2024 (7) TMI 1605 - AT - Income Tax

Penalty u/s 271D and u/s 271E - violations of Sections 269SS and 269T - as argued incriminating evidences as relied do not establish any transaction of loan or payment of interest - HELD THAT - We are of the considered view that with regard to the incriminating nature of the evidences which were allegedly unearthed in the search and subsequently requisitioned by the AO the issue about their veracity is still wide open in the light of the pendency of the appeals in the case of Sant Asharam ji Ashram and even in the case of the assessee wherein additions on merits have been challenged. Thus without going into the merits of the same if the penalty order is examined it comes up that the AO has merely relied the observations in the assessment order for concluding that there were transactions of loan taken from Asharam in cash violating section 271D and that the alleged loan were repaid to Asharam in cash leading to alleged violation and penalty u/s 271E. Now as settled proposition of law we find that penalty proceedings are included in the expression assessment and the true nature of a penalty is the imposition of an additional tax. But one of the principal objects is to provide a deterrent against recurrence of default on the part of the assessee. Therefore the relevant sections 269SS read with section 271D and 271E of the Act is a penal provision and the proceedings imposing penalty are quasi- criminal in nature. The onus is heavy on the Department to not only establish the facts with categorical finding independently of the assessment order but to also successfully canvass that due process of law was strictly followed. The penalty orders as passed in the case in hand show that the AO has drawn conclusion on the basis of elaborate discussion in the assessment order without making a specific examination of the issues independently. It is for this reason the discrepancies with regard to the name of the borrower or lender being Shri Asharam ji Ashram or Shri Asharam Bapu or stating violator to be assessee company while the assessee is individual have crept in. In this background if we consider the purport of the CBDT Circular dated 26.04.2016 which is heavily relied by the ld. counsel of the assessee that reference for the purpose of penalty u/s 271D and 271E of Act should be made during the course of assessment proceedings itself. We find that directions were not complied. Since in the Act there is no specific provision about the stage at which the reference for penalty is to be made during assessment therefore the initiation of the reference is akin to filing of complaint before JCIT and same has to be as per due procedure laid down under the law. Since there is no specific provision in the Act this circular shall prevail. Revenue cannot claim it to be merely advisory. As observed earlier at cost of repetition we hold that this direction of Board has subsumed in the Act as a step validating the exercise of jurisdiction to initiate penalty proceedings by JCIT concerned. Here in the case in hand initiation was not during the pendency of the assessment as directed by the Circular but way after thus the assumption of jurisdiction to issue the penalty notice was vitiated and consequently the imposition of penalty also stands vitiated. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this case revolve around the imposition of penalties under Sections 271D and 271E of the Income Tax Act, 1961, for alleged violations of Sections 269SS and 269T. Specifically, the issues include:

• Whether the assessee violated Section 269SS by accepting loans in cash exceeding the prescribed limit.
• Whether the assessee violated Section 269T by repaying loans in cash exceeding the prescribed limit.
• The validity of the penalty proceedings initiated under Sections 271D and 271E, considering the procedural aspects and the applicability of the CBDT Circular No. 09/DV/2016.
• The adequacy of evidence and the legality of the penalty orders based on the materials seized and statements recorded.
• The impact of procedural discrepancies and the timing of the reference for penalty proceedings on the validity of the penalties imposed.

2. ISSUE-WISE DETAILED ANALYSIS

Violation of Sections 269SS and 269T:

• Legal Framework and Precedents: Sections 269SS and 269T of the Income Tax Act prohibit the acceptance and repayment of loans or deposits in cash exceeding Rs. 20,000, respectively. Penalties for violations are prescribed under Sections 271D and 271E.
• Court's Interpretation and Reasoning: The Court examined whether the transactions in question involved cash loans and repayments exceeding the statutory limit, thereby attracting penalties. The Court noted that the Assessing Officer (AO) relied on seized materials and statements to conclude that such violations occurred.
• Key Evidence and Findings: The AO's findings were based on seized documents, statements from associated individuals, and ledger entries indicating cash transactions. The reliability of these documents and statements was contested by the assessee.
• Application of Law to Facts: The AO concluded that the assessee engaged in cash transactions violating Sections 269SS and 269T, leading to penalties under Sections 271D and 271E. The Court scrutinized the AO's reliance on seized materials and statements.
• Treatment of Competing Arguments: The assessee argued that the evidence was insufficient and contested the procedural aspects of the penalty proceedings. The Court considered these arguments in light of the applicable legal standards and procedural requirements.
• Conclusions: The Court found that the AO's reliance on seized materials and statements was not independently verified, and procedural lapses in initiating penalty proceedings were identified.

Validity of Penalty Proceedings:

• Legal Framework and Precedents: The Court examined the procedural requirements for initiating penalty proceedings under Sections 271D and 271E, particularly in light of the CBDT Circular No. 09/DV/2016.
• Court's Interpretation and Reasoning: The Court emphasized that penalty proceedings are quasi-criminal in nature and require strict adherence to procedural norms. The CBDT Circular mandates that references for penalties should be made during assessment proceedings.
• Key Evidence and Findings: The Court found discrepancies in the penalty proceedings, including the timing of the reference to the Joint Commissioner of Income Tax (JCIT) and the issuance of show cause notices.
• Application of Law to Facts: The Court determined that the procedural lapses, such as delays in making references and issuing notices, rendered the penalty proceedings invalid.
• Treatment of Competing Arguments: The Revenue argued that the procedural requirements were advisory, not mandatory. The Court disagreed, holding that procedural compliance is essential in penalty cases.
• Conclusions: The Court concluded that the penalty proceedings were vitiated due to procedural non-compliance, particularly the failure to adhere to the CBDT Circular.

3. SIGNIFICANT HOLDINGS

• Preservation of Verbatim Quotes: The Court noted, "The initiation of the reference is akin to filing of complaint before JCIT and same has to be as per due procedure, laid down under the law."
• Core Principles Established: Penalty proceedings under Sections 271D and 271E are quasi-criminal and require strict procedural compliance. The CBDT Circular No. 09/DV/2016 is binding and mandates that references for penalties be made during assessment proceedings.
• Final Determinations on Each Issue: The Court held that the penalties imposed under Sections 271D and 271E were invalid due to procedural lapses, including the failure to make timely references as per the CBDT Circular. Consequently, the penalties were deleted, and the appeals were allowed.