The assessee preferred an appeal against the order passed by the National Faceless Appeal Centre, affirming the penalty imposed under section 271D of the Income-tax Act, 1961 for the Assessment Year 2010–11. The penalty proceedings arose pursuant to an assessment completed under section 143(3), wherein it was alleged that the assessee had accepted cash loans aggregating to ₹37,00,000 in contravention of section 269SS of the Act.

The case of the Revenue was based primarily on statements recorded during a survey conducted under section 133A in the cases of third parties. Statements recorded under section 131 from certain individuals indicated that one Mr. Gauri Shankar Choudhary was acting as a facilitator for arranging loans in cash and through banking channels, and it was alleged that the assessee had also received cash loans through such arrangement. Relying on these statements, the Assessing Officer initiated penalty proceedings under section 271D and imposed penalty equal to the alleged cash loan amount.

During the penalty proceedings, the assessee categorically denied having received any cash loans. It was contended that the penalty was imposed solely on the basis of third-party statements, without any independent or corroborative evidence, and without affording an effective opportunity of cross-examination of the persons whose statements were relied upon. The assessee further submitted that loose papers or third-party records, not maintained as regular books of account, could not constitute admissible evidence.

The Commissioner (Appeals), however, upheld the penalty, observing that the penalty proceedings under section 271D were independent of the assessment proceedings and that the assessee had failed to rebut the allegations effectively.

Upon consideration of the rival submissions and material on record, the Tribunal observed that the entire penalty was founded solely on third-party statements recorded during survey proceedings. There was no independent evidence on record to establish that the assessee had actually accepted cash loans in violation of section 269SS. The Tribunal further noted that the assessee was not afforded a meaningful opportunity to cross-examine the persons whose statements were relied upon.

Relying on the judgment of the Hon’ble Supreme Court in Common Cause (A Registered Society) v. Union of India, the Tribunal reiterated that third-party statements and loose papers, without corroboration and without evidentiary value, cannot form the sole basis for adverse action. It was held that penalty proceedings, being quasi-criminal in nature, require strict proof and cannot be sustained on uncorroborated statements.

Accordingly, the Tribunal held that the imposition of penalty under section 271D was not sustainable in law. The penalty of ₹37,00,000 imposed by the Assessing Officer and confirmed by the Commissioner (Appeals) was deleted, and the appeal of the assessee was allowed.

Source Link- https://itat.gov.in/public/files/upload/1768389514-CUXSA6-1-TO.pdf

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