Penalty Under Section 271(1)(c) Inapplicable Where Prepaid Tax

Penalty Under Section 271(1)(c) Inapplicable Where Prepaid Tax Exceeds Assessed Tax In Reassessment Proceedings

Issue

Whether a penalty for concealment of income under Section 271(1)(c) read with Explanation 3 and Explanation 4(c) can be levied when the tax deducted at source (TDS) and deposited prior to the issuance of a Section 148 notice exceeds the final tax liability determined on the returned income accepted without additions.

Facts

Non-Filing of Original Return: The assessee failed to furnish an original return of income under Section 139 for Assessment Year 2015-16.
Reassessment Proceedings: Proceedings under Section 147 were initiated, and a notice under Section 148 was issued to the assessee.
Filing & Acceptance of Return: In response to the Section 148 notice, the assessee filed a return declaring total income and claimed credit for Tax Deducted at Source (TDS), which resulted in a tax refund. The Assessing Officer (AO) accepted the returned income in full without making any additions.
Levy of Penalty: Despite accepting the return without additions, the AO levied a minimum 100% penalty under Section 271(1)(c), reasoning that the assessee disclosed income only post-reopening, thereby treating the assessed tax as “tax sought to be evaded.”

Decision

Applicability of Deemed Concealment Provisions: In favor of Assessee. In cases falling under Explanation 3 to Section 271(1)(c) (deemed concealment due to non-filing), the “tax sought to be evaded” must be computed in conjunction with Clause (c) of Explanation 4.
Absence of Tax Evaded: In favor of Assessee. Because the prepaid taxes (TDS) deposited prior to the Section 148 notice exceeded the final tax liability determined by the AO, the “tax sought to be evaded” was nil. Consequently, there was no legal basis or justification to sustain the penalty under Section 271(1)(c).

Key Takeaways

Interaction of Explanation 3 & Explanation 4(c): For non-filers processed under Section 148, deemed concealment under Explanation 3 does not automatically lead to a penalty unless a positive “tax sought to be evaded” exists under Explanation 4(c).
Impact of Prepaid Taxes: Taxes paid or deducted at source prior to the issuance of a Section 148 notice must be set off while determining the quantum of tax evaded.
No Penalty Where Assessment Matches Accepted Return: When accepted assessed tax is fully covered by advance tax or TDS—resulting in a refund or zero net liability—no penalty for concealment under Section 271(1)(c) can survive.

IN THE ITAT MUMBAI BENCH ‘E’

Hitesha Sachin Takur

Income-tax Officer

Siddhartha Nautiyal, Judicial Member
and Vikram Singh Yadav, Accountant Member

IT Appeal No. 452 (Mum.) of 2026
[Assessment year 2015-16]

JULY 30, 2026

Bhupendra Shah for the Appellant. Ashok Charan, Sr.DR for the Respondent.

ORDER

Vikram Singh Yadav, Accountant Member. – This is an appeal filed by the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [‘Ld.CIT(A)’], dated 02.01.2026, pertaining to Assessment Year (AY) 2015-16, wherein the ld. CIT(A) has sustained the levy of penalty u/s. 271(1)(c) amounting to Rs. 3,75,652/-.

2. Briefly, the facts of the case are that the assessee did not file her return of income originally u/s. 139(1) of the Act. Subsequently, the proceedings were initiated u/s. 147 and notice u/s. 148 was issued. In response, the assessee filed her return of income stating that the same may be treated as a return filed in compliance with the notice u/s. 148 of the Act. In the return of income, the assessee disclosed ‘Income from salary’, loss under the head ‘Income from House Property’, Short Term Capital Gains and ‘Income from other sources’ and total income was disclosed at Rs. 18,05,950/- and tax liability was determined at Rs. 3,75,650/- and after claiming credit of TDS of Rs. 4,30,896/-, the refund of Rs. 55,240/- was claimed.

3. The reassessment proceedings were thereafter conducted after calling for necessary information/documentation and the same were completed u/s. 143(3) r.w.s. 147 of the Act, dated 04.03.2024, wherein the income declared by the assessee in her return of income pursuant to notice u/s. 148 was accepted. No addition, disallowances or variation of any nature was made to the returned income and the refund of Rs. 55,244/- was determined and the assessment proceedings attained finality in terms of income so disclosed by the assesse in her return of income.

