Income Tax Penalty u/s 271(1)(c): Kerala HC directs Legal Heirs to Appeal [Read Order]

The Kerala High Court disposed of a writ petition challenging an income tax penalty under Section 271(1)(c) of the Income Tax Act, 1961, directing the legal heirs of the deceased assessee to pursue their case through the statutory appeal process.

The court found that the central issue involved a disputed question of fact, which is not typically adjudicated in a writ petition under Article 226 of the Constitution.

The legal heirs of M.J. George challenged a penalty order issued under Section 271(1)(c) for the assessment year 2006-2007. The case originated from an assessment where a substantial sum of ₹9.68 crore was added to the assessee's income as 'Long Term Capital Gains' from a land sale. This led to a prolonged legal battle through various appellate authorities, including the Income Tax Appellate Tribunal and the High Court, before the penalty was ultimately imposed in 2024.

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The petitioners' primary contention was that the penalty proceedings were initiated improperly. They argued that the proceedings were started long after the assessment was completed via a notice in 2024, which is not permissible as Section 271(1)(c) requires penalty proceedings to be initiated "in the course of" the original assessment proceedings.

They consistently maintained that the assessee had never received a show-cause notice allegedly dated 31.12.2008, which the department claimed was the basis for the penalty.

The Income Tax Department contended that the penalty proceedings were a continuation of an original show-cause notice issued on 31.12.2008. They argued that the 2024 notices merely referenced these earlier, ongoing proceedings. The department pointed to a reply submitted by the assessee, which they claimed contained a clear reference to the 2008 notice, indicating the assessee was aware of it and had replied.

The central factual dispute revolved around the existence and service of the alleged 2008 show-cause notice. Despite a court directive, the Income Tax Department was unable to produce a copy of the 2008 notice. However, the court noted a contradictory statement in the assessee's own reply, where he stated, "After much difficulty I got a copy of the notice...". This created a factual ambiguity as to whether the notice was ever actually served.

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Justice Ziyad Rahman A.A. held that the issue of whether the 2008 notice was properly served constituted a "disputed question of fact." The court reasoned that such factual disputes, requiring careful verification of documents and surrounding circumstances, cannot be satisfactorily adjudicated in a writ petition under Article 226 of the Constitution. The proper remedy, the court found, was the statutory appeal available to the assessee before the first appellate authority.

Accordingly, the court disposed of the writ petition. It granted the legal heirs a period of one month from receiving the judgment to file a statutory appeal against the penalty order. The appellate authority was directed to entertain this appeal and decide the matter independently, without being influenced by the High Court's observations. The court's interim order was extended for a further three months to allow the petitioners to pursue this remedy.

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