The Income Tax Appellate Tribunal (ITAT), Chennai, has deleted a ₹26 lakh penalty imposed on a salaried taxpayer for accepting a cash advance towards the sale of his residential house, holding that the circumstances established a bona fide financial exigency and reasonable cause under Section 273B of the Income Tax Act, 1961.
The Bench of Aby T Varkey (Judicial Member) and S. R. Raghunatha (Accountant Member) considered the taxpayer’s modest annual income, substantial outstanding housing loan, efforts to sell the property and evidence confirming the transaction. The order was pronounced on October 13, 2026.
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The tribunal clarified that property advances fall within Section 269SS. However, a violation of the prescribed mode of receipt does not automatically justify a penalty where the taxpayer establishes reasonable cause.
The dispute concerned Assessment Year 2017–18. The taxpayer deposited ₹24.13 lakh in cash into his bank account during the demonetisation period. He explained that he had received ₹26 lakh as an advance against the sale of his house.
The advance was received under an unregistered sale agreement dated November 24, 2016. The agreement involved the purchaser’s husband, and the property sale was subsequently completed on February 6, 2017.
The taxpayer explained that he had an outstanding housing loan of ₹25,37,571 with Axis Bank and had been attempting to sell the property for several months to discharge the liability. His total income for the relevant assessment year was ₹3,41,168.
During the assessment proceedings, the Assessing Officer recorded statements from the taxpayer and the purchaser’s husband. Both confirmed the agreement and the subsequent sale.
Although the Assessing Officer observed that the source of the cash deposits appeared genuine, the explanation was rejected because the deposits involved the withdrawn ₹500 and ₹1,000 banknotes. The assessment was completed under Section 144 on December 6, 2019.
Separate proceedings were initiated under Section 271D for contravention of Section 269SS. By an order dated March 26, 2024, the Revenue imposed a penalty of ₹26 lakh.
The taxpayer contended that the transaction was genuine and that provisions intended to counter unaccounted money should not be invoked in the circumstances.
The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, rejected the challenge on January 31, 2026. The appellate authority held that accepting the property advance in cash contravened Section 269SS and that the taxpayer’s case was not covered by the statutory exceptions.
Before the ITAT, the Revenue supported the penalty, emphasising that the taxpayer had admitted receiving the advance in cash contrary to the prescribed mode.
The tribunal first examined whether receiving the amount as an advance, rather than as final sale consideration, placed it outside Section 269SS.
It held that the provision, as applicable to the relevant period, covered a “specified sum”, including money receivable as an advance or otherwise in relation to the transfer of immovable property, whether or not the transfer ultimately takes place.
Accordingly, the ₹26 lakh advance remained within the scope of Section 269SS.
The tribunal nevertheless explained that the existence of a technical contravention did not conclude the penalty inquiry. Section 273B expressly protects a taxpayer from a penalty under Section 271D where reasonable cause for the failure is proved.
The explanation therefore had to be assessed against the actual circumstances leading to the cash receipt, the taxpayer’s bona fides and the supporting evidence.
The ITAT found that the taxpayer had offered a specific explanation supported by the record.
His outstanding housing loan was substantial compared with his annual income. He had been trying to sell the property for several months to discharge the liability. When the purchaser and her husband came forward after demonetisation, he accepted the cash advance to facilitate the sale and repay the loan.
The tribunal considered the sale agreement, subsequent completion of the transaction and statements confirming the sale as evidence supporting the explanation.
It also took account of observations in the assessment and quantum appellate proceedings that the source of the deposits appeared genuine. Those findings did not independently establish reasonable cause for accepting cash, but were relevant in assessing the taxpayer’s bona fides.
The tribunal expressly clarified that neither the genuineness of the transaction nor the taxpayer’s limited knowledge of income-tax law was sufficient, by itself, to warrant deletion of the penalty.
Instead, it relied on the cumulative effect of the circumstances: the outstanding housing loan, comparatively modest income, efforts to sell the property and evidence confirming the transaction.
The Revenue had brought no material on record to establish that the sale was fictitious, that the explanation regarding the loan was false, or that the transaction was devised to introduce undisclosed money or evade tax.
On that basis, the Bench accepted that the taxpayer had demonstrated a bona fide financial exigency.
The tribunal drew support from the Madras High Court’s decision in CIT v. Balaji Traders, [2008] 303 ITR 312 (Madras), concerning genuine transactions, business exigency and reasonable cause for accepting cash.
Although that case involved cash borrowings for business commitments, the ITAT applied the principle that reasonable cause must be assessed objectively against the circumstances faced by the taxpayer.
It also considered Sreenivasan Ramya v. ACIT, ITA No. 3162/Chny/2025, decided on April 16, 2026.
The Bench distinguished the completed sale consideration involved in that case from the advance received in the present matter. It relied on the earlier ruling only to the extent relevant to examining reasonable cause under Section 273B.
Allowing the appeal, the tribunal held that the taxpayer had established reasonable cause for failing to comply with the prescribed mode of receipt.
It set aside the CIT(A)’s order and directed the Assessing Officer to delete the ₹26 lakh penalty under Section 271D.
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