Third-party seized material cannot by itself sustain cash-loan penalty where the Revenue fails to prove actual acceptance and repayment.

Penalty under sections 271D and 271E for alleged cash loans and repayments was deleted because the Revenue relied only on uncorroborated third-party seized material. The underlying quantum addition had already been removed for failure to prove the existence, use, or repayment of the alleged loans, and penalty could not survive without independent proof of contravention of sections 269SS and 269T. No incriminating material was found from the assessee's premises, and the denial of document supply and cross-examination left the third-party material unreliable. The Revenue therefore failed to discharge the burden of proving actual acceptance and repayment of cash loans, and penal liability was not established.

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Issues: (i) Whether penalties under sections 271D and 271E of the Income-tax Act, 1961 were sustainable on the basis of alleged cash loans and repayment recorded in seized materials belonging to third parties; (ii) Whether the Revenue discharged the burden of proving actual acceptance and repayment of cash loans in the absence of seized material from the assessee's premises, supply of documents, and opportunity of cross-examination.

Issue (i): Whether penalties under sections 271D and 271E of the Income-tax Act, 1961 were sustainable on the basis of alleged cash loans and repayment recorded in seized materials belonging to third parties.

Analysis: The penalties were founded only on entries in loose papers and digital material seized from third parties. The assessment additions on the underlying interest expenditure had already been deleted in quantum proceedings on the finding that the Revenue had failed to establish the existence of the alleged loans, their utilisation, or repayment from undisclosed sources. Penalty proceedings being distinct and penal in nature, the mere existence of assessment additions could not by itself sustain penalty without independent proof of the contravention of sections 269SS and 269T.

Conclusion: The penalties under sections 271D and 271E were not sustainable and were deleted in favour of the assessee.

Issue (ii): Whether the Revenue discharged the burden of proving actual acceptance and repayment of cash loans in the absence of seized material from the assessee's premises, supply of documents, and opportunity of cross-examination.

Analysis: No incriminating material was found from the assessee's premises. The assessee had specifically denied the alleged cash loan transactions and sought supply of the seized documents as well as cross-examination of the third parties from whose records the allegations arose, but no such opportunity was provided. In these circumstances, the third-party material remained uncorroborated and unreliable for fastening penal liability, and the initial burden of proof continued to lie on the Revenue.

Conclusion: The Revenue failed to prove the alleged cash loans and repayments, and the denial of documents and cross-examination vitiated the penalty action in favour of the assessee.

Final Conclusion: The penalty orders could not be sustained on the basis of unproved third-party material, and all the appeals were allowed with deletion of the impugned penalties.

Ratio Decidendi: Penalty for contravention of sections 269SS and 269T requires the Revenue to independently prove the actual cash loan or repayment; uncorroborated third-party seized material, without confrontation and cross-examination, cannot by itself justify penal liability.

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