The Karnataka High Court has held that although penalty proceedings under Section 271DA of the Income Tax Act, 1961 formally commence only when the Joint Commissioner issues a notice under Section 274, such notice must ordinarily be issued within six months from the end of the month in which the Assessing Officer’s proposal or reference is received. 

The bench of Justice S.G. Pandit and Justice K.V. Aravind has observed that Section 269ST generally prohibits a person from receiving ₹2 lakh or more in cash from another person in a day, in respect of a single transaction, or in relation to transactions connected with one event or occasion, subject to statutory exceptions. Section 271DA provides for a penalty equal to the amount received in violation of Section 269ST. The power to impose this penalty is vested in the Joint Commissioner of Income Tax.

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The Assessing Officer forwarded the proposal for initiation of penalty proceedings to the Joint Commissioner on November 16, 2023. However, the Joint Commissioner issued the show-cause notice under Section 274 read with Section 271DA only on November 29, 2024. The penalty order was subsequently passed on March 28, 2025.

The assessee challenged the proceedings on the ground that they were barred by the limitation prescribed under Section 275 of the Income Tax Act. A Single Judge had accepted the challenge and set aside the penalty proceedings by relying on the Karnataka High Court’s earlier ruling in Principal Commissioner of Income Tax v. K. Umesh Shetty.

The department carried the matter in appeal, contending that a reference made by the Assessing Officer could not be treated as initiation of penalty proceedings. According to the Department, the Assessing Officer had no jurisdiction to impose a penalty under Section 271DA, and the decision whether to commence proceedings rested exclusively with the Joint Commissioner.

The department submitted that the Assessing Officer’s reference merely forwarded information and material for the consideration of the competent authority. The Joint Commissioner was required to independently examine the material and decide whether the circumstances justified initiation of penalty proceedings.

The assessees argued that the period of limitation began when the Assessing Officer made the reference to the Joint Commissioner. They also contended that the proceedings were invalid because the Joint Commissioner had not separately recorded satisfaction before issuing the notice. A further objection was raised that the notices were in a standard pro forma and did not contain sufficient factual particulars.

The Division Bench examined the expression “action for the imposition of penalty has been initiated” appearing in Section 275(1)(c). It held that the critical question was whether initiation occurred when the Assessing Officer made a reference or only when the Joint Commissioner issued the statutory notice.

The Court observed that the Assessing Officer was not competent to impose a penalty under Section 271DA. The decision whether such proceedings should be initiated fell within the exclusive jurisdiction of the Joint Commissioner. Therefore, a proposal or reference from the Assessing Officer could not itself be regarded as initiation of penalty proceedings.

“If the proposal/reference itself is construed as initiation of penalty proceedings, two anomalies would arise,” the Bench observed. 

First, it would amount to initiation by an officer who was not competent to impose the penalty.

Second, it would effectively compel the Joint Commissioner to proceed even where the higher authority, after examining the material, was not satisfied that penalty proceedings were warranted.

The Court further noted that treating the Assessing Officer’s reference as the starting point of the six-month limitation for passing the penalty order would curtail the statutory period available to the Joint Commissioner. It would also allow the Assessing Officer to indirectly control the time available to the competent penalty authority.

Relying on the Supreme Court’s decision in Armour Security (India) Limited v. Commissioner, CGST, Delhi, the High Court held that preliminary steps, information-gathering exercises or communications preceding the exercise of statutory power could not be equated with the initiation of proceedings. Initiation takes place only when the competent authority manifests its decision to proceed by issuing the notice contemplated under the statute.

Accordingly, the Bench held that proceedings under Section 271DA formally commence when the Joint Commissioner issues a notice under Section 274, calling upon the assessee to explain why the proposed penalty should not be imposed. The Assessing Officer’s reference merely places information and material before the Joint Commissioner and does not determine the assessee’s rights or disclose a final decision to proceed.

The Court, however, rejected the Revenue’s wider contention that there was no time limit whatsoever for the Joint Commissioner to initiate penalty proceedings. It observed that an unlimited period for initiating proceedings would permit arbitrary or whimsical exercise of power and expose taxpayers to penalty action after prolonged delays.

The Bench noted that while Section 275 prescribes the period for completing penalty proceedings, it does not expressly prescribe the time within which the Joint Commissioner must initiate them after receiving the Assessing Officer’s reference. In the absence of an express statutory period, the power must be exercised within a reasonable time.

Referring to the Supreme Court’s ruling in State of Punjab v. Bhatinda District Cooperative Milk Producers Union Limited, the High Court reiterated that when a statute does not prescribe limitation, the statutory authority must exercise its jurisdiction within a reasonable period. What constitutes a reasonable period must be determined from the nature and scheme of the relevant legislation.

The Court found guidance within Section 275 itself. Since the provision grants six months for completing penalty proceedings from the end of the month in which they are initiated, the Bench considered it reasonable to prescribe a corresponding six-month period for the Joint Commissioner to initiate proceedings after receiving the Assessing Officer’s reference.

The Court consequently laid down a two-stage limitation framework. First, the Joint Commissioner must issue the notice under Section 274 within six months from the end of the month in which the Assessing Officer’s reference is received. Second, once the notice is issued, the final penalty order must be passed within six months from the end of the month in which the notice was issued.

The Bench clarified that the Assessing Officer’s reference does not itself commence the statutory limitation for passing the final penalty order. Nevertheless, the reference remains relevant for determining whether the Joint Commissioner initiated proceedings within a reasonable time.

In Ganesh Agarwal’s case, the Assessing Officer’s reference was made on November 16, 2023, while the Joint Commissioner issued the notice only on November 29, 2024. As the notice was issued beyond six months from the end of the month in which the reference was received, the Court declared the penalty proceedings time-barred.

The Court similarly dismissed the Revenue’s appeals in three other cases where the notices were issued beyond six months from the Assessing Officer’s references. However, it allowed six appeals in which the Joint Commissioner had issued notices within the prescribed reasonable period. The penalty orders dated March 28, 2025 in those cases were restored.

Addressing the objection regarding absence of recorded satisfaction, the High Court held that Section 271DA does not require the Joint Commissioner to formally record satisfaction before initiating proceedings. The Court said that no procedural requirement could be added to a taxing statute when the statutory language did not provide for it.

The Bench also rejected the contention that the Section 274 notices were invalid because they did not contain exhaustive factual and legal particulars. It observed that neither Section 271DA nor Section 274 requires a detailed show-cause notice in the manner mandated under some other enactments. Section 274 principally requires that the assessee be given a reasonable opportunity of being heard before a penalty is imposed.

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