Every one of my cash payments was under the limit and the officer has still disallowed the lot, thrown out my books and now wants a penalty equal to the cash I took on my plot. Where do I start?
The client is a proprietor trading in cement, steel and hardware from a town in the Sikar district, assessed for AY 2023-24 on a turnover of Rs 6,42,00,000. The order under s.143(3) dated 12 March 2026 does three things. It disallows Rs 12,76,000 under s.40A(3): Rs 8,64,000 of freight paid in cash to one goods transporter across forty-one payments, each between Rs 12,000 and Rs 31,000, of which on nine days two payments were made to that transporter on the same day aggregating between Rs 38,000 and Rs 52,000; and Rs 4,12,000 paid to two suppliers in individual amounts of Rs 8,000 to Rs 9,800, of which on eleven days three or four payments went to the same supplier on one day aggregating between Rs 26,000 and Rs 38,000. It rejects the books under s.145(3) for the absence of a stock register and unvouched cash sales, and estimates gross profit at 8.5% against the 6.2% declared, adding Rs 9,40,000, the rate being drawn from three comparable dealers who are not named and whose figures were not put to the client. And it initiates penalty under s.270A and s.271A, saying nothing at all about the cash the client received on a land sale. On 4 June 2026 a separate notice under s.271D arrived from the Additional Commissioner proposing a penalty of Rs 22,00,000 on cash received against the sale of an inherited plot registered on 9 January 2023, of which Rs 3,00,000 was a token advance taken in October 2022 and Rs 19,00,000 was handed over at the sub-registrar's office on the day of registration. The reference from the assessing officer to the Additional Commissioner is dated 28 May 2026. The client has the freight bills, the transporter's declaration and permanent account number, purchase bills, the cash book, the registered sale deed and the bank statements.
Rebuild both ledgers payee by payee and date by date before answering a word of the disallowance, because the section does not disallow payments over a limit, it disallows expenditure where the payment or the aggregate of payments to one person in one day crosses the limit, and the two classes of payment on this file have different limits. Freight paid for plying, hiring or leasing goods carriages carries a ceiling of Rs 35,000, not Rs 10,000. On the officer's own figures, forty-one freight payments of Rs 12,000 to Rs 31,000 each are inside that ceiling on every day except the nine on which two payments were made to the same transporter, and the supplier payments are caught only on the eleven aggregation days. The disallowance should therefore be a fraction of Rs 12,76,000 rather than the whole of it, and until that schedule exists nothing else in the reply is worth writing.
The test is per person per day, so three payments of Rs 9,000 to the same supplier on one day are one payment of Rs 27,000; and the consequence of crossing the line is the whole of that expenditure and not the amount above the line. The general ceiling is Rs 10,000 and the ceiling for a payment made for plying, hiring or leasing goods carriages is Rs 35,000. That distinction is worth most of the disallowance on this file and it is the officer's own material that proves it, so the schedule should be built from his annexure and tied back to the freight bills. Check separately whether any liability booked in an earlier year was settled in cash during this year, because the companion provision taxes such a payment as income of the year of payment and the officer has not looked at it.
The exception rule is a list of circumstances and not a general dispensation, and its clauses are specific: payments in a village or town not served by a bank, payments for agricultural or similar produce made to the cultivator, grower or producer, payments to an agent required to pay cash on the assessee's behalf, adjustments against liabilities for goods supplied, and so on. The Supreme Court upheld the section, applied it to purchases of stock-in-trade, and said in terms that it must not be read in isolation or to the exclusion of the exception rule, and that considerations of business expediency and other relevant factors are not excluded. The same judgment is the reason the reply cannot rest on honesty: the Court also said that genuine and bona fide transactions are not taken out of the sweep of the section by the mere fact of cash. So the reply names a clause, or it names the circumstance that made the prescribed mode impracticable on that day, with the distance to the branch, the hour and the payee's insistence recorded now rather than reconstructed later.
Where no clause fits, the argument that is actually run is that the transaction is genuine and every payee is identified. A Tribunal deleted a disallowance on that footing, on cash paid to sellers named in registered sale deeds, treating the exception rule as not exhaustive and business expediency as a live consideration. A High Court has taken the opposite view on materially the same argument, upholding a disallowance where the assessees rested on genuineness and identifiable payees, and using against them the fact that three-quarters of the consideration had gone through banking channels to show that banking facilities were available. That second point is the strongest thing the officer has on this file, because most of the client's freight and purchases were paid by bank transfer. Neither decision binds an assessee in Rajasthan, but the Tribunal order is from the bench that will hear this appeal, which is where it will do its work.
