You took a cash loan and now face penalty equal to the whole amount. Is there any relief?
Yes, through s.273B. The Court upheld s.269SS as valid precisely because s.273B mitigates the hardship: no penalty is imposable if you prove reasonable cause for the failure.
Decided by the Supreme Court (R.P. Sethi and K.G. Balakrishnan, JJ. (judgment delivered by K.G. Balakrishnan, J.)) on 2002-05-03, reported as (2002) 255 ITR 258 (SC); (2002) 174 CTR 513 (SC); (2002) 122 Taxman 574 (SC); (2002) 6 SCC 259; AIR 2002 SC 2188 — Criminal Appeal No. 601 of 1992 and Civil Appeal No. 4478 of 2000. It bears on section 269SS, section 271D, section 273B, section 276DD of the Income Tax Act 1961, in Penalty matters.
Section 273B is the general reasonable-cause defence across most penalties, and this is the Supreme Court's account of why it exists. Note the sting: genuineness alone is not enough — you must also show why you could not use a cheque.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
Two appeals were heard together, both challenging the constitutional validity of ss.269SS and 271D. Section 269SS had been inserted by the Finance Act, 1984 with effect from 1 April 1984 but made operative from 1 July 1984, after searches repeatedly turned up large amounts of unaccounted cash which taxpayers explained as loans or deposits from others, supported by confirmatory letters obtained later, leaving the department unable to trace the source. It barred the taking of a loan or deposit of Rs.10,000 or more otherwise than by account payee cheque or bank draft; that threshold was raised to Rs.20,000 with effect from 1 April 1989. The original penal provision, s.276DD, carried imprisonment up to two years and a fine equal to the loan or deposit; it was omitted with effect from 1 April 1989 and replaced by s.271D, which provides for a penalty equal to the amount alone. In Criminal Appeal No. 601 of 1992 a Single Judge of the Madras High Court had quashed a prosecution, holding s.269SS violative of Article 14, and granted a certificate under Article 134A; the department appealed. In Civil Appeal No. 4478 of 2000 the assessee appealed against a Division Bench judgment in Writ Appeal No. 5447 of 1999 affirming the dismissal of a writ petition challenging the same provisions.
The criminal appeal was allowed and the Single Judge's judgment set aside; the civil appeal was dismissed as without merit, without costs (para 21). Section 269SS is not violative of Article 14: the borrower and the lender, though parties to a single transaction, are not similarly situated when viewed from the angle of tax evasion, and the quashing of the prosecution on that ground could not be sustained (para 11). Nor was it enacted without legislative competence: the law relating to taxation may be enacted under Entry 82 of List I, and legislation intended to make the collection of income-tax easier and systematic falls within that competence (paras 14 and 17). Sections 269SS, 271D and the earlier s.276DD are not unconstitutional as draconian or expropriatory (para 20), because s.273B provides that notwithstanding s.271D no penalty shall be imposable where the person proves reasonable cause for the failure - so that where there is a genuine and bona fide transaction and the taxpayer could not for bona fide reasons take the loan or deposit by account payee cheque or draft, the authority has a discretionary power (para 19).
On Article 14 the Court held that the object of s.269SS is to stop a taxpayer escaping by a false explanation for unaccounted money or false entries in his accounts, the practice being that on search the taxpayer says he borrowed from relatives or friends and the supposed lender then manipulates his own records to fit; in tax legislation it is for Parliament to decide the manner of legislating, subject to constitutional validity (para 8). It applied the Constitution Bench decision in S.K. Dutta v. Lawrence Singh Ingty, which holds that the State has a wide discretion in selecting persons or objects to tax and does not have to tax everything in order to tax something, so that a law is open to attack only where it operates unequally within the range of its own selection (para 9). It approved the reasoning of the Gujarat High Court in Sukhdev Rathi that it is the borrower as a class who evades tax by false entries, explanations and confirmatory letters, whereas a lender paying otherwise than by cheque does not thereby evade income-tax, so the two are not equal or similarly situated for this purpose (para 11). On competence, the heads of legislation in the Lists are not to be construed narrowly or pedantically; entries are to be given their fullest meaning and widest amplitude and extend to all ancillary and subsidiary matters, and an ancillary provision which incidentally transgresses is still valid (para 14). It followed Union of India v. A. Sanyasi Rao, that 'income' in Entry 82 is to be construed liberally and the power to legislate takes in incidental and ancillary matters including provision to prevent evasion of tax (para 15), and Jaora Sugar Mills on what must be shown to establish colourable legislation (para 16), and P.N. Krishna Lal on the presumption of constitutionality and the liberal construction of legislative entries (para 17). On harshness, the Court pointed to the removal of imprisonment when s.276DD gave way to s.271D, and to s.273B (paras 18 and 19).
