The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has deleted a penalty of ₹5.07 crore holding that the Income Tax Department failed to establish, with independent and cogent evidence, that the assessee had violated the cash transaction restrictions prescribed under Section 269ST of the Income Tax Act.
The Tribunal allowed the appeals for Assessment Years 2018-19 and 2019-20, setting aside the orders of the Commissioner of Income Tax (Appeals) and directing the Assessing Officer to delete the penalties levied under Section 271DA.
The controversy arose after a search and seizure operation conducted on the Vasavi Group on 17 August 2022, during which the Investigation Wing seized physical documents, electronic records, tally data, loose sheets and other materials allegedly reflecting unaccounted cash transactions relating to the sale of flats, villas and commercial units.
During the search, statements were recorded from key executives and partners of the group. The Department relied upon these statements and the seized tally records to conclude that the group had received substantial “on-money” in cash from customers, which was allegedly not reflected in the regular books of account. The assessment proceedings also recorded that the group had offered approximately ₹400 crore as additional income based on the discrepancies found during the search.
Based on the seized tally data, the Department initially alleged that cash receipts of approximately ₹29.67 crore violated Section 269ST. However, after examining the records during penalty proceedings, the Additional Commissioner restricted the alleged contraventions to ₹5.07 crore and imposed an equivalent penalty under Section 271DA.
The Department maintained that the electronic tally records, supported by certificates under Section 65B of the Indian Evidence Act and statements recorded during search proceedings, demonstrated that the assessee had accepted cash exceeding the statutory limit prescribed under Section 269ST.
The assessee argued that the penalty proceedings were fundamentally flawed because the Assessing Officer had failed to record a proper satisfaction regarding violation of Section 269ST in the assessment order. The penalty notice was vague and did not specify the precise contravention. The entire case rested only on rough tally entries and loose sheets without independent corroboration. The Department failed to identify the individual customers, dates of receipts, nature of transactions or actual cash receipts exceeding ₹2 lakh as required under Section 269ST. The additional income offered during the search was merely for settlement of assessment and could not automatically be treated as an admission of violation of Section 269ST.
The assessee further contended that once the Assessing Officer himself had rejected the books of account and estimated income under Section 145(3), the same records could not selectively be relied upon for imposing a penalty carrying quasi-criminal consequences.
The ITAT extensively examined the statutory requirements of Sections 269ST and 271DA and reiterated that penalty proceedings are independent of assessment proceedings.
The Bench observed that although the Department relied upon seized tally records, the material did not establish, with transaction-wise certainty, that any identifiable person had paid cash exceeding the statutory threshold prescribed under Section 269ST.
According to the Tribunal, the seized material lacked essential particulars such as identity of the payer, date of receipt, amount received from each customer, nature of the transaction, whether the receipt related to a single transaction, a single day, or one event or occasion as contemplated under Section 269ST.
The Tribunal noted that such deficiencies made it impossible to conclusively establish the statutory ingredients necessary for invoking Section 269ST.
A significant aspect of the ruling is the Tribunal’s reiteration that the burden of proving a statutory default always rests upon the Revenue, particularly in penalty proceedings, which are quasi-criminal in nature.
The Bench relied upon several Supreme Court precedents, including Dilip N. Shroff, T. Ashok Pai, and Khoday Eswarsa & Sons, to hold that the Department cannot impose penalty merely on assumptions, estimates or admissions made during assessment proceedings. Instead, independent and reliable evidence establishing each element of the alleged violation must be produced.
The Tribunal further clarified that the assessee’s disclosure of additional income during search proceedings did not automatically amount to an admission that Section 269ST had been violated.
According to the Bench, an offer of income made to settle tax disputes or avoid prolonged litigation cannot substitute the Department’s obligation to independently establish the factual ingredients required for levy of penalty under Section 271DA.
The Tribunal described the seized tally records as inadequate for sustaining the penalty because they were “non-speaking” and did not contain transaction-wise or buyer-wise particulars necessary to prove violation of Section 269ST.
The Bench held that penalty proceedings require cogent, corroborative and independent evidence and cannot be sustained merely on assumptions arising from electronic entries or estimated income.
Holding that the Revenue failed to discharge its burden of proving actual contravention of Section 269ST, the Hyderabad ITAT concluded that the penalty imposed under Section 271DA was legally unsustainable.
The Tribunal set aside the orders of the Commissioner (Appeals); directed deletion of the penalty for Assessment Year 2018-19; and granted identical relief for Assessment Year 2019-20, observing that the issues involved were identical except for the figures.
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