In the current tax administration landscape, it is common for the Assessing Officer (AO) to initiate penalty proceedings immediately after confirming additions during assessment. However, taxpayers should be aware of critical legal principles that can be invoked to challenge such penalties effectively.
One of the fundamental grounds for seeking relief in penalty matters is that when the quantum addition is under challenge and the appeal is pending adjudication before an appellate authority, such as the Commissioner of Income Tax (Appeals) [CIT(A)], the Income Tax Appellate Tribunal (ITAT), or a higher judicial forum, the corresponding penalty proceedings should be kept in abeyance. Initiating or continuing penalty proceedings while the underlying addition remains sub judice would amount to prejudging the issue and is inconsistent with the principles of natural justice, leading to avoidable multiplicity of litigation.
It is a well-settled legal position that if the quantum appeal is ultimately decided in favour of the assessee, the very basis for the imposition of penalty ceases to exist, and therefore, the penalty must also be deleted or not levied at all.
Accordingly, where the assessee has already preferred an appeal against the quantum addition and the same is pending, it is both prudent and legally tenable for the assessee to request that the penalty proceedings be stayed or kept in abeyance till the disposal of the quantum appeal.
Practical Guidance for Taxpayers and Practitioners
For taxpayers and Chartered Accountants, it is advisable to promptly inform the Assessing Officer about the pending quantum appeal and request that the penalty proceedings be kept in abeyance. This can be substantiated by providing documentary evidence such as Form 35 or Form 36, as applicable. This proactive approach ensures that the penalty proceedings are deferred until the final resolution of the quantum appeal, thereby upholding the principles of natural justice and avoiding unnecessary litigation.
There are numerous judgments which affirm the above statement:
Legal Precedents Supporting Abeyance of Penalty Proceedings
1. Madras High Court - Aadhitya Property Developers v. Income Tax Department
In Aadhitya Property Developers vs Additional/Joint/Deputy/Assistant Commissioner of Income Tax (W.P.Nos.9200 & 9206 of 2022, dated 13 April 2022), the Madras High Court held:
When that being so, if these penalty proceedings which are concluded in the impugned orders in both the writ petitions are permitted to be executed, certainly that will prejudice the interest of the petitioner as the main issue with regard to the quantum made in the assessment order dated 27.09.2021 itself is the subject matter before the Appellate Authority, hence these penalty proceedings can await for sometime till the decision is taken by the Appellate Authority in the appeal.
9. In that view of the matter, this Court is inclined to dispose of these writ petitions with the following orders:
(i) That the impugned proceedings shall be kept in abeyance till a decision is taken by the Appellate Authority in the appeal filed by the petitioner dated 06.12.2021 against the order of assessment dated 27.09.2021. It is needless to mention that, once a decision has come from the Appellate Authority depending upon the outcome of the same, the further course of action with regard to the impugned orders i.e., the penalty proceedings can be decided by the Revenue.
(ii) The Appellate Authority is hereby directed to take up the appeal including the condone delay petition and decide the same as early as possible preferably within six months from the date of receipt of a copy of this order.
10. With these directions, both the Writ Petitions are disposed of. No costs. Consequently, connected miscellaneous petitions are closed.
2. ITAT Delhi - Surendra Kumar Gupta v. ACIT
In Surendra Kumar Gupta, New Delhi vs ACIT, Central Circle-19, New Delhi (ITA No. 8733/Del/2019, dated 16 January 2024), the Income Tax Appellate Tribunal (ITAT) Delhi observed:
11. Since, the quantum appeal is decided in favour of the assessee on merits, concealment penalty levied u/s 271(1)(c) of the Act which is subject matter of appeal in ITA No. 8733/Del/2019 would have no legs to stand, hence, the penalty levied in the sum of Rs. 21,21,500/- is hereby directed to be deleted.
From the above facts and legal position, it is amply clear that the penalty proceedings are ancillary and consequential to the quantum proceedings, deriving their very foundation from the additions made therein. When the quantum assessment itself is under appeal and pending final adjudication, the initiation or continuation of penalty proceedings is premature and unwarranted.
Conclusion
The above legal positions establish that penalty proceedings are ancillary to quantum assessments. Initiating or continuing penalty proceedings while the quantum addition is under appeal is premature and may lead to procedural impropriety. Taxpayers facing such situations should promptly bring these legal precedents to the attention of the appellate authorities and request that penalty proceedings be deferred until the final resolution of the quantum appeal.
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