Penalty Recovery Stayed When Main Tax Appeal is Admitted by High Court.

Issue

Whether the Income Tax Department can proceed with the recovery of a penalty levied under Section 271(1)(c) for concealment of income, when the underlying tax demand (on which the penalty is based) is the subject of a pending appeal that has been formally admitted by the High Court.

Facts

The assessee paid freight charges to non-resident shipowners without deducting tax at source (TDS) under Section 195.
The Income Tax Appellate Tribunal (ITAT) ruled against the assessee, holding that tax was deductible on these payments.
Based on the ITAT’s order, the Assessing Officer initiated penalty proceedings and passed an order under Section 271(1)(c) for concealment of income.
The assessee filed a Tax Appeal in the High Court against the ITAT’s order on the main tax demand. The High Court admitted this appeal, signifying it involves a substantial question of law.
The assessee then sought a stay on the recovery of the penalty, arguing that it cannot be enforced while the main tax dispute is still pending.

Decision

The High Court ruled in favour of the assessee.
It held that since the assessee’s main (“quantum”) appeal against the Tribunal’s order has been admitted by the High Court, the recovery proceedings for the consequential penalty must be kept in abeyance (stayed) until the High Court gives its final decision on the main appeal.

Key Takeaways

Penalty is Consequential: A penalty for concealment of income under Section 271(1)(c) is entirely dependent on the final determination of the tax liability.
Admission of Appeal is Key: The “admission” of an appeal by a High Court is a formal step that signifies the court has found a “substantial question of law” to be decided.
No Recovery During Pendency: It is a settled legal principle that if the main tax demand is itself under dispute and has been admitted by a High Court, it is illogical and unjust to allow the department to recover a penalty that is based on that very demand.
Basis of Penalty is Sub Judice: If the assessee wins the main tax appeal, the tax liability will be deleted, and the very foundation of the penalty order will cease to exist. Therefore, recovery must be stayed.

HIGH COURT OF MADRAS

OPG Power Generation (P.) Ltd.

Assistant Commissioner of Income-tax

C. Saravanan, J.

W.P. No. 36202 of 2025
W.M.P. Nos. 40461 & 40463 of 2025

SEPTEMBER 19, 2025

B. Kumar, Senior Standing Counsel and S. Ramachandran for the Petitioner. A.P. Srinivas, Senior Standing Counsel for the Respondent.

ORDER

1. In this Writ Petition, the Petitioner has challenged the impugned penalty order dated 29.08.2025 passed under Section 271(1)(c) of the Income Tax Act, 1961 for the Assessment Year 2016-2017.

2. The Petitioner has already suffered adverse orders in both in the hands of the Original Authority, the First Appellate Authority and the Tribunal and the matter is now subject matter of T.C.A.Nos. 117 and 118 of 2025. The Division Bench of this Court has already admitted the appeals vide its order dated 28.07.2025 and has framed the following substantial questions of law to be answered: –

“(1)

Whether freight charges received abroad by nonresidents for goods shipped outside India but delivered in India is chargeable to tax in India?

(2)

Whether the Tribunal erred in holding that tax was deductible under Section 195 of the Income Tax Act, 1961 on freight paid to non-resident shipowners when such income is not chargeable to income-tax in India under Section 44B of the Act?

(3)

Whether Section 44B of the Act, being a special provision with a non-obstante clause, overrides Sections 40(a)(i), 195 and 9 of the Act with respect to non-resident shipping income?

(4)

Whether the Tribunal erred in not applying CBDT Instruction No.1934, which exempts payments outside India for ocean freight on import of cargo from TDS and is binding under Section 119 of the Act?

(5)

Whether the Tribunal erred in holding that CBDT Instruction No.1934, applies for time charter of ships and not for payment for ocean freight when the annexed Office Memorandum specifically applies to ocean freight for import of cargo?

(6)

Whether the Tribunal erred in holding that CBDT Instruction No.1934 applied only to public sector undertakings, when a Co-ordinate Bench of the Tribunal had held that it applies to private companies as well? “

They pertain to the Assessment Year 2014-2015 and 2016-2017. As mentioned above, the impugned order passed under Section 271(1)(c) of the Income Tax Act, 1961 also pertains to the said Assessment year 2016-2017.

