2025 (1) TMI 653 - AT - Income Tax

Penalty under Section 271D deleted due to Assessing Officer's failure to record satisfaction before initiating proceedings

Narender Goud Tigulla Hyderabad Versus Income Tax Officer Ward-9 (1) Hyderabad

ITAT Hyderabad held that penalty under section 271D was invalid due to the Assessing Officer's failure to record satisfaction prior to initiating penalty ... Penalty u/s 271D - non recording of satisfaction is a prerequisite condition for initiation of penalty - HELD THAT:- The observations of AO referred to by the CIT(A) in his order to hold that there was proper satisfaction recorded by the learned Assessing Officer, on the observations in the penalty order, but not the satisfaction forming foundation to initiate the penalty proceedings. Requirement of law, as observed in the case of Jai Lakshmi rice Mills [2015 (11) TMI 1453 - SUPREME COURT] and Sreenivasa ready Reddeppagari [2022 (12) TMI 1446 - TELANGANA HIGH COURT] is that prior to the initiation of the penalty proceedings the learned Assessing Officer shall record his satisfaction to initiate the penalty proceedings, which is admittedly absent in this case. Thus direct AO to delete the penalty and the issue decided in favour of the assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:Whether the penalty under Section 271D of the Income Tax Act, 1961, can be levied without recording satisfaction in the assessment order.Whether the proceedings under Section 271D are independent of the assessment proceedings.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legality of Penalty without Recorded SatisfactionLegal Framework and Precedents:Section 271D of the Income Tax Act imposes a penalty for accepting loans or deposits in contravention of Section 269SS, which mandates that such transactions be conducted through specified banking channels. The Supreme Court in Jai Lakshmi Rice Mills established that satisfaction must be recorded in the assessment order for initiating penalty proceedings under Section 271D.Court's Interpretation and Reasoning:The Tribunal emphasized that the recording of satisfaction is a prerequisite for initiating penalty proceedings. This interpretation aligns with the Supreme Court's decision in Jai Lakshmi Rice Mills and the jurisdictional High Court's ruling in Sreenivasa Ready Reddeppagari, which both underscore the necessity of recorded satisfaction in the assessment order.Key Evidence and Findings:The Assessing Officer failed to record satisfaction in the assessment order regarding the infraction of Section 269SS. The Tribunal found that the observations in the penalty order do not substitute for the required satisfaction in the assessment order.Application of Law to Facts:The Tribunal applied the legal requirement of recorded satisfaction to the facts, noting its absence in the assessment order. This absence invalidated the penalty proceedings initiated under Section 271D.Treatment of Competing Arguments:The Revenue argued that the penalty proceedings were valid based on the observations in the penalty order. However, the Tribunal rejected this argument, citing the need for satisfaction to be recorded in the assessment order itself, as per Supreme Court and High Court precedents.Conclusions:The Tribunal concluded that without recorded satisfaction in the assessment order, the penalty under Section 271D is invalid. Consequently, the penalty was directed to be deleted.Issue 2: Independence of Penalty ProceedingsLegal Framework and Precedents:The Supreme Court in Jai Lakshmi Rice Mills addressed whether penalty proceedings are independent of assessment proceedings, concluding that they are not if the original assessment order is set aside.Court's Interpretation and Reasoning:The Tribunal reiterated that penalty proceedings must be based on satisfaction recorded in the assessment order, indicating their dependence on the assessment proceedings.Key Evidence and Findings:The Tribunal found no recorded satisfaction in the fresh assessment order, rendering the penalty proceedings invalid.Application of Law to Facts:The Tribunal applied the principle that penalty proceedings under Section 271D require satisfaction in the assessment order, which was absent in this case.Treatment of Competing Arguments:The Tribunal dismissed the argument that the penalty order could stand independently, emphasizing the necessity of recorded satisfaction in the assessment order.Conclusions:The Tribunal held that penalty proceedings are not independent of assessment proceedings when the latter lacks recorded satisfaction, leading to the annulment of the penalty.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning:'The requirement of law, as observed by the Hon'ble Apex Court in the case of Jai Lakshmi Rice Mills and the Hon'ble jurisdictional High Court in the case of Sreenivasa Ready Reddeppagari, is that prior to the initiation of the penalty proceedings the learned Assessing Officer shall record his satisfaction to initiate the penalty proceedings, which is admittedly absent in this case.'Core principles established:Satisfaction must be recorded in the assessment order to initiate penalty proceedings under Section 271D.Penalty proceedings are not independent of assessment proceedings if the latter lacks recorded satisfaction.Final determinations on each issue:The Tribunal allowed the appeal, directing the deletion of the penalty under Section 271D due to the absence of recorded satisfaction in the assessment order.