Therefore, undue hardship is very much mitigated by the inclusion of Section 273B in the Act.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppYes, through s.273B. The Court upheld s.269SS as valid precisely because s.273B mitigates the hardship: no penalty is imposable if you prove reasonable cause for the failure. This was decided by the Supreme Court (R.P. Sethi and K.G. Balakrishnan, JJ. (judgment delivered by K.G. Balakrishnan, J.)) and bears on section 269SS, section 271D, section 273B, section 276DD of the Income Tax Act 1961. It is reported as (2002) 255 ITR 258 (SC); (2002) 174 CTR 513 (SC); (2002) 122 Taxman 574 (SC); (2002) 6 SCC 259; AIR 2002 SC 2188 — Criminal Appeal No. 601 of 1992 and Civil Appeal No. 4478 of 2000. Section 273B is the general reasonable-cause defence across most penalties, and this is the Supreme Court's account of why it exists. Note the sting: genuineness alone is not enough — you must also show why you could not use a cheque. If it applies to you, the first step is this: Plead reasonable cause under s.273B expressly, and identify which penalty section it is being read with.
Two appeals were heard together, both challenging the constitutional validity of ss.269SS and 271D. Section 269SS had been inserted by the Finance Act, 1984 with effect from 1 April 1984 but made operative from 1 July 1984, after searches repeatedly turned up large amounts of unaccounted cash which taxpayers explained as loans or deposits from others, supported by confirmatory letters obtained later, leaving the department unable to trace the source. It barred the taking of a loan or deposit of Rs.10,000 or more otherwise than by account payee cheque or bank draft; that threshold was raised to Rs.20,000 with effect from 1 April 1989. The original penal provision, s.276DD, carried imprisonment up to two years and a fine equal to the loan or deposit; it was omitted with effect from 1 April 1989 and replaced by s.271D, which provides for a penalty equal to the amount alone. In Criminal Appeal No. 601 of 1992 a Single Judge of the Madras High Court had quashed a prosecution, holding s.269SS violative of Article 14, and granted a certificate under Article 134A; the department appealed. In Civil Appeal No. 4478 of 2000 the assessee appealed against a Division Bench judgment in Writ Appeal No. 5447 of 1999 affirming the dismissal of a writ petition challenging the same provisions. The matter was decided on 2002-05-03 by the Supreme Court (R.P. Sethi and K.G. Balakrishnan, JJ. (judgment delivered by K.G. Balakrishnan, J.)). On those facts the Supreme Court held as follows. The criminal appeal was allowed and the Single Judge's judgment set aside; the civil appeal was dismissed as without merit, without costs (para 21). Section 269SS is not violative of Article 14: the borrower and the lender, though parties to a single transaction, are not similarly situated when viewed from the angle of tax evasion, and the quashing of the prosecution on that ground could not be sustained (para 11). Nor was it enacted without legislative competence: the law relating to taxation may be enacted under Entry 82 of List I, and legislation intended to make the collection of income-tax easier and systematic falls within that competence (paras 14 and 17). Sections 269SS, 271D and the earlier s.276DD are not unconstitutional as draconian or expropriatory (para 20), because s.273B provides that notwithstanding s.271D no penalty shall be imposable where the person proves reasonable cause for the failure - so that where there is a genuine and bona fide transaction and the taxpayer could not for bona fide reasons take the loan or deposit by account payee cheque or draft, the authority has a discretionary power (para 19).
On Article 14 the Court held that the object of s.269SS is to stop a taxpayer escaping by a false explanation for unaccounted money or false entries in his accounts, the practice being that on search the taxpayer says he borrowed from relatives or friends and the supposed lender then manipulates his own records to fit; in tax legislation it is for Parliament to decide the manner of legislating, subject to constitutional validity (para 8). It applied the Constitution Bench decision in S.K. Dutta v. Lawrence Singh Ingty, which holds that the State has a wide discretion in selecting persons or objects to tax and does not have to tax everything in order to tax something, so that a law is open to attack only where it operates unequally within the range of its own selection (para 9). It approved the reasoning of the Gujarat High Court in Sukhdev Rathi that it is the borrower as a class who evades tax by false entries, explanations and confirmatory letters, whereas a lender paying otherwise than by cheque does not thereby evade income-tax, so the two are not equal or similarly situated for this purpose (para 11). On competence, the heads of legislation in the Lists are not to be construed narrowly or pedantically; entries are to be given their fullest meaning and widest amplitude and extend to all ancillary and subsidiary matters, and an ancillary provision which incidentally transgresses is still valid (para 14). It followed Union of India v. A. Sanyasi Rao, that 'income' in Entry 82 is to be construed liberally and the power to legislate takes in incidental and ancillary matters including provision to prevent evasion of tax (para 15), and Jaora Sugar Mills on what must be shown to establish colourable legislation (para 16), and P.N. Krishna Lal on the presumption of constitutionality and the liberal construction of legislative entries (para 17). On harshness, the Court pointed to the removal of imprisonment when s.276DD gave way to s.271D, and to s.273B (paras 18 and 19). In the words reproduced by the source cited on this page: "Therefore, undue hardship is very much mitigated by the inclusion of Section 273B in the Act." The decision followed or applied S.K. Dutta, ITO v. Lawrence Singh Ingty [1968] 68 ITR 272 (SC) (Constitution Bench, applied at para 9); K.R.M.V. Ponnuswamy Nadar Sons (Firm) v. Union of India [1992] 196 ITR 431 / [1989] 47 Taxman 290 (Mad.) (approved); Sukhdev Rathi v. Union of India [1995] 211 ITR 157 / [1994] 77 Taxman 7 (Guj.) (approved); Union of India v. A. Sanyasi Rao [1996] 219 ITR 330 / 85 Taxman 321 (SC) (followed, para 15); Jaora Sugar Mills (P.) Ltd. v. State of M.P. AIR 1966 SC 416 (applied, para 16); P.N. Krishna Lal v. Government of Kerala 1995 Supp (2) SCC 187 (applied, para 17).
