Introduction
The Income Tax Appellate Tribunal (ITAT), Pune Bench, in Mitul Jagdishchandra Shah v. Income Tax Officer (ITA No.385/PUN/2026, dated 19.06.2026), delivered a significant ruling on the evidentiary standards required for levying penalty under section 271D of the Income-tax Act, 1961. The case revolved around an alleged cash loan of ₹50 lakhs, which the Assessing Officer (AO) sought to penalize solely on the basis of a third party’s statement recorded during a search. The ITAT, in a well-reasoned order, deleted the penalty, emphasizing that no penalty can be sustained without providing the assessee an opportunity to cross-examine the deponent and without any corroborative evidence. This commentary delves into the facts, legal reasoning, and broader implications of the decision, highlighting the principles of natural justice and the burden of proof in penalty proceedings.
Facts of the Case
The assessee, an individual, filed his return of income for Assessment Year 2022-23 on 28.12.2022, declaring total income of ₹4,33,620/- and agricultural income of ₹90,551/-. The case was selected for scrutiny under CASS based on a verification report. During the assessment, the AO noted that a search under section 132 had been conducted on 13.12.2021 at the business premises of M/s. Sumangal Safe Deposit Vault LLP. Based on information from that search, the AO alleged that the assessee had received a cash loan of ₹50 lakhs from one Mr. Mahendrakumar C. Mehta.
The assessee consistently denied having taken any such cash loan. He repeatedly requested the AO to provide copies of incriminating papers, the statement of Mr. Mahendrakumar C. Mehta, relevant portions of the assessment order showing how the transaction was treated in Mr. Mehta’s case, and an opportunity for cross-examination. The AO, however, did not furnish any of these. Instead, the AO accepted the returned income but initiated penalty proceedings under section 271D, invoking the provisions of section 269SS. In the penalty proceedings, the assessee again denied the transaction, but the AO—relying solely on the statement of Mr. Mahendrakumar C. Mehta—levied a penalty of ₹50,00,000/-. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the penalty, leading the assessee to appeal before the ITAT.
Reasoning of the ITAT
The ITAT’s reasoning forms the core of this commentary and is the most detailed part of the order. The Tribunal meticulously examined the record and the rival submissions. The sole issue was whether the penalty under section 271D could be sustained on the basis of a third party’s statement without any corroborative evidence or opportunity for cross-examination.
1. Absence of Corroborative Evidence
The Tribunal noted that the AO had based the penalty entirely on the statement of Mr. Mahendrakumar C. Mehta recorded during the search of M/s. Sumangal Safe Deposit Vault LLP. No incriminating material was found from the assessee’s possession. The assessee had repeatedly denied the transaction and requested the AO to provide the statement, the incriminating papers, and the assessment order of Mr. Mehta. The AO failed to comply. More critically, the AO did not add the alleged loan amount in the hands of Mr. Mahendrakumar C. Mehta, nor did he provide any evidence that such a cash loan was actually advanced. The ITAT observed that if the alleged sum of ₹50 lakhs was not added in Mr. Mehta’s assessment, then the source of this cash was unexplained, making the allegation against the assessee baseless.
2. Violation of Natural Justice – No Cross-Examination
The Tribunal emphasized that the assessee was never given an opportunity to cross-examine Mr. Mahendrakumar C. Mehta. In penalty proceedings, especially those based on third-party statements, the right to cross-examine is fundamental. The AO’s reliance on a statement that the assessee could not challenge violated the principles of natural justice. The ITAT cited the Supreme Court’s decision in Common Cause (A Registered Society) v. Union of India [2017] 77 taxmann.com 245 (SC), which held that loose sheets of paper found from third parties are wholly irrelevant as evidence unless supported by admissible and cogent evidence. The Court further held that there must be some relevant and reliable evidence pointing to the involvement of the specific third person against whom the allegation is levelled. In this case, the AO had not produced any such evidence linking the assessee to the alleged transaction.
3. Reliance on Coordinate Bench Decision
The ITAT drew strength from the decision of its coordinate bench in DCIT v. Shri Gaurangbhai P. Upadhyay (ITA No. 208 to 216/SRT/2017, dated 12.07.2019). In that case, on identical facts—where documents were seized from a third party and not from the assessee—the penalty under section 271D was deleted. The coordinate bench held that the presumption under sections 132(4A) and 292C does not apply when the documents are not found from the assessee’s possession. Moreover, when the transactions recorded in those documents are not deciphered by the persons from whose possession they were recovered, the charge cannot be established. The ITAT found this reasoning directly applicable to the present case.
4. Penalty Based on Surmises and Conjectures
The Tribunal concluded that the AO’s action was based on surmises and conjectures. There was no evidence that the assessee had ever accepted the cash loan, nor was there any corroborative material such as regular business dealings between the assessee and Mr. Mehta. The AO grossly erred in invoking section 269SS, which prohibits taking loans in cash above a specified limit. Without any substantive proof, the penalty could not stand.
Conclusion
The ITAT allowed the appeal and deleted the penalty of ₹50,00,000/- levied under section 271D. The order underscores the essential requirement for revenue authorities to provide a fair hearing, including the opportunity for cross-examination, before imposing penalties. It reiterates that a third-party statement, without corroboration and without any incriminating material found from the assessee, cannot form the sole basis for penalty. The decision aligns with settled jurisprudence that penalty provisions are quasi-criminal in nature and must be construed strictly. The Revenue’s reliance on loose sheets or unverified statements from unrelated search proceedings is insufficient unless linked to the assessee through admissible evidence. This case serves as a strong precedent for taxpayers facing similar allegations based solely on information from third-party searches.
—