Facts of the Case:

  • The assessee, M/s. Shri Sidhdata Ispat (P) Ltd., incorporated in 2002, filed its income tax return for the relevant year showing a loss of ₹1,63,68,608.
  • The Assessing Officer (AO) under Section 143(3) assessed total income at ₹2,06,78,913, disallowing cash receipts of ₹1,48,82,000 as share application money and ₹98,30,000 received under Section 269SS.
  • The CIT (Appeals) allowed the assessee’s appeal, observing that:
    • Cash received from promoters and relatives as share application money was legitimate.
    • The identity and source of funds of share applicants were established.
    • Mere suspicion of the AO cannot form the basis of addition.
  • Subsequently, a penalty under Section 271D was imposed, reduced by the CIT(A) to ₹3,51,47,523. The Revenue appealed against the deletion of penalty.

Issues Involved:

  1. Whether the ITAT’s deletion of penalty under Section 271D for violation of Section 269SS was justified.
  2. Whether receipt of share application money in cash, properly accounted and from identified shareholders, constitutes a violation attracting penalty.
  3. Applicability of judicial precedents where reasonable cause was found to exist for cash receipts.

Petitioner’s Arguments (Revenue):

  • Inclusion of ₹3,70,47,523 should automatically attract penalty under Section 271D.
  • Share application money received in cash without allotment of shares violates Section 269SS.
  • The assessee failed to demonstrate whether shares were allotted, making the penalty mandatory.

Respondent’s Arguments (Assessee):

  • Cash received as share application money was from identified promoters and relatives; affidavits, balance sheets, and bank statements substantiated the transaction.
  • Section 68 requirements were satisfied, establishing identity and source of funds.
  • Precedents like CIT v. Rugmini Ram Raghav Spinners Pvt. Ltd. (304 ITR 417) and CIT v. Vegetable Products (88 ITR 192) support deletion of penalty when a plausible explanation exists.
  • The addition was based on conjecture, not evidence.

Court Order / Findings:

  • The High Court upheld the Tribunal’s decision deleting the penalty. Key points:
    • Identity and source of share applicants were established beyond doubt.
    • Cash receipt for share application, bona fide and properly documented, cannot attract penalty.
    • Judicial precedents permit deletion of penalty when reasonable cause exists:
      • Rugmini Ram Raghav Spinners Pvt. Ltd., 304 ITR 417 (Madras HC)
      • Vegetable Products Ltd., 88 ITR 192 (SC)
      • Bhalotia Engineering Works Pvt. Ltd., 275 ITR 399 (Jharkhand HC)
    • Tribunal’s order was concurrent and factually based; no interference warranted.
  • Appeal by Revenue dismissed.

Important Clarifications:

  • Cash received as share application money from promoters/relatives is valid if identity and source are verifiable.
  • Mere suspicion or low declared income of contributors does not warrant additions or penalties.
  • Two competing judicial views may exist; the view favorable to the assessee can be adopted for penalty purposes.

Sections Involved:

  • Section 143(3) – Assessment
  • Section 68 – Cash Credits
  • Section 269SS – Restrictions on cash transactions
  • Section 271D – Penalty for acceptance of cash in violation of Section 269SS
  • Section 273B – Reasonable cause for penalty exemptio 

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2012:DHC:5879-DB/SRB20092012ITA12472011.pdf  

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