Andre Spicer, a business school professor, let the youngster set up a stand near their home to sell refreshments to people heading to the Lovebox music festival in Victoria Park, east London, last weekend.
“She basically suggested it herself,” Professor Spicer told the Press Association.
She made a sign and starting selling home-made lemonade - £1 for a large glass, and 50p for a small one.
But after just half an hour, four officials marched over and demanded they stop and issued them with an £150 fine, telling them it could be reduced to £90 if paid quickly.
“They were following a script,” said Professor Spicer, who said daughter burst into tears at they spoke.
“I had to pick her up and hold her.”
Tower Hamlets council has since cancelled the fine and hand-delivered a note to his home to apologise, after Professor Spicer wrote an article in the Daily Telegraph describing the incident.
The four enforcement officers who shut down the stall should have used “common sense”, said the council.
“We are very sorry that this has happened,” a spokesman said.
“We expect our enforcement officers to show common sense and to use their powers sensibly. This clearly did not happen.
“The fine will be cancelled immediately and we have contacted Professor Spicer and his daughter to apologise.”
However, just because the fine has been dropped, that does not mean the children of Tower Hamlets can set up lemonade stands at will.
The council spokesman said: “Strictly speaking it could be seen as illegal trading.”
Professor Spicer suggested enforcement of such rules where children are involved is part of a wider trend.
“The broader point here is how restrictive we have become with children,” he said.
“They are not allowed out of the house or anything.
“All we do is put them in front of the television or send them to adventure parks.”