by the Finance Act, 2015, effective from 01.06.2015, and therefore, no penalty could have been levied for the transactions in AY 2014-15. The Tribunal concluded that the penalty under Section 271D was not warranted for the cash received in AY 2017-18, as it was merely an adjustment of the amount received in AY 2014-15.

3. Whether Penalty Should Have Been Levied Only on Advances of Rs. 4.20 Lakhs Received in Cash

The assessee contended that, without prejudice, the penalty should have been levied only on the advances of Rs. 4.20 lakhs received in cash. The Tribunal agreed with this contention, noting that even if the penalty were to be levied, it should have been only for the Rs. 4.20 lakhs received in cash on 06.10.2016, and not the entire Rs. 1.14 crores.

The Tribunal referred to a similar case, ITO v. R. Dhinagharan (HUF) [in ITA No.3329/Chny/2019 for AY 2016-17], where the penalty was deleted on the grounds that the entire sale consideration was disclosed in the Profit and Loss Account, and there was no generation of black money. The Tribunal concluded that the penalty of Rs. 1.14 crores was excessive and not justified.

Conclusion

The Tribunal allowed the appeal filed by the assessee, finding that the penalty notice issued under Section 271DA was invalid, and even if the penalty were to be levied, it should have been only for Rs. 4.20 lakhs. The penalty of Rs. 1,18,20,000/- was deemed unsustainable and was deleted. The appeal was allowed, and the order was pronounced on the 29th day of May, 2024, in Chennai.

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