Penalty Under Section 271(1)(c) Cannot Survive if the Underlying Assessment Order is Quashed

Penalty Under Section 271(1)(c) Cannot Survive if the Underlying Assessment Order is Quashed

The Issue

The Revenue challenged the deletion of a penalty amounting to ₹1,25,53,423 imposed under Section 271(1)(c). The Revenue contended that the CIT (Appeals) erred in deleting the penalty without examining the merits of the concealment or inaccurate particulars of income.

The Facts

• Assessment Stage: An ex-parte assessment was originally framed under Section 144 read with Section 147, resulting in a substantial addition of ₹3,60,17,984.

• Penalty Imposition: Based on this addition, the Assessing Officer (AO) imposed a penalty for “concealment of income” or “furnishing inaccurate particulars.”

• Appellate Turn: However, by the time the penalty appeal reached the CIT (Appeals), the underlying assessment order had already been set aside by the NFAC (National Faceless Appeal Centre) in a separate proceeding.

• CIT(A) Decision: Since the additions on which the penalty was based no longer existed, the CIT(A) deleted the penalty entirely.

The Decision

The ITAT Chandigarh Bench (Vice President Raj Pal Yadav) dismissed the Revenue’s appeal, affirming a fundamental principle of tax jurisprudence:

1. Extinguishment of Genesis: The Tribunal held that the “genesis” of the penalty is the addition made in the assessment. If the assessment order is set aside or quashed, the very foundation of the penalty is extinguished.

2. Statutory Interpretation: Perusing Section 271(1)(c)(iii), the Tribunal noted that penalty is calculated as a percentage of the tax sought to be evaded. If the additions are deleted or the matter is sent back for fresh adjudication, there is no “tax sought to be evaded” currently computed.

3. Fresh Discretion: The Court clarified that if the AO re-determines the income in the remanded (set aside) proceedings and makes fresh additions, the AO may initiate penalty proceedings again at his discretion. However, the original penalty order cannot be sustained in a vacuum.

4. Outcome: The deletion of the ₹1.25 Crore penalty was upheld. In favour of assessee.

Key Takeaways for Taxpayers

• Penalty Follows Assessment: Penalty proceedings are “quasi-criminal” and consequential. If you win your “Quantum Appeal” (the appeal against the tax addition), any penalty based on that addition must be dropped automatically.

• Set Aside vs. Deletion: Even if the High Court or Tribunal “sets aside” your case back to the AO for fresh verification (rather than deleting the addition outright), the existing penalty order becomes infructuous and must be cancelled.

• Protecting Your Records: If your assessment is set aside, ensure you provide a copy of that appellate order to the officer handling your penalty file to ensure the proceedings are dropped immediately.