An estimate is only as good as the rejection that precedes it. The officer must first record why the accounts are incorrect, incomplete or not drawn on a proper method, which is why a fall in the gross profit ratio is not by itself a ground to discard books. Once they go, two limits bite on the estimate. The Supreme Court has held that the officer is not entitled to assess on pure guess without reference to evidence, and that material he relies on must be disclosed to the assessee with an opportunity to rebut it, which disposes of three unnamed comparables. The same Court has held that although some guesswork is inevitable, the figure must be honest and must bear a reasonable nexus to the available material and the circumstances of the case. The honest advice on this file is that the missing stock register is the client's own default and it will not be wished away, so run the rejection ground first and the quantum ground in the alternative, and put the past history, the audited results and a quantitative reconciliation on record now rather than at appeal.
The provision bars taking or accepting a loan, a deposit or a specified sum, and the specified sum is defined widely as any sum receivable, whether as advance or otherwise, in relation to transfer of an immovable property, whether or not the transfer takes place. A Tribunal has set aside a penalty of this kind in full, holding that sale consideration on a completed transfer is neither a loan nor a deposit and that the penalty is entirely derivative of a contravention of the substantive provision. The library flags that decision as unsettled and contested, with Tribunal authority the other way upholding a penalty on cash received against a large sale consideration, and records that what is really doing the work is the definition of a specified sum introduced by the 2015 amendment. The practical consequence for this file is that the Rs 3,00,000 token advance taken in October 2022 is far more exposed than the Rs 19,00,000 handed over at registration, and the two should never be defended as one sum. Expect the department's alternative case to be the general cash receipt provision instead, which is a different section, a different penalty and, importantly, outside the reasonable cause relief.
The penalty is imposed by the Joint Commissioner, but the proceeding begins with the assessing officer's satisfaction recorded in the order he passes, and the Supreme Court has held that where the assessment carrying that satisfaction is set aside the satisfaction does not survive and the penalty falls with it. Where no satisfaction was recorded at all the notice is bad from the start, and on this file the order records penalty under s.270A and s.271A and says nothing about the cash on the land sale. Limitation for this penalty runs under the residual limb rather than the appeal-linked limb, because the penalty is not attached to an assessment that goes on appeal, and a High Court has held that the words pointing to when action for imposition of penalty is initiated point to the first introductory step, which is the assessing officer's reference to the Joint Commissioner and not the show-cause notice issued later. On these dates that means 28 May 2026 and not 4 June 2026. Check also whether the substituted quarterly rule applies, since any order will be passed well after 1 April 2025.
The Supreme Court upheld the cash-receipt provision precisely because the reasonable cause provision mitigates the hardship, giving the penalty authority a discretion to refrain from levying. But the same reasoning carries the sting: genuineness alone is not enough, and the assessee must additionally show bona fide reasons why an account payee instrument could not be used. A Tribunal deleted a penalty on a cash loan taken from a relative on two grounds, reasonable cause and a wider reading of the section, and the library advises leading with the ground that can be proved rather than the construction point. Behind both sits the general principle that a penalty for failure to carry out a statutory obligation is not to be imposed merely because it is lawful to do so, and not at all for a technical or venial breach or where the default flowed from a bona fide belief; that principle still works for procedural penalties read with the reasonable cause provision, though its description of such penalties as quasi-criminal has been displaced for concealment penalty.
Rs 8,64,000 of freight paid to one transporter in a year is squarely within the contractor withholding provision, and the disallowance that follows a failure there is a separate one from the cash disallowance and can be levied alongside it. A High Court has held that where the assessee obtained the transporter's permanent account number and reported the particulars in the prescribed quarterly statement, the statutory exemption applied and there was nothing for the disallowance provision to operate on, and the note on that decision records that proper reporting in the statement is sufficient compliance even where no authority had been nominated to receive the declaration. If the reporting was not done, the disallowance is thirty per cent of the sum and not the tax and not the whole expense, it comes back in the year the tax is paid, and there is a route under the second proviso by which the assessee is deemed to have deducted and paid on the date the payee filed his return, if the accountant's certificate is furnished. Splitting payments to keep each one below the threshold does not work.
The cash disallowance almost always comes down, and it comes down on arithmetic rather than on principle: once the day-wise schedule is filed and the higher goods carriage ceiling is applied to the freight, what is left is usually the aggregation days alone, which on these facts is a small fraction of Rs 12,76,000. What remains after that turns on whether a clause of the exception rule can be named, and if none can, on which line the bench prefers, which is genuinely uncertain. The book rejection normally survives where there is no stock register, but the estimated rate rarely survives intact where the comparables were never disclosed, and the usual outcome at the first appeal is a rate somewhere between the declared and the estimated figure. The cash penalty on the land sale is the item most likely to be disposed of without reaching the merits at all, because the assessment order records no satisfaction on it and the limitation clock starts from the reference; the token advance is the part that will still need answering on reasonable cause.