It was decided by the Supreme Court on 2002-05-03 and is reported as (2002) 255 ITR 258 (SC); (2002) 174 CTR 513 (SC); (2002) 122 Taxman 574 (SC); (2002) 6 SCC 259; AIR 2002 SC 2188 — Criminal Appeal No. 601 of 1992 and Civil Appeal No. 4478 of 2000. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 269SS, section 271D, section 273B, section 276DD, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The criminal appeal was allowed and the Single Judge's judgment set aside; the civil appeal was dismissed as without merit, without costs (para 21). Section 269SS is not violative of Article 14: the borrower and the lender, though parties to a single transaction, are not similarly situated when viewed from the angle of tax evasion, and the quashing of the prosecution on that ground could not be sustained (para 11). Nor was it enacted without legislative competence: the law relating to taxation may be enacted under Entry 82 of List I, and legislation intended to make the collection of income-tax easier and systematic falls within that competence (paras 14 and 17). Sections 269SS, 271D and the earlier s.276DD are not unconstitutional as draconian or expropriatory (para 20), because s.273B provides that notwithstanding s.271D no penalty shall be imposable where the person proves reasonable cause for the failure - so that where there is a genuine and bona fide transaction and the taxpayer could not for bona fide reasons take the loan or deposit by account payee cheque or draft, the authority has a discretionary power (para 19). It arises in Penalty matters, on section 269SS, section 271D, section 273B, section 276DD of the Income Tax Act 1961, and was decided by R.P. Sethi and K.G. Balakrishnan, JJ. (judgment delivered by K.G. Balakrishnan, J.). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show both limbs: that the transaction was genuine, AND why banking channels could not be used. Note s.273B does not cover s.271(1)(c), so do not plead it there.
Still good law. Applied and treated as controlling on s.273B by the Mumbai Special Bench of the ITAT in Deepak Sales & Properties (P.) Ltd. v. Addl. CIT [2018] 95 taxmann.com 166 (Mumbai) (SB), decided 13 June 2018, for the proposition that a genuine or bona fide transaction is not by itself enough to attract relief under s.273B and that bona fide reasons for the non-compliance must also be established. Nothing doubting or overruling it was found. Note that the s.273B plea failed on the facts in that case. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Section 273B does not extend to s.271(1)(c). Two further points from the judgment itself. This was two appeals decided in opposite directions - the department's Criminal Appeal No. 601 of 1992 was allowed and the Single Judge's quashing of the prosecution set aside, while the assessee's Civil Appeal No. 4478 of 2000 was dismissed; so the case is an unqualified upholding of the provisions, not a compromise. And the threshold has moved: the Court records Rs.10,000 as the original figure, raised to Rs.20,000 with effect from 1 April 1989, and it has since been reduced again, so do not read the figure out of this judgment. Note also that in the Special Bench case applying this decision the s.273B plea failed on the facts. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The criminal appeal was allowed and the Single Judge's judgment set aside; the civil appeal was dismissed as without merit, without costs (para 21). Section 269SS is not violative of Article 14: the borrower and the lender, though parties to a single transaction, are not similarly situated when viewed from the angle of tax evasion, and the quashing of the prosecution on that ground could not be sustained (para 11). Nor was it enacted without legislative competence: the law relating to taxation may be enacted under Entry 82 of List I, and legislation intended to make the collection of income-tax easier and systematic falls within that competence (paras 14 and 17). Sections 269SS, 271D and the earlier s.276DD are not unconstitutional as draconian or expropriatory (para 20), because s.273B provides that notwithstanding s.271D no penalty shall be imposable where the person proves reasonable cause for the failure - so that where there is a genuine and bona fide transaction and the taxpayer could not for bona fide reasons take the loan or deposit by account payee cheque or draft, the authority has a discretionary power (para 19).
TaxSphere, “ADIT (Investigation) v Kum. A.B. Shanthi”, https://taxnotice.vittsphere.com/caselaw/case/adit-v-ab-shanthi/ (validity last checked 2026-08-19)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
I took and repaid small cash loans from my family's sister concern, all recorded in the books. Must penalty follow automatically under sections 271D and 271E?
My assessment order says penalty under sections 271D and 271E is initiated. The Joint Commissioner issued his notice months later and passed the penalty order after that. Does time run from the assessment order or from his notice?
Our credit society takes and repays members' money in cash across the counter like a bank. The officer has levied penalty under sections 271D and 271E on the whole turnover. Can it stand?
Our credit society takes deposits and repays loans in cash to members. Can the department levy 271D and 271E on the whole amount?
