ITAT quashes sections 271D and 271E penalties after underlying section 147 reassessment declared void ab initio

The ITAT Mumbai quashed penalties imposed under sections 271D and 271E after the underlying reassessment proceedings under section 147 were declared void ab initio by a coordinate bench. The AO had alleged violations of sections 269SS and 269T regarding loan transactions conducted without account payee cheques or bank drafts. The CIT(A) upheld the penalty despite the quashed reassessment. Following the SC precedent in Jayalakshmi Rice Mills, the ITAT held that penalty proceedings cannot survive when the underlying reassessment order is annulled, ruling in favor of the assessee.

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Issues Involved:
1. Imposition of penalty under Section 271D and 271E of the Income-tax Act, 1961.
2. Validity of reassessment proceedings under Section 147 of the Income-tax Act, 1961.
3. Dependency of penalty proceedings on the outcome of assessment proceedings.

Detailed Analysis:

Issue 1: Imposition of Penalty under Section 271D and 271E of the Income-tax Act, 1961

The appeals concern the imposition of penalties under Sections 271D and 271E of the Income-tax Act, 1961, for the assessment years (AY) 2010-11 and 2011-12. The penalties were imposed due to the assessee's alleged violation of Sections 269SS and 269T, which pertain to the acceptance and repayment of loans or deposits through means other than an account payee cheque or bank draft. The penalties were imposed following reassessment proceedings initiated under Section 147 of the Act.

Issue 2: Validity of Reassessment Proceedings under Section 147

The reassessment proceedings were initiated based on information received from a search conducted at the premises of Dharmadev Infrastructure Limited, identifying 36 benami accounts, one of which was linked to the assessee. The reassessment was quashed by the ITAT on the grounds that any material found during the search should have been used to initiate proceedings under Section 153C, not Section 147. The ITAT held that the initiation of proceedings under Section 147 was void ab initio, rendering any subsequent actions, including the penalty proceedings, invalid.

Issue 3: Dependency of Penalty Proceedings on Assessment Proceedings

The assessee argued that since the reassessment proceedings were quashed, the penalty proceedings could not survive. The CIT(A) rejected this argument, stating that penalty proceedings are distinct from assessment proceedings. However, the ITAT relied on the Supreme Court's decision in CIT vs. M/S Jayalakshmi Rice Mills, which held that penalty proceedings under Section 271D do not survive if the assessment order on which they are based is set aside. The ITAT also referenced the decision of the Co-ordinate Bench in the case of DCIT vs. Karan Empire Pvt. Ltd., which supported the view that penalties initiated under invalid assessment orders do not survive.

Conclusion:

The ITAT concluded that with the quashing of the reassessment order, the penalties under Sections 271D and 271E could not be sustained. The reliance on the Supreme Court's decision in Jayalakshmi Rice Mills and the Co-ordinate Bench's decision in Karan Empire Pvt. Ltd. was pivotal in reaching this conclusion. The ITAT allowed all three appeals, deleting the penalties imposed.

Order:

The appeals of the assessee were allowed, and the penalties under Sections 271D and 271E were deleted. The order was pronounced in the open court on 28 June 2024.

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