Non-Application of Mind by AO: ITAT quashes Income Tax Penalty u/s 271(1)(c) [Read Order]

The Income Tax Appellate Tribunal (ITAT), Pune Bench, has recently, in an appeal filed before it, held that penalty under section 271 (1) (c) cannot be imposed by AO, by non-application of mind.

The aforesaid observation was made by the Pune ITAT, when an appeal was preferred before it by the assessee, challenging the first appellate order of National Faceless Appeal Centre, Delhi [CIT(A)/NFAC], dated 14/11/2022, passed under Section 250 of the Income Tax Act, 1961, upholding the order of penalty dated 01/01/2022, passed under Section 271(1)(c) of the Income Tax Act, by the National Faceless Assessment Centre [AO], for the assessment year 2016-17.

The short issue emanating from the extant appeal being directed against the action of lower tax authorities in imposing a penalty under Section 271(1)(c), whereas the satisfaction in the order of assessment was recorded for under-reporting or misreporting of the income by the assessee, hearing the contentions of both sides as presented by Shri Shardul Sonawane & Ms Abhilasha Pawar, on behalf of the assessee, and by Shri Ramnath Murkunde, on behalf of the Revenue, as well as perusing the materials available on record, the ITAT observed:

“We note that while culminating the reassessment proceeding in the case of the assessee, the Ld. AO vide concluding para placed at page 4 of his order communicated to the assessee his action of initiating the penalty proceedings under Section 271(1)(c) of the Income Tax Act for ‘under-reporting/misreporting’ of income however by the impugned order has ended up levying penalty under Section 271(1)(c) for ‘furnishing inaccurate particulars of income’, which found perfunctory sustained by the Ld. CIT(A). It shall be purposive to state that, where the Assessing Officer in the course of any proceedings under the Act, is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income he may direct such person to pay such penalty in addition to tax, if any, payable by him. The pre-existence of conditions stipulated in 271(1)(c) are sine qua non for initiation of penal proceedings and this holds good despite the insertion of s/s (1B) to section 271. Thus, this authoritatively settles that the jurisdiction to levy penalty under Section 271(1)(c) fails in the absence of satisfaction as regards to either of the two or both the specific limbs prescribed therein.”

“Undisputedly in the present case before us, the AO in the course of reassessment proceedings has recorded his satisfaction for ‘under-reporting/misreporting’ of income and de-facto-initiated penalty proceedings under Section 271(1)(c) of Act, this per-se sufficient to demonstrate his non-application of mind while recording satisfaction vis-àvis initiation of penal proceedings”, the Coram of S.S Godara, the Judicial Member, and G.D Padmahshali, the Accountant Member added.

Thus, the ITAT finally held:

“In the light of undisputed facts and afore stated deliberation, we are of the considered view that the necessity for prima facie satisfaction triggering initiation of penal proceedings continues to be a jurisdictional fact and same should discernible from the body of assessment order, which in the present case a miss, consequently we have no hesitation in holding the very basis of initiation of penal proceedings under Section 271(1)(c) suffers from infirmity hence bad in law and deserves to be quashed in the light of law laid by the Hon’ble Apex Court in Dilip N Shroff Vs JCIT and we order accordingly. As a result, the appeal of the assessee is allowed.”

To Read the full text of the Order CLICK HERE

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