4. Separately, penalty proceedings u/s. 271(1)(c) of the Act were initiated and subsequently, the Assessing Officer levied the penalty u/s. 271(1)(c) amounting to Rs. 3,75,652/- on the reasoning that the assessee had failed to file the return of income u/s. 139(1) of the Act and that the income came to be disclosed only pursuant to reopening of assessment proceedings and the tax sought to be evaded was determined at Rs. 3,75,652/- and minimum penalty @ 100% of tax to be evaded amounting to Rs. 3,75,652/- was levied vide order passed u/s. 271(1)(c) of the Act, dated 26.09.2024.

5. The assessee thereafter carried the matter in appeal before the ld. CIT(A) and it was submitted that although the return of income was not filed u/s. 139(1) of the Act, the return was duly filed in response to notice u/s. 148 of the Act, wherein the entire income for the year was fully and truly disclosed. It was submitted that the reassessment proceedings were completed u/s. 143(3) r.w.s. 147 by accepting the returned income without making any addition, disallowance or variation whatsoever and in absence of any addition to the income or any finding of concealment or furnishing of inaccurate particulars of income, the foundational requirements for levy of penalty u/s. 271(1)(c) does not stand satisfied. It was further submitted that the non-filing of return u/s. 139(1) by itself, does not ipso facto attract penalty for concealment, particularly when the income disclosed in response to Section 148 has been accepted.

6. The submissions so filed by the assessee were considered by the ld CIT(A). As per the ld. CIT(A), it is an admitted position emerging from the assessment records that the return of income filed by the assessee in response to notice u/s. 148 was accepted in full and that no addition or disallowance, or variation was made to the income so returned while completing the reassessment u/s. 143(3) read with Section 147. Thus, there is no dispute with regard to the quantum of income assessed which remains identical to the income disclosed by the assessee in the return filed pursuant to reopening proceedings. It was held that in the present case, the penalty has been levied essentially on the premise that the assessee had not filed the return of u/s. 139(1) and that the income came to light only pursuant to reopening of the assessment. The ld CIT(A) held that such reasoning, by itself, does not automatically meet the statutory threshold required u/s. 271(1)(c); however, the explanation to section 271(1)(c) places an onus on the assessee to establish that the failure to disclose income at the initial stage was supported by a bonafide explanation and that all material facts were subsequently disclosed. It was held that in the instant case, the failure to file the return of income u/s. 139(1) resulted in initiation of reassessment proceedings, during which income chargeable to tax came to be disclosed only pursuant to notice u/s. 148. It was held that the penalty proceedings u/s. 271(1)(c), though distinct from the assessment proceedings, one has to examine whether the initial non-disclosure of income stands satisfactorily explained in terms of Explanation 1 to the said section. It was held that in the instant case, the explanation offered by the assessee does not sufficiently discharge the onus cast under Explanation 1 to section 271(1)(c) and accordingly, the levy of penalty u/s. 271(1)(c) was held to be justified and the appeal of the assessee was dismissed.

7. Against the said order and findings of the ld CIT(A), the assessee is in appeal before us.

8. During the course of hearing, the ld. AR reiterated the submissions made before the lower authorities and it was submitted that all the income stood fully disclosed in the return filed in response to notice u/s. 148, that the AO accepted such disclosure without any modification, and that there was neither concealment of income nor furnishing of inaccurate particulars of income so as to warrant the levy of penalty u/s. 271(1)(c) of the Act. Further, reliance was placed on the Coordinate Bench decision in case of Dwarka Cement Works Ltd. v. ITO [IT Appeal No. 6706 (Mum.) of 2025, dated 23-2-2026] wherein the Coordinate Bench has rejected one of the arguments of the ld. CIT(A), wherein he has invoked the Explanation 1 to section 271(1)(c) and it was held that the said explanation and the principles therein would apply where there is an addition or disallowance sustained in reassessment giving rise to deemed concealment and given that in the said case, in the reassessment order, the Assessing Officer has not made any addition over and above the income returned u/s. 148, it was held that the foundational requirement for invocation of Explanation 1 itself is absent. It was accordingly submitted that in the instant case as well, since there is no variation or adjustment made to the returned income, Explanation 1 to section 271(1)(c) has been wrongly invoked by the ld. CIT(A) while confirming the findings of the AO.

