Hyderabad ITAT Cancels ₹10 Lakh Cash Penalty Initiated Without Pending Tax Proceedings

Background of the case

The taxpayer had not filed a return of income for Assessment Year 2017-18. On the basis of information available with the Department, the Assessing Officer formed a view that the taxpayer had accepted ₹10 lakh in cash against the sale of immovable property during Financial Year 2016-17.

The Department treated the alleged receipt as a violation of Section 269SS. A notice under Section 274 read with Section 271D was issued on 5 March 2020. The Assessing Officer later passed a penalty order on 21 March 2022 and imposed a penalty equal to the alleged cash receipt, namely ₹10 lakh.

The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, confirmed the penalty. The taxpayer then approached the Hyderabad ITAT.

Delay in filing the ITAT appeal was condoned

The appeal before the Tribunal was delayed by 249 days. The taxpayer explained that he was a small mason with limited knowledge of income-tax proceedings. He also placed medical records concerning his mother's serious spinal condition and surgeries before the Tribunal.

The taxpayer stated that he became aware of the appellate order only after his bank account was attached on 30 January 2026. He then approached another professional and filed the appeal.

The Tribunal found the explanation bona fide and supported by evidence. Applying a justice-oriented approach, it condoned the delay and admitted the appeal for decision on merits.

Main legal objection raised by the taxpayer

The taxpayer pressed the ground challenging the validity of the penalty proceedings. His case was that no assessment, reassessment or other proceeding under the Act was pending in his own case when the penalty notice was issued.

It was argued that Section 271D penalty proceedings must originate from satisfaction recorded by the Assessing Officer during a valid proceeding under the Income-tax Act. If there is no pending proceeding and no recorded satisfaction, the penalty authority cannot independently create jurisdiction merely by issuing a penalty notice.

Revenue supported the penalty

The Revenue relied on the orders of the lower authorities. It maintained that accepting ₹10 lakh in cash against an immovable-property transaction violated Section 269SS and justified an equal penalty under Section 271D.

However, the Revenue did not produce any record showing that an assessment or another proceeding was pending in the taxpayer's case or that the Assessing Officer had recorded the required satisfaction before issuing the notice.

Why the Hyderabad ITAT deleted the penalty

The Tribunal treated the absence of a pending proceeding and recorded satisfaction as a jurisdictional defect. The undisputed record showed that no proceeding under the Act was pending when the notice dated 5 March 2020 was issued.

The Bench followed earlier decisions holding that Sections 271D and 271E are materially similar. Both provisions impose penalties for specified cash transactions, while Sections 269SS and 269T contain the corresponding restrictions.

The Tribunal relied on the principle that penalty proceedings under these provisions cannot be initiated in isolation when there is no assessment or other statutory proceeding in which the Assessing Officer has formed and recorded the necessary satisfaction.

Because the basic jurisdictional requirement was missing, the Tribunal held that the initiation itself was bad in law. It deleted the entire ₹10 lakh penalty and allowed the appeal.

Meaning of Sections 269SS and 271D

• Section 269SS restricts acceptance of specified loans, deposits and sums connected with transfers of immovable property otherwise than through permitted banking or electronic modes when the statutory threshold and conditions apply.
• Section 271D provides for a penalty that may equal the amount accepted in violation of Section 269SS.
• Section 274 governs the opportunity of hearing and procedure before a penalty is imposed.
• Section 275 prescribes limitation rules for penalty orders and is framed with reference to proceedings under the Act.

The decision does not approve cash property transactions

The ruling should not be understood as permission to accept property advances or other specified sums in cash. The Tribunal decided the appeal on the legality of penalty initiation, not by declaring that every alleged cash receipt falls outside Section 269SS.

Taxpayers should continue to use account-payee banking channels or prescribed electronic modes and should retain agreements, bank records and payment evidence. A procedural defect in one case does not remove the substantive restrictions imposed by the Act.

Practical significance of recorded satisfaction

Recorded satisfaction connects the penalty proposal with a proceeding conducted by the Assessing Officer. It demonstrates that the authority considered the material in the taxpayer's case before deciding that penalty action may be required.

Where no proceeding exists, the taxpayer may question how and in which statutory process the alleged default was examined. This decision confirms that the Department must establish the legal foundation for penalty jurisdiction and cannot rely only on information about a transaction.

Important points for taxpayers and professionals

• Check whether any assessment, reassessment or other proceeding was pending when the Section 271D notice was issued.
• Review the relevant assessment order or statutory order to determine whether satisfaction for penalty initiation was actually recorded.
• Verify whether the alleged transaction is legally a loan, deposit or specified sum covered by Section 269SS.
• Examine the transaction date, amount, payment mode and supporting property or loan documents.
• Raise jurisdictional objections at the earliest stage and preserve copies of every notice, reply and order.
• Do not rely on a technical defence as a substitute for compliance with prescribed banking modes.
• If an appeal is delayed, provide a clear chronology and reliable evidence explaining the circumstances that prevented timely filing.

Key takeaways

• The case was decided by the Hyderabad A Bench on 1 July 2026.
• The appeal number was ITA No. 354/Hyd/2026 for Assessment Year 2017-18.
• The Department imposed a ₹10 lakh penalty under Section 271D for an alleged cash receipt connected with immovable property.
• No assessment or other proceeding was pending when the penalty notice was issued.
• No prior order recording the Assessing Officer's satisfaction was produced.
• The Tribunal held that the penalty initiation was invalid and deleted the full amount.
• The ruling addresses penalty jurisdiction and does not authorise cash transactions prohibited by Section 269SS.

Conclusion

Narasimham Palanki v. ITO reinforces that a serious penalty must rest on valid statutory jurisdiction. Information suggesting a cash transaction may prompt lawful enquiry, but it does not by itself replace the requirement of a pending proceeding and recorded satisfaction where those conditions govern penalty initiation.

For taxpayers, the decision highlights the value of examining the complete procedural history instead of contesting only the transaction facts. For the Department, it emphasises the need to document satisfaction in the appropriate proceeding before commencing action under Section 271D.