Income Tax Proceedings against Dissolved HUF Invalid: Calcutta HC Quashes ₹7.29 Crore Penalty [Read Order]

In a recent ruling, the Calcutta High Court quashed a penalty order of Rs. 7.29 crore, ruling that the penalty proceedings under Section 271(1)(c) of the Income Tax Act were legally unsustainable, as they were conducted against an entity that no longer existed following a complete partition of the HUF.

The case arose from Chandravadan Desai (HUF)’s assessment for the Assessment Year 2014-15, in which the Assessing Officer disallowed a capital loss claimed by the HUF and initiated penalty proceedings for furnishing inaccurate particulars of income.

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A show-cause notice was issued in 2016, followed by a penalty order dated 30 June 2017, citing concealment of income. The HUF had already been dissolved on 26 March 2014, and the assessee stated that the penalty proceedings were initiated against a non-existent person.

The assessee argued that the capital loss claim was a genuine mistake in the course of the HUF’s dissolution and that all gains or losses from asset distribution were computed at cost, in compliance with Section 47 of the Income Tax Act.

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A rectification application filed under Section 154 showed that the net income was nil due to carry-forward losses, rendering the assessment tax-neutral. The assessee also relied on the Supreme Court’s ruling in Maruti Suzuki India Ltd., which held that notices issued to non-existent entities are invalid.

Despite these submissions, the National Faceless Appeal Centre (NFAC) upheld the penalty. On a further appeal, the Income Tax Appellate Tribunal (ITAT) set aside the penalty, ruling that the HUF had ceased to exist and that penalty notices and orders were therefore void ab initio.

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The tribunal explained that no tax demand had been made and accepted the assessee’s position that the issue was tax-neutral. The revenue challenged the ITAT's ruling before the Calcutta High Court, relying on Section 171 of the Income Tax Act to argue that liability persists even after partition.

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A division bench led by Chief Justice T.S. Sivagnanam observed that individual members of the HUF were never put on notice and that the Assessing Officer had already accepted the HUF's dissolution during the original assessment.

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The court held that the penalty proceedings suffered from multiple incurable defects, including inconsistency in the grounds for initiating and concluding the penalty and the fundamental issue of proceeding against a non-existent entity. The court explained that penalty proceedings are independent of assessment and require specific proof of concealment or intent to evade tax, neither of which was established in this case.

The court dismissed the Revenue’s appeal and held that the entire penalty proceeding was void in law. The accompanying stay application was also dismissed.

To Read the full text of the Order CLICK HERE

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