The Income Tax Appellate Tribunal, Kolkata, has clarified that penalties under Section 271D of the Income Tax Act cannot be imposed when cash receipts constitute repayment of prior loans or advances extended by the assessee, rather than acceptance of new loans or deposits. This distinction is critical for businesses in agricultural supply chains that operate through structured financing models with farmers.
Background & Facts
The Dispute
The appellant, Matri Bhumi Agritech LLP, operates a cold storage facility in Bhastara Village, Hooghly, West Bengal. It extended advances to local farmers to enable them to repay bank loans taken against Cold Storage Receipts (CSRs). The farmers repaid these advances in cash upon releasing their potatoes from storage. The Income Tax Department treated these cash receipts as "loans or deposits" received by the assessee, triggering penalty proceedings under Section 271D for violation of Section 269SS, which prohibits cash transactions exceeding ₹20,000.
Key Facts
- The assessee withdrew a seasonal cash credit facility of ₹3.30 crore from a bank in March 2016 for on-lending to farmers.
- Farmers repaid these advances in cash during the period May - December 2016, totaling ₹3,30,77,252.
- The assessee deposited these cash receipts into its bank account to repay its own loan to the bank.
- The assessee’s books recorded these receipts as "repayment of loans/advances" to farmers, not as deposits or new loans.
- The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) treated the receipts as deposits under Section 269SS and imposed a penalty of ₹3,30,77,252 under Section 271D.
- The assessee contended that no loan or deposit was received from farmers; instead, it was recovery of its own prior advances.
- No balance sheet or supporting documents evidencing the advance ledger were filed before the Tribunal.
Procedural History
- 12.09.2017: Assessee filed return of income for AY 2017-18 declaring loss of ₹6,65,476.
- 09.03.2022: Notice under Section 274 read with Section 271D issued by JCIT, Range-23, Hooghly, alleging violation of Section 269SS.
- 19.08.2022: Assessee submitted written reply explaining cash receipts were repayments of prior advances, not deposits.
- 26.09.2022: AO passed penalty order under Section 271D for ₹3,30,77,252.
- 11.04.2025: CIT(A) confirmed the penalty, holding that the nature of receipts was "loan or deposit" as defined under Section 269SS.
- 16.04.2026: Hearing concluded before ITAT Kolkata.
- 05.05.2026: Tribunal delivered judgment.
The Parties' Positions
For the Assessee: The cash receipts were not loans or deposits received from farmers, but repayments of advances previously given by the assessee to farmers to enable them to service bank loans. The transaction was a financing arrangement, not a deposit. The assessee sought remand to produce documentary evidence (advance ledger, loan agreements, bank statements) to substantiate this claim.
For the Department: The receipts were credited in the assessee’s books as "advance to rentiers" and were received in cash in excess of ₹20,000. The character of the transaction was determined by the nature of receipt, not the intent. Section 269SS applies regardless of whether the money was originally advanced or later repaid.
Relief Sought
The assessee sought quashing of the penalty order under Section 271D, remand to the AO for fresh adjudication with opportunity to produce evidence, and deletion of the penalty on grounds that Section 269SS was not attracted.
The Legal Issue
The central question was whether Section 269SS of the Income Tax Act is attracted when a person receives cash as repayment of an advance previously extended by them, or whether the provision applies only to the receipt of new loans or deposits from another person.
Arguments Presented
For the Appellant
The Ld. AR argued that Section 269SS prohibits the acceptance of loans or deposits in cash. The assessee did not accept any loan or deposit from farmers; instead, it recovered its own prior advances. The transaction was a repayment, not an inflow of new funds. The Department’s interpretation would penalize legitimate agricultural financing models. The assessee requested remand to produce evidence - such as advance ledgers, loan agreements, and bank records - to prove the sequence of advances and repayments.
For the Respondent
The Ld. DR contended that the character of the transaction is determined by the nature of the receipt as recorded in the books. The cash amounts were credited as "advance to rentiers" and later shown as "return of loan." The fact that the money was used to repay the bank does not alter its character as a deposit received in cash. The AO’s findings were based on the assessee’s own admission in its written submission. Section 273B’s reasonable cause defense was not established.
The Court's Analysis
The Tribunal acknowledged the complexity of agricultural financing models where cold storage units act as intermediaries between farmers and banks. It noted that the assessee’s business model involved advancing funds to farmers to enable repayment of bank loans, with repayment occurring in cash upon potato release.
The Tribunal observed that the CIT(A) had treated the cash receipts as "deposits" under Section 269SS, relying on the fact that the amounts were credited in the assessee’s books. However, the Tribunal emphasized that the substance of the transaction must prevail over mere book entries.
"The company after having received such amount was duty bound to repay back to the creditor which in the instant case may be a Bank or otherwise and it is not the case of the assessee that the amount which was received from Rentiers would remain with the company and was not repayable."
The Tribunal accepted the assessee’s contention that the receipts were repayments of prior advances, not new loans or deposits. It held that Section 269SS is triggered only when a person receives a loan or deposit from another person. Recovery of an advance previously given does not constitute "acceptance of a loan or deposit" under the provision.
The Tribunal further noted that the assessee had not been given a proper opportunity to produce documentary evidence to substantiate its claim. The balance sheet and advance ledger, referenced in the written submissions, were not part of the record before the Tribunal.
Regarding Ground No. 1 on the absence of DIN in the notice, the Tribunal relied on the retrospective insertion of Section 292BA via the Finance Act, 2026, which deems assessments valid despite omission of DIN, and dismissed the ground.
The Verdict
The appeal was partly allowed. The Tribunal set aside the penalty order dated 26.09.2022 and remanded the matter to the Ld. JCIT/ACIT for fresh adjudication. The assessing authority was directed to grant the assessee one more opportunity to produce evidence proving that the cash receipts were repayments of prior advances, not loans or deposits. If the evidence establishes this, the penalty under Section 271D must be deleted. The Tribunal dismissed Ground No. 1 and Ground No. 4.
What This Means For Similar Cases
Repayment of Advances Is Not a Deposit Under Section 269SS
- Practitioners must distinguish between receipt of new funds (loan/deposit) and recovery of prior advances in cash transactions.
- In agricultural, retail, or SME sectors where businesses extend credit to customers, repayment in cash does not trigger Section 269SS.
- Book entries alone are insufficient to establish a deposit; the underlying transactional history must be examined.
Documentary Evidence Is Critical for Substantiating Claims
- Assessees must maintain and produce ledgers, loan agreements, bank statements, and repayment schedules to substantiate claims of advance recovery.
- Failure to file such documents before lower authorities may result in adverse inference.
- Remand for fresh hearing is a viable remedy when evidence was not placed due to procedural oversight.
Procedural Fairness Overrides Technical Defects
- The Tribunal prioritized substantive justice over rigid application of rules.
- Even where statutory violations appear clear, the nature of the transaction must be examined before imposing penalties.
- This judgment reinforces the principle that tax penalties must be proportionate and grounded in the actual economic reality of the transaction.
