Reasonable cause doctrine prevents penalties for prohibited cash loan transactions where bank records and corroboration establish bona fide dealings.

Whether penalties for accepting and repaying cash loans contrary to the statutory prohibition can stand where the assessee adduces evidence of genuineness and claims reasonable cause under the statutory exemption: the tribunal applied the principle that demonstrable bona fide transactions and a reasonable cause defence preclude imposition of penalty, found bank records, a sanctioned term loan and corroborating explanations established the genuineness and reasonable cause, and on that basis cancelled the penalties and allowed the appeals in favour of the assessee.

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Issues: Whether the penalties levied under Section 271D and Section 271E of the Income-tax Act, 1961 for acceptance and repayment of cash loans in excess of Rs.20,000 per transaction can be sustained where the assessee offers evidence of genuineness of transactions and claims reasonable cause under Section 273B of the Income-tax Act, 1961.

Analysis: Sections 271D and 271E impose penalties for contravention of the prohibitions in Section 269SS and Section 269T regarding acceptance and repayment of loans otherwise than by account payee cheque or demand draft. Section 273B provides that no penalty shall be imposable under those provisions if the assessee proves reasonable cause for the failure to comply. Judicial authority establishes that bona fide transactions and demonstrable reasonable cause preclude imposition of such penalties. Applying this framework, the assessee produced bank records, evidence of a sanctioned term loan, and explanations showing that cash received from relatives and friends was used in connection with obtaining and repaying a sanctioned bank loan and for genuine family and educational purposes. The assessing and penalty authorities did not adequately consider that evidence. On the facts presented, the nature and chronology of the bank transactions, corroboration of the sanctioned term loan, and repayment to lenders demonstrate genuineness and a bona fide reason for cash handling that falls within the scope of reasonable cause under Section 273B.

Conclusion: Penalties under Section 271D and Section 271E of the Income-tax Act, 1961 are cancelled; the appeals are allowed in favour of the assessee.

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