Reasonable Cause Trumps Rigidity: Chhattisgarh High Court Holds Section 273B Overrides Mechanical Levy of Penalty Under Section 271E of the Income-tax Act

Introduction

When do statutory defaults under the Income-tax Act, 1961 (‘Act’) automatically invite penalties, and when does the law provide breathing room for genuine, bona fide mistakes? This question sits at the heart of a recent ruling by the Chhattisgarh High Court in Kamaljeet Kaur Gill[i], where the Court was called upon to decide whether penalty under s. 271E of the Act must invariably follow from a cash loan repayment made in contravention of s. 269T of the Act – or whether the explanation of ‘reasonable cause’ under s. 273B could shield the assessee from such penal consequences.

This decision gains particular relevance given the broader legislative backdrop of various provisions like s. 269T, which aims at curbing the circulation of unaccounted money and ensuring non-cash transactions. Yet, as the Court highlights in this decision, even when statutory defaults are established, the law envisages that genuine, bona fide transactions with adequate reasons should be spared the rigours of penalty. Just because the power to impose a penalty exists, such power must not be used as a matter of mandatory exercise, nor treated as the automatic consequence of every technical breach – rather, it must be exercised judicially.

Brief Facts

• The assessee had taken a commercial vehicle loan from M/s Tata Finance Corporation (‘TFC’) and repaid Rs. 22,96,476/- in cash during the financial year (FY) relevant to assessment year (AY) 2015-16. The Assessing Officer (‘AO’) completed the assessment under s. 143(3) read with s. 147 of the Act on 26.12.2017, accepting the genuineness of the transaction and the assessee’s return of income (ROI).

• Despite accepting the genuineness of the transaction, the AO observed that cash repayments exceeded Rs. 20,000/-, thereby violating s. 269T of the Act, which prescribes mandatory non-cash repayment modes. Consequently, the AO initiated penalty proceedings under s. 271E.

• In response, the assessee submitted a letter dated 05.11.2012 from TFC, which expressly directed it to make cash repayments due to prior payment defaults. However, the AO disregarded this explanation and imposed the penalty under s. 271E, treating the cash repayment as a direct breach of s. 269T of the Act.

• Aggrieved, the assessee filed appeals before the Commissioner of Income-tax (Appeals) [‘CIT(A)’], which was dismissed on 25.10.2022, and subsequently before the Income-tax Appellate Tribunal (‘ITAT’), which was also dismissed on 06.09.2023. Both appellate authorities took the view that non-compliance with s. 269T automatically triggered penalty under s. 271E. With no further recourse, the assessee approached the High Court under s. 260A, raising the pivotal legal question – had the authorities below erred by imposing a penalty without examining the justification of ‘reasonable cause’ under s. 273B for the non-compliance?

Held

• The High Court set aside the penalty orders of the AO, CIT(A), and ITAT, quashing the penalty imposed on the assessee. The Court carefully examined the statutory framework, including: s. 269T, which prohibits repayment of loans or deposits exceeding Rs. 20,000/- in cash and mandates repayment only through specified non-cash modes; s. 271E, which prescribes a penalty equal to the amount repaid in violation of s. 269T; and s. 273B, which provides that no penalty shall be imposed if the assessee proves there was ‘reasonable cause’ for the failure.

• The Court observed that while the language of s. 269T is couched in negative terms, making compliance mandatory,  the Act itself builds in a safeguard under s. 273B of the Act, preventing mechanical imposition of penalties where reasonable cause exists. Relying on the Supreme Court’s decisions in Hindustan Steel Ltd.[ii] and A.B. Shanthi[iii], the High Court emphasized that penalty provisions are quasi-criminal and should not be invoked merely because a technical default has occurred. It was also held in these cases that penal consequences require evidence of deliberate defiance, dishonesty, or conscious disregard of legal obligations.

• The Court further noted that the term ‘reasonable cause’ in s. 273B is not defined in the Act but, as held by the Delhi High Court in Azadi Bachao Andolan[iv], refers to a cause that would constrain a reasonable person of ordinary prudence acting under normal circumstances without negligence or mala fides. Notably, the Court highlighted that none of the authorities below had found the assessee’s transaction to be mala fide, aimed at tax evasion, or lacking in genuineness. In fact, the record showed that the cash repayment was made only because of TFC’s insistence, which constituted a valid and compelling reasonable cause in the opinion of the High Court.

• The Court, therefore, held that ignoring s. 273B effectively converts s. 271E into an absolute penalty, which was never the legislative intent. Accordingly, it was laid down that penalty powers must be exercised judicially, considering the specific facts and explanations provided by the assessee, and not merely because the power to impose such penalties exists under the Act.

Our Analysis

This decision beautifully illustrates the interconnected statutory scheme comprising ss. 269T, 271E, and 273B. While s. 269T lays down the command (prohibition on cash repayments) and s. 271E sets out the consequence (penalty for violation), s. 273B serves as a crucial safety valve. It ensures that taxpayers are not unfairly penalized when genuine circumstances, beyond their control, explain their non-compliance. The High Court’s ruling affirms that these provisions must be read together to achieve a balance between strict enforcement and fair treatment.

The highlight of this decision is that the penalty under the Act is not a mechanical or automatic exercise; accordingly, mere technical or venial breaches, absent mala fides, tax evasion motives, or loss to the Revenue, should not trigger harsh financial consequences. This principle resonates not only under ss. 269T and 271E but also under other similar frameworks – for example, s. 269ST (which restricts cash receipts over Rs. 2 lakh) and s. 271DA (which imposes a penalty for violating s. 269ST). Notably, s. 271DA also expressly provides relief where the assessee can demonstrate ‘good and sufficient reasons’ for the default. Such protective shields reflect the legislative understanding that while anti-black-money safeguards are critical, honest taxpayers must not be trapped in the penalty net due to bona fide lapses.

This interplay between the penal and protective provisions points to a deeper legislative philosophy: penalties under the Act are not intended to be mere revenue-raising tools or punishment for every slip-up. They are designed to deter intentional, mala fide conduct that threatens the integrity of the financial system. By reinforcing the necessity of judicial application of mind before imposing penalties, the Chhattisgarh High Court’s ruling serves as a timely reminder that while compliance is non-negotiable, fairness and discretion remain the cornerstones of a just and equitable tax regime.

End Notes

[i] Kamaljeet Kaur Gill v. Joint Commissioner of Income-tax, 2025 SCC OnLine Chh 4794.

[ii] Hindustan Steel Ltd. v. State of Orissa, (1969) 2 SCC 627.

[iii] Assistant Director of Inspection v. Kum. A.B. Shanthi, [2002] 122 Taxman 574 (SC).

[iv] Azadi Bachao Andolan v. Union of India, 2001 SCC OnLine Del 293.

Authored by Srishty Jaura, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.