ITAT Hyderabad Quashes Penalty U/S 271DA Income Tax Act, Finds No Proof Of Section 269ST Violation

On 24 June, the Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) set aside penalties imposed on Shreemukh Realtors under Section 271DA of the Income Tax Act, holding that the Revenue failed to prove, with cogent evidence, any contravention of Section 269ST relating to alleged cash receipts exceeding Rs. 2 lakh.

Vice President Vijay Pal Rao and Accountant Member Manjunatha G allowed the appeals against orders of the Commissioner of Income Tax (Appeals), which had upheld penalties for assessment years 2020–21 to 2023–24. The Bench held:

“The A.O has not conclusively proved the violation of provisions of section 269ST of the Act, so as to levy penalty under section 271DA of the Act, and thus, in our considered view, penalty levied by the A.O. is not sustainable on merits on the facts of this case and in law.”

The Income Tax Department conducted a search on the Vasavi Group in August 2022 and seized electronic tally data and other material allegedly indicating unaccounted cash receipts.

The Assessing Officer rejected Shreemukh Realtors' books of account during assessment proceedings, estimated profits on the basis of seized material, and initiated penalty proceedings under Section 271DA. The Additional Commissioner imposed penalties after identifying transactions allegedly violating Section 269ST, and the Commissioner (Appeals) confirmed the orders.

Shreemukh Realtors argued before the Tribunal that the Revenue failed to establish the essential ingredients of Section 269ST, including identification of the payer, date, nature, and mode of the alleged cash receipts. It also submitted that the Department relied solely on rough tally entries without corroboration through sale bills, cash receipts, or verification from alleged purchasers.

The Tribunal held that when the Revenue alleged violation of Section 269ST, it first had to discharge the burden of proving the contravention with reliable evidence before any onus shifted to the taxpayer.

It further held that mere reliance on seized tally data, without supporting material such as sale documents or independent inquiry with purchasers, could not sustain penalty proceedings. It also noted discrepancies in the transaction list relied upon by the appellate authority and found that the Department adopted a selective approach by rejecting the same material for income estimation while relying on it for penalty.

Further, the Bench referred to the proviso to Section 271DA and held that the provision did not mandate automatic penalty and permitted relief where the taxpayer showed good and sufficient reasons for the alleged contravention.

It pointed to the disparity between the Assessing Officer's estimation of income at 16 per cent of receipts and the imposition of penalty equal to 100 per cent of the alleged cash receipts, holding the approach unjustified. It observed:

“The A.O. himself concluded that the assessee has earned only 16 per cent income on receipts, ought not to have levied 100 per cent penalty u/s. 271DA of the Act.”

Accordingly, the ITAT concluded that the statutory conditions for levy of penalty remained unsatisfied and set aside the orders of the Commissioner (Appeals) and directed deletion of penalties for all four assessment years.