3. The principle issue that falls for consideration before the Division Bench in T.C.A. Nos.117 and 118 of 2025 is whether on the telegraphic transfers made to non-residents residing outside India for the freight charges, the Petitioner was required to pay tax or not. The authorities have held that as per Section 195 of the Income Tax Act, 1961, Petitioner was indeed required to pay tax.

4. Learned Senior Counsel for the Petitioner would endeavour to place reliance on the decision of the Punjab and Haryana High Court in the case of CIT v. Gurdaspur Co-operative Sugar Mills Ltd /[2013] 354 ITR 27 (Punjab & Haryana), rendered on 21.01.2024, wherein the Tribunal had set aside the penalty imposed on the said assessee under Section 271(1)(c) of the Act.

5. Learned Senior Counsel would also submit that appeal against the aforesaid order was dismissed, as the Government conceded taking note of the legal position and therefore, the pending applications, if any shall stand disposed of vide order dated 22.01.2024 in the case of Commissioner of Income Tax, IT v. Gurudaspur Cooperative Sugar Mills (P.) Ltd., referred supra.

6. Learned Senior Counsel would also endeavour to place reliance on other decisions, as detailed below: –

(i)

CIT v. S.S.M. Ahmed Hussain [2017] (Madras

(ii)

Gurdaspur Co-operative Sugar Mills Ltd. (Supra)

(iii)CIT

v. Gurdaspur Cooperative Sugar Mills (P.) Ltd. (SC)/[2024] 461 ITR 208 (SC)

(iv)

Pr. CIT v. Hemalatha Rajan (Madras)/[2017] 396 ITR 515 (Madras)

(v)

CIT v. Dr. Harsha N. Biliangady (Karnataka)/[2015] 379 ITR 529 (Karnataka)

(vi)

CIT v. D.Harindran (Madras)

(vii)

Commissioner of Income-tax, Ahmedabad v. Reliance Petroproducts (P.) Ltd.

(viii)

Pr. CIT v. Harsh International (P.) Ltd (Delhi)

(ix)

Pr. CIT v. Control & Switchgear Contractors Ltd.215 (Delhi)

7. Learned counsel for the Respondent on the other hand would submit that the Petitioner has an alternate remedy under Section 246A of the Income Tax Act, 1961 before the appellate commissioner. It is submitted that the impugned order does not suffer from any infirmity and therefore, the writ petition is liable to be dismissed.

8. That apart it is submitted that as against the order of the CIT (Appeals), the Petitioner had preferred an appeal before the ITAT and pending disposal of the appeal. The penalty proceedings initiated pursuant to a notice issued under Section 271(1)(c) of the Income Tax Act, was disposed of vide impugned order dated 29.08.2025 and hence, prays for dismissal of the writ petition.

9. Having considered the submissions made by the learned counsel for the Petitioner and the learned counsel for the Respondent, I am of the view that since the petitioner’s appeal has been admitted in T.C.A.Nos.117 and 118 of 2025, either this proceeding can be kept in abeyance or in the alternative, the Petitioner can be relegated to work out an appellate remedy and all further recovery proceedings can be kept in abeyance pending disposal of the appeal in T.C.A.Nos. 117 and 118 of 2025.

10. In my view, the Petitioner should be asked to work out the remedy before the Appellate Commissioner. However, the recovery proceedings pursuant to the impugned order shall be kept in abeyance in view of the pendency of the appeal in T.C.A.Nos.117 and 118 of 2025 before this Court. At that stage, subject to final outcome of the aforesaid Tax Case Appeals, it is open for the Petitioner to argue the case as to whether the benefit of the decision of the Punjab and Haryana High Court in Gurudaspur Cooperative Sugar Mills (P.) Ltd. (supra), referred to supra would apply to the case of the Petitioner.

11. Since the time limit for filing the appeal has already been expired, the Petitioner is permitted to file such an appeal within a period of 30 days from the date of receipt of copy of this order. It is made clear that in case, such an appal is filed, the appeal shall be kept in abeyance and all further recovery proceedings pursuant to the impugned order shall be kept in abeyance pending disposal of T.C.A.Nos.117 and 118 of 2025.

12. The Writ Petition is disposed of with the above observations. Consequently, connected miscellaneous petitions are closed. There shall be no order as to costs.