Penalty proceedings would not sustain if an assessment is debatable: Delhi High Court

Penalty proceedings would not sustain if an assessment is debatable: Delhi High Court

The Delhi High Court (HC) has held that the penalty proceedings shall not survive if an assessment is debatable

The Assessing Officer (AO) had passed the assessment under Section 153A read with Section 143(3) of the Income Tax Act (IT Act), which was challenged by M/s Harsh International Pvt. Ltd. (respondent-assessee) before the appellate authorities. In 2004- 05 the appeal of the assessee was admitted and a similar appeal was filed by the respondent for the assessment years 2005-06, being ITA No. 1/2017 that was admitted by the Court vide order dated 18 July 2017.

Under Section 271(1)(c) of the IT Act, the AO had initiated penalty proceedings against the respondent. A notice was issued on30 December 2006 under Section 274 read with Section 271(1)(c) of the Income Tax Act, 1961 (IT Act).

After disposal of the appeals, a show-cause notice (SCN) was issued to the respondent. After taking into consideration the reply to the notice, the AO levied the penalties for the relevant years through an order dated 20 March 2014. The respondent challenged the said penalty order before the Commissioner of Income Tax (Appeals)[CIT(A)] and CIT(A) also confirmed the order.

The said order was again challenged before the Income Tax Appellate Tribunal (ITAT). The ITAT allowed the appeal filed by the respondent and deleted the penalty amount.

On behalf of the appellant, it was contended that the order of ITAT was improper and not just. It has erred in deleting the penalty without considering the material facts that the additions were made by the AO had been confirmed by the CIT(A).

An appeal was filed before the division bench of the HC that comprised of Justice Sanjeev Narula and Justice Manmohan. The HC opined that levy of penalty cannot be a matter of course, as sought to be contended by the Revenue. It further clarified that penalty can only be imposed in the case where the concealment of income has been proven.

The HC stated, "The ITAT was right in deleting the penalty levied under Section 271(1)(c) of the IT Act. It has to be noted that penalty proceedings are an outcome of the assessment and if the assessment itself is debatable, the penalty proceedings cannot survive".

The HC referred to the judgment in the case of CIT v. Thomson Press India Ltd. where the ITAT had upheld the deletion of the penalty on the same ground i.e. the fact that appeals were admitted proved that the issue was debatable.

The HC deleted the penalty levied by the AO and framed substantial questions of law in the appeal preferred by the respondent-assessee. The HC stated that the alleged concealment is not final and the issue is disputable.