2025 (8) TMI 1243 - AT - Income Tax

Penalty under Sec.271D set aside where AO failed to record mandatory satisfaction in assessment under Section 153C for Sec.269SS

ITAT, Chennai (AT) allowed the appeal, holding that penalty under Sec.271D for alleged contravention of Sec.269SS could not be validly initiated because ... Levy of penalty u/s.271D - violation of provisions of Sec.269SS alleging that assessee has received Rs. 4.20 Cr. in cash for sale of property - mandation to record satisfaction - HELD THAT:- As relying on Sirnivasa Reddy Reddeppagari [2022 (12) TMI 1446 - TELANGANA HIGH COURT] and T Shiju [2019 (6) TMI 603 - ITAT CHENNAI] held that recording of satisfaction by the AO in the assessment order regarding the violation of the provisions of section 269SS is a mandatory requirement for valid initiation of penalty proceedings us 271D of the Act and no penalty could be levied if the AO failed to record such satisfaction in the assessment order. In the present case, on perusal of the assessment order u/s 153C dated 16.08.2021, it is seen that no such satisfaction has been recorded by the AO in the said assessment order. Hence, having regard to the failure of the AO to record his satisfaction in the assessment order with regard to the violation of the provisions of Sec. 269SS, it is held that the penalty proceedings u/s. 271D of the Act have not been validly initiated - Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271D can be validly levied where the Assessing Officer, in the assessment order, did not record satisfaction of contravention of section 269SS at the time of framing assessment under section 153C. 2. Whether the requirement to record satisfaction by the Assessing Officer is mandatory (jurisdictional) or directory for initiation of penalty proceedings under section 271D. 3. Whether earlier recorded satisfaction that was set aside or not carried forward to a fresh assessment order sustains a subsequent penalty proceeding under section 271D. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of penalty under section 271D when the assessment order lacks recorded satisfaction of contravention of section 269SS Legal framework: Section 269SS prohibits receipt of loans, deposits or specified sums otherwise than by an account payee cheque or bank transfer; section 271D prescribes penalty for accepting such sums in contravention of section 269SS. The statutory scheme contemplates initiation of penalty proceedings following the Assessing Officer's satisfaction that the offence under section 269SS is made out. Precedent Treatment: The Court relied on authoritative higher-court decisions holding that levy of penalty under provisions pari materia to section 271D requires recording of satisfaction by the Assessing Officer in the assessment order; absent such recorded satisfaction, penalty is invalid. Tribunal decisions of coordinate benches applying the same principle were followed. Interpretation and reasoning: The Tribunal examined the assessment order framed under section 153C and found no recorded satisfaction by the Assessing Officer regarding contravention of section 269SS. Applying the principle that recording of satisfaction is essential to validly initiate penalty proceedings under the parallel statutory provisions, the Tribunal concluded the initiation of penalty under section 271D was legally defective. Ratio vs. Obiter: Ratio - where the assessment order contains no recorded satisfaction about contravention of section 269SS, initiation and levy of penalty under section 271D is invalid. Obiter - none material to the holding beyond application of the established principle. Conclusion: Penalty under section 271D could not be sustained because the assessment order did not record the required satisfaction; the penalty order is therefore bad in law. Issue 2 - Mandatory versus directory nature of recording satisfaction by the Assessing Officer Legal framework: The issue concerns whether the Assessing Officer must formally record satisfaction (a jurisdictional precondition) or whether satisfaction can be inferred or need not be written in a particular manner for penalty proceedings under section 271D. Precedent Treatment: The Tribunal applied binding authority establishing that recording of satisfaction in the assessment order is a mandatory requirement for initiation of penalty proceedings under provisions pari materia to section 271D. Decisions suggesting flexible or non-specific modes of recording were considered but subordinated to the higher-court rulings. Interpretation and reasoning: The Tribunal noted the principle that when higher-court precedent mandates recorded satisfaction in the assessment order, adjudicating authorities must comply; mere belief or informal satisfaction not recorded in the assessment order does not meet the statutory prerequisite for valid penalty initiation. The Tribunal rejected contentions that the Assessing Officer's satisfaction need not be reduced to writing in a particular form where contrary authoritative precedent requires recording in the assessment order. Ratio vs. Obiter: Ratio - recording of satisfaction by the Assessing Officer in the assessment order is mandatory for valid initiation of penalty under section 271D; non-recording vitiates the penalty. Obiter - observations criticizing reliance on conflicting lower-court decisions which do not follow the binding precedent. Conclusion: The requirement to record satisfaction is mandatory; absence of such recording renders penalty proceedings under section 271D invalid. Issue 3 - Effect of set-aside or fresh assessment order on previously recorded satisfaction Legal framework: When an original assessment order containing recorded satisfaction is set aside and a fresh assessment is framed, the question arises whether the earlier recorded satisfaction survives for purposes of initiating penalty proceedings. Precedent Treatment: The Tribunal followed authority holding that if an original assessment order is set aside, any satisfaction recorded in that order does not survive; the fresh assessment must itself record satisfaction to support subsequent penalty proceedings. Interpretation and reasoning: The Tribunal observed that recorded satisfaction in an order that has been set aside cannot be treated as a continuing jurisdictional foundation for penalty. Therefore, where the fresh assessment order lacks recorded satisfaction regarding contravention of section 269SS, a penalty subsequently levied is unsustainable even if an earlier (set-aside) order had recorded satisfaction. Ratio vs. Obiter: Ratio - satisfaction recorded in an assessment order that is subsequently set aside does not sustain later penalty proceedings; a fresh recorded satisfaction in the operative assessment order is required. Obiter - none additional beyond application of established authority. Conclusion: Where the operative assessment order does not record satisfaction (because earlier order was set aside or otherwise does not contain such satisfaction), penalty proceedings under section 271D cannot be validly initiated. Interrelationship and Outcome Cross-reference: Issues 1-3 are interrelated: the mandatory nature of recording satisfaction (Issue 2) governs the validity of any penalty when the operative assessment order lacks such recording (Issue 1), and a prior recorded satisfaction in an order that was set aside cannot be relied on in a fresh assessment (Issue 3). Final conclusion: Applying the binding precedent and the statutory framework, the Tribunal held that the penalty under section 271D was improperly initiated and levied because the assessment order under section 153C did not record the Assessing Officer's satisfaction regarding contravention of section 269SS. The penalty order is therefore invalid and was set aside; other grounds became academic and were not adjudicated.