Penalty under Income Tax not Imposable for Cash Repayment of Loan on Lender’s Instruction to Curb Interest Escalation: Chhattisgarh HC

The Chhattisgarh High Court quashed income tax penalties on a borrower for cash repayment of ₹82 lakh loan, accepting the "lender's instruction" defense under Section 269SS. Justice Narendra Kumar Vyas held that penalties cannot apply when cash transactions are initiated by financial institutions to prevent interest capitalization. The judgment analyzed bank correspondence proving the lender's insistence on immediate cash repayment to regularize the NPA account. This creates a crucial exception to cash transaction restrictions, recognizing practical banking realities. The court mandated assessing officers to verify lender instructions before imposing penalties, requiring documented evidence of such directives. The ruling impacts thousands of MSME borrowers who face similar penalties during debt restructuring. Tax authorities estimate ₹3,200 crore in contested penalties relate to this issue across India. While welcoming the precedent, the CBDT has sought clarification on distinguishing genuine cases from circular transactions. Practitioners advise borrowers to obtain written lender instructions and maintain bank statement trails to avail this protection during scrutiny assessments.