Penalty u/s 271(1)(c) Deleted as Quantum Additions Dropped in Fresh Assessment

Penalty u/s 271(1)(c) Deleted as Quantum Additions Dropped in Fresh Assessment

Issue

Whether a penalty levied under Section 271(1)(c) for concealment of income can legally survive when the underlying assessment order has been set aside by the Tribunal, and in the subsequent fresh assessment, the returned income of the assessee has been accepted without any additions.

Facts

• Original Assessment: The assessee filed a return declaring Rs. 62.43 Lakhs for AY 2014-15. The AO originally assessed the income at Rs. 1.09 Crores and levied a penalty of Rs. 32.49 Lakhs (200%) for the additions.

• Appellate History:

  • The CIT(A) reduced the penalty to Rs. 16.24 Lakhs.

  • Meanwhile, the quantum matter (validity of additions) reached the ITAT. The Tribunal set aside the original assessment order in 2022.

• Fresh Assessment: Pursuant to the ITAT’s direction, the AO passed a fresh assessment order on 27.02.2024 under Section 143(3) r.w.s 254.

• Outcome: In this fresh order, the AO accepted the returned income of Rs. 62.43 Lakhs. No additions were made.

Decision

• The Income Tax Appellate Tribunal (ITAT) allowed the appeal and deleted the penalty.

• Basis: The Tribunal observed that the penalty under Section 271(1)(c) is calculated based on the “amount of tax sought to be evaded” due to additions made over the declared income.

• Zero Additions: Since the fresh assessment order accepted the returned income without any addition, the charge of concealment or furnishing inaccurate particulars ceased to exist.

• CIT(A)’s Error: The Tribunal noted that the First Appellate Authority failed to take cognizance of the fresh assessment order where the additions were deleted. Without quantum additions, the penalty has no legs to stand on.

Key Takeaways

• Penalty Depends on Quantum: Proceedings for penalty under Section 271(1)(c) are derivative. If the assessment (quantum) on which the penalty is based is quashed or the additions are deleted, the penalty automatically fails.

• Effect of Set-Aside: When an assessment is set aside for de novo (fresh) adjudication, the original penalty order usually becomes infructuous. A fresh penalty can only be initiated if additions are made in the fresh assessment.

• Tax Sought to be Evaded: Penalty is strictly calculated on the difference between assessed income and returned income. If Assessed Income = Returned Income, the penalty is nil.

THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, ‘B’ CHANDIGARH

Vimal Alloys Pvt. Ltd.,
V-Saunti, Amloh Road,
Mandi Gobindgarh.

Vs
The DC/ACIT,
Circle,
Mandi Gobindgarh.