Penalty under Section 271E (of Income Tax Act, 1961) quashed: AO must record satisfaction in reassessment order

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Case Name

Sunil Agrawal & Ors. vs. Assistant Commissioner of Income Tax, Central Circle-4, Jaipur & Ors.(High Court of Judicature for Rajasthan Bench at Jaipur)

D.B. Civil Writ Petition No. 1102/2025

Date: 30th January 2025

Key Takeaways

• Penalty under Section 271E (of Income Tax Act, 1961) (and 271D) of the Income Tax Act cannot be imposed unless the AO records satisfaction for initiating penalty proceedings in the assessment or reassessment order itself.
• The Supreme Court’s decision in Commissioner of Income Tax vs. Jai Laxmi Rice Mills [(2015) 379 ITR 521 (SC)] is binding and directly applicable.
• Later references or satisfaction notes by other officers (like ACIT) after the assessment/reassessment are not sufficient.
• The court quashed all penalty notices and proceedings in these connected cases.

Issue

Can penalty proceedings under Section 271E (of Income Tax Act, 1961), be validly initiated if the Assessing Officer did not record satisfaction for such initiation in the reassessment order?

Facts

• The petitioners (including Sunil Agrawal and others) were subjected to search operations by the Income Tax Department.
• Reassessment proceedings under Section 148 (of Income Tax Act, 1961) were conducted, resulting in additions to their income.
• The reassessment order was passed on 12.03.2024, but it did not record any satisfaction for initiating penalty proceedings under Section 271E (of Income Tax Act, 1961) (which deals with penalty for repayment of loans or deposits in cash, in violation of Section 269T (of Income Tax Act, 1961)).
• Later, the Deputy Commissioner of Income Tax (DCIT) referred the matter to the Additional Commissioner of Income Tax (ACIT) for penalty, and the ACIT recorded satisfaction on 24.09.2024.
• Notices for penalty under Section 271E (of Income Tax Act, 1961) were issued on 01.10.2024, 03.01.2025, and 13.01.2025.
• The petitioners challenged these notices, arguing that the law requires the AO to record satisfaction in the assessment/reassessment order itself.

Arguments

Petitioners’ Arguments

• Relied on the Supreme Court’s decision in Commissioner of Income Tax vs. Jai Laxmi Rice Mills [(2015) 379 ITR 521 (SC)].
• Argued that penalty under Section 271E (of Income Tax Act, 1961) cannot be imposed unless the AO records satisfaction for initiating penalty proceedings in the assessment/reassessment order.
• Pointed out that in their case, no such satisfaction was recorded in the reassessment order.

Respondents’ Arguments

• Claimed that the DCIT had referred the matter to the ACIT for penalty, and the ACIT had recorded satisfaction before issuing the penalty notice.
• Argued that there is no requirement under Section 271E (of Income Tax Act, 1961) for the AO to record satisfaction in the assessment/reassessment order.
• Tried to distinguish the Supreme Court’s decision but could not provide a convincing distinction.

Key Legal Precedents

• Commissioner of Income Tax vs. Jai Laxmi Rice Mills [(2015) 379 ITR 521 (SC)]:
• The Supreme Court held that penalty proceedings under Section 271D (of Income Tax Act, 1961) (and by analogy, 271E) are not independent of assessment proceedings. If the AO does not record satisfaction for initiating penalty in the assessment order, penalty cannot be imposed later.
• The Rajasthan High Court found this precedent directly applicable to the present case.
• Sections Referenced:
• Section 271E (of Income Tax Act, 1961): Penalty for repayment of loans or deposits in cash, in violation of Section 269T (of Income Tax Act, 1961).
• Section 271D (of Income Tax Act, 1961): Penalty for accepting loans or deposits in cash, in violation of Section 269SS (of Income Tax Act, 1961).
• Section 148 (of Income Tax Act, 1961): Deals with reassessment proceedings.
• Section 69A (of Income Tax Act, 1961) and 69C (of Income Tax Act, 1961): Relate to unexplained money and unexplained expenditure, respectively.

Judgement

• The High Court held that the issue is squarely covered by the Supreme Court’s decision in Jai Laxmi Rice Mills.
• Since the AO did not record satisfaction for initiating penalty proceedings under Section 271E (of Income Tax Act, 1961) in the reassessment order, the subsequent penalty notices and proceedings are invalid.
• The court quashed the penalty notices and all proceedings under Section 271E (of Income Tax Act, 1961) in these cases.
• All writ petitions were allowed in favor of the petitioners.

FAQs

Q1: What is Section 271E (of Income Tax Act, 1961)?

A: Section 271E (of Income Tax Act, 1961) imposes a penalty for repaying loans or deposits in cash, violating Section 269T (of Income Tax Act, 1961), which requires such repayments to be made through account payee cheque, bank draft, or electronic means.

Q2: Why did the court quash the penalty proceedings?

A: Because the Assessing Officer did not record satisfaction for initiating penalty proceedings under Section 271E (of Income Tax Act, 1961) in the reassessment order, as required by law and clarified by the Supreme Court in Jai Laxmi Rice Mills.

Q3: Can the department initiate penalty proceedings later if the AO forgot to record satisfaction in the assessment order?

A: No, as per this judgment and the Supreme Court precedent, the satisfaction must be recorded in the assessment/reassessment order itself.

Q4: Does this judgment apply to both Section 271D (of Income Tax Act, 1961) and 271E (of Income Tax Act, 1961)?

A: Yes, the court noted that the language of both sections is analogous, and the principle applies to both.

Q5: What happens to the petitioners now?

A: The penalty notices and proceedings against them under Section 271E (of Income Tax Act, 1961) are quashed, so they are not liable for the penalties in these cases.