The Rajkot Bench of the Income Tax Appellate Tribunal (ITAT) has set aside a penalty of ₹60 lakh imposed under Section 271E, holding that penalty proceedings cannot survive where the Assessing Officer failed to record satisfaction for initiating such proceedings in the assessment order itself. 

The bench of Sonjoy Sarma (Judicial Member) and  Dr. Arjun Lal Saini (Accountant Member) relied on the Supreme Court’s landmark judgment in CIT v. Jai Laxmi Rice Mills, reiterating that recording satisfaction in the assessment order is a mandatory jurisdictional requirement before initiating penalty proceedings.

The appeal arose from an order of the National Faceless Appeal Centre (NFAC), which had upheld a penalty imposed by the Joint Commissioner of Income Tax under Section 271E for the alleged violation of Section 269T of the Income Tax Act.

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The assessee had filed its return for Assessment Year 2017-18, declaring nil business income. The scrutiny assessment under Section 143(3) was completed by accepting the returned income without making any additions. Subsequently, an order under Section 154 read with Section 143(3) determined the total income at ₹22,500. 

During later proceedings, the tax department alleged that the assessee had repaid loans amounting to ₹60 lakh through modes other than account-payee cheque, account-payee bank draft, electronic clearing system (ECS), or other prescribed banking channels, allegedly violating Section 269T.

Based on this allegation, penalty proceedings were initiated, culminating in a penalty order dated 26 September 2024imposing a penalty equal to the amount allegedly repaid, namely ₹60 lakh. The NFAC subsequently affirmed the penalty. 

The principal issue before the Tribunal was whether a penalty under Section 271E can be sustained when the original assessment order contains no finding regarding violation of Section 269T and records no satisfaction for initiating penalty proceedings.

The assessee argued that the assessment order accepted the returned income without any additions. There was no observation regarding any violation of Section 269T. The Assessing Officer never recorded satisfaction for initiating penalty proceedings under Section 271E. Consequently, the entire penalty proceeding lacked legal foundation.

The assessee relied heavily on the Supreme Court’s decision in CIT v. Jai Laxmi Rice Mills, which held that penalty proceedings initiated without recording satisfaction in the assessment order are legally unsustainable. 

During the hearing, the department supported the orders of the lower authorities.

However, according to the Tribunal, the Department was unable to rebut or distinguish the applicability of the Supreme Court’s ruling cited by the assessee. 

After examining the assessment records, the ITAT found that the assessment order passed under Section 143(3) accepted the returned income, contained no satisfaction regarding initiation of penalty proceedings under Section 271E, and did not record any finding that the assessee had violated Section 269T.

The Bench observed that the Supreme Court has already settled the legal position that recording satisfaction during assessment proceedings is an essential prerequisite for valid initiation of penalty proceedings.

Following the binding precedent, the Tribunal held that the penalty proceedings themselves were invalid and therefore could not be sustained in law. 

Allowing the appeal, the Tribunal directed the Assessing Officer to delete the entire penalty of ₹60 lakh imposed under Section 271E.

The appeal was accordingly allowed. 

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