9. Further, our reference was drawn to the Explanation (3) to Section 271(1)(c) and it was submitted that even if, the case of the assessee falls under any of the Explanations, it is Explanation (3) to section 271(1)(c) which needs to be considered and the said explanation has to be read along with clause (c) to Explanation (4) to section 271(1)(c) which defines the term tax sought to be evaded in cases where Explanation (3) applies.

10. It was submitted that Explanation (3) talks about the situation where the assessee fails without the reasonable cause to furnish within the period specified under sub-section (1) of Section 153, a return of its income which is required to be furnished u/s. 139 and until the expiry of the period aforesaid, no notice has been issued to him and the Assessing Officer is satisfied that in respect of such assessment year, such person has taxable income, then such person shall for the purposes of clause (c), be deemed to have concealed the particulars of his income in respect of such assessment year notwithstanding that such person furnishes a return of his income, at any time, after the expiry of period aforesaid in pursuance of the notice u/s. 148 of the Act. It was submitted that though the Assessing Officer and the ld. CIT(A) have not talked specifically about the Explanation (3), if at all, any Explanation has to be invoked, it is the Explanation (3) as the assessee could not furnish her original return of income u/s 139 and it is only pursuant to notice issued u/s Section 148, the return of income has been furnished.

11. It was further submitted that the Explanation (3) has to be read along with the meaning of “the amount of tax sought to be evaded” and which is provided in clause (c) to Explanation (4) where it provides that “where in any case to which Explanation 3 applies, the amount to tax sought to be evaded shall be taxed on total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self-assessment tax paid before the issuance of notice u/s. 148 of the Act.”

12. It was submitted that in the instant case, it is an admitted fact as evident from the records that an amount of Rs. 4,30,896/- has been deducted at source from salary and interest income and those taxes have been deducted and deposited well before furnishing the return of income in response to notice u/s 148 and in the return of income, the assessee has claimed due credit of the same and even the Assessing Officer for determining the tax liability has taken the same into account, wherein, he has determined the tax liability at Rs. 3,75,652/- and after giving credit of TDS amounting to Rs. 4,30,896/-, has determined the refund due to the assessee amounting to Rs. 55,244/-. It was accordingly submitted that on this limited ground itself, the assessee deserves the necessary relief as there is no tax sought to be evaded as the taxes were already deposited by way of TDS prior to the filing of the return of income itself and therefore, there is no question of any tax sought to be evaded by the assessee. It was submitted that the assessee has infact made the reference thereof in her submissions before the Assessing Officer which however, has not appreciated by the Assessing Officer while determining the tax sought to be evaded without taking into consideration the taxes already deducted at source and the penalty has been levied simpliciter taking the tax liability so determined and the findings of the Assessing officer have thereafter been confirmed by the ld. CIT(A).

13. The ld. DR has been heard, who has relied on the order passed by the lower authorities.

14. We have heard the rival contentions and perused the material available on record. Admittedly, it is a case where the assessee has filed her return of income pursuant to notice u/s. 148 of the Act. No reasonable cause has been shown in terms of non-filing of the return of income originally u/s 139 of the Act. Therefore, it is a case of deemed concealment in terms of Explanation (3) to section 271(1)(c) of the Act.

15. It is further noted that the return income so filed by the assessee has been accepted and there has been no adjustment or variation and the returned income amounting to Rs. 18,05,950/- has been assessed as such at the same figure and the tax liability has been determined at Rs. 3,75,652/- and as against that, there is already tax deposited on behalf of the assessee by way of TDS amounting to Rs. 4,30,896/- well before the issuance of notice u/s 148 of the Act. Therefore, being a case of deemed concealment in terms of Explanation (3), one has to read the same along with clause (c) of Explanation (4) for determining the tax sought to be evaded and in this regard, we find merit in the contentions advanced by the ld. AR that there is no tax sought to be evaded as the tax already deducted and deposited prior to issuance of notice u/s 148 exceeds the final tax liability so determined by the Assessing Officer. In light of the same, we find that there is no basis and justification for levy of penalty amounting to Rs. 3,75,652/- u/s 271(1)(c) of the Act and the same is hereby directed to be deleted.

16. In the result, the appeal filed by the assessee is allowed.