2021 (7) TMI 805 - AT - Income Tax

Penalty levied u/s 221(1) - non-payment of tax demanded in the assessment order - HELD THAT - Penalty under sec.221(1), if the assessee is in default or is deemed to be in default in making a payment of tax. In the instant cases, the penalty proceedings u/s 221(1) has been initiated by the AO, since both the assessee have failed to pay the demand raised in the reassessment order and hence they have become assessee in default . Provisions of sub. Sec. (2) further state that the penalty levied shall be cancelled, where as a result of final order the amount of tax, with respect to the default in payment of which the penalty was levied, has been wholly reduced. In the instant cases, as on today, the assessment orders have been quashed by the Tribunal, vide its order dated 03-02-2021 (referred above) in the hands of both the assessee by holding that reopening of assessment is invalid. Hence, as on today, the demand has become Nil. Accordingly, as per the provisions of sub. Sec. (2) of sec. 221, the penalty levied u/s 221(1) is liable to be cancelled, if the orders passed by the Tribunal becomes final order, i.e., the operation of sub. Sec (2) would depend upon the question as to whether the orders passed by the Tribunal have become final or not? If the revenue has accepted the orders passed by the Tribunal in the hands of both the assessees, then the same will result in a final order, in which case, the impugned penalty levied u/s 221(1) of the Act shall be liable to be cancelled. We hold that the impugned penalty levied in the hands of both the assessee is liable to be quashed. We order accordingly. However, in the event of reversal of orders passed by the Tribunal in the quantum proceedings in the hands of both the assessee for AY 2007-08, the impugned penalty levied u/s 221(1) in the hands of both the assesses shall revive. - Appeals of the assessees are treated as allowed.

Summary

Issues:
Appeal against penalty under section 221(1) of the Income-tax Act, 1961 for AY 2007-08.

Analysis:
1. The appeals were filed against penalty orders under section 221(1) of the Act for non-payment of taxes demanded in the assessment orders for AY 2007-08. The assessees challenged the validity of the reassessment proceedings initiated by the AO.

2. The Tribunal disposed of the appeals against the quantum assessment orders by quashing the reassessment proceedings in the hands of both assessees. Consequently, the tax demand became nil, as per the Tribunal's orders. The penalty under section 221(1) cannot stand if there is no pending tax demand due to the quashed assessment orders.

3. Section 221(1) of the Act states that an assessee is liable to pay a penalty if in default in making a tax payment. However, as per section 221(2), if the tax amount is wholly reduced due to a final order, the penalty levied shall be cancelled. In this case, the assessment orders being quashed resulted in a nil demand, leading to a possible cancellation of the penalty.

4. The Tribunal held that the penalty levied under section 221(1) in the hands of both assessees is liable to be quashed. The cancellation of the penalty is subject to the finality of the Tribunal's orders. If the revenue challenges the Tribunal's orders, the fate of the penalty would depend on the outcome of the appeals.

5. The impugned penalties were quashed, but in case of a reversal of the Tribunal's orders in the quantum proceedings, the penalties may revive. Both parties are granted liberty to pursue their cases as per the law. Ultimately, the appeals of the assessees were treated as allowed by the Tribunal.

This detailed analysis of the judgment highlights the legal intricacies involved in the appeal against the penalty under section 221(1) of the Income-tax Act, 1961 for the assessment year 2007-08.