2024 (4) TMI 1253 - AT - Income Tax

Penalty u/s 271(1)(c) order passed in the name of the non-existent person/entity - HELD THAT - As we find that the assessee HUF was dissolved on 26/03/2014 and the notices for carrying out the penalty proceedings as well as the penalty order has been made in the name of the nonexistent entity. Since this fact goes uncontroverted that the penalty order has been made on a non-existent entity ratio law laid down in the case of Maruti Suzuki India Ltd. 2019 (7) TMI 1449 - SUPREME COURT is squarely applicable and accordingly the penalty proceedings are held void ab initio. Thus the order of penalty levying penalty u/s 271(1)(c) of the Act is quashed and the impugned penalty is hereby deleted. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the penalty order passed against a Hindu Undivided Family (HUF) that had ceased to exist upon partition is valid or void ab initio for being issued in the name of a non-existent entity;

(b) Whether the penalty proceedings initiated under section 271(1)(c) of the Income-tax Act, 1961, for concealment of particulars of income, are justified when the alleged error was an inadvertent mistake of claiming a long-term capital loss;

(c) Whether the penalty order is barred by limitation;

(d) Whether the penalty order is invalid due to defective notice under section 274 of the Act;

(e) On merits, whether there was any concealment of particulars of income warranting penalty;

Though multiple grounds were raised, the Tribunal primarily focused on the first issue regarding the validity of the penalty order against a non-existent HUF entity.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of penalty order against a non-existent HUF entity

Relevant legal framework and precedents:

The Income-tax Act, 1961, empowers the Assessing Officer (AO) to levy penalty under section 271(1)(c) for concealment or furnishing inaccurate particulars of income. However, the identity of the assessee is crucial for the validity of proceedings. The Supreme Court in PCIT v. Maruti Suzuki India Ltd. held that any notice or order issued in the name of a non-existent person renders the proceedings nullity. Similarly, the Patna High Court in Commissioner of Income-tax v. Sanichar Sah Bhim Sah and the Andhra Pradesh High Court in Mahankali Subba Rao Mahankali Nageswara Rao v. Commissioner of Income-tax have held that penalty proceedings cannot be sustained against an HUF that has ceased to exist.

Court's interpretation and reasoning:

The Tribunal observed that the HUF in question was dissolved by partition on 26th March 2014, prior to the issuance of the penalty notice and order. The AO was aware of this fact during the assessment and penalty proceedings. Both the show-cause notice under section 274 and the penalty order under section 271(1)(c) were issued in the name of the dissolved HUF. The Tribunal found this to be a fatal legal defect because the entity against whom the penalty was levied no longer existed at the time of issuance.

Key evidence and findings:

The partition deed dated 26/03/2014 and the AO's own acknowledgment of the dissolution of the HUF were undisputed. The penalty notice and order dated 30/12/2016 and 30/06/2017 respectively, were issued in the name of the dissolved HUF.

Application of law to facts:

Applying the binding precedent from the Supreme Court and High Courts, the Tribunal held that the proceedings initiated and penalty imposed on a non-existent entity are void ab initio. The legal principle is that the identity of the assessee must be alive and valid at the time of proceedings.

Treatment of competing arguments:

The Revenue argued in support of the penalty but failed to controvert the fact of dissolution or the binding nature of the precedents. The Tribunal found the Revenue's contentions insufficient to overcome the established legal position.

Conclusions:

The penalty proceedings and order are declared void ab initio and quashed.

Issue (b): Justification of penalty for concealment where the error was inadvertent

Relevant legal framework and precedents:

Section 271(1)(c) penalizes concealment or furnishing inaccurate particulars of income. However, the element of mens rea (intent to conceal) and the nature of the mistake (inadvertent or deliberate) are relevant in determining penalty. Courts have held that bona fide errors without intention to evade tax do not attract penalty.

Court's interpretation and reasoning:

The Tribunal noted that the assessee admitted the error was inadvertent and there was no tax gain from the claimed long-term capital loss. However, since the penalty proceedings were quashed on the primary ground of non-existent entity, the Tribunal refrained from adjudicating this issue further, deeming it academic.

Conclusions:

No determination was made on merits due to disposal on the primary legal ground.

Issue (c): Limitation and defective notice

The assessee contended that the penalty order was barred by limitation and the notice under section 274 was defective. The Tribunal did not address these issues because the penalty was quashed on the primary ground of invalidity of proceedings against a non-existent entity, rendering these issues academic.

Issue (d): Merits of concealment

Similarly, the Tribunal did not consider the merits of concealment or the quantum of penalty since the penalty order was set aside on the fundamental legal ground.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The Hon'ble Apex Court in the case of PCIT v. Maruti Suzuki India Ltd. has held that notices and/or the consequent order issued in the name of non-existent person renders the entire proceedings and all consequent actions to be nullity in the eyes of law."

"In view of the above binding judicial precedents and the similarity of facts, we find that the assessee HUF was dissolved on 26/03/2014 and the notices for carrying out the penalty proceedings as well as the penalty order has been made in the name of the nonexistent entity. Since this fact goes uncontroverted that the penalty order has been made on a non-existent entity, ratio law laid down in the case of Maruti Suzuki India Ltd. is squarely applicable and accordingly, the penalty proceedings are held void ab initio."

Core principles established include:

- A penalty order or notice issued in the name of a non-existent entity is void ab initio;

- The identity of the assessee must be alive and valid at the time of initiation of penalty proceedings;

- Where penalty proceedings are invalid on fundamental grounds, other issues including limitation, defective notice, or merits of concealment need not be adjudicated.

Final determination:

The appeal was allowed by quashing the penalty order under section 271(1)(c) of the Income-tax Act, 1961, on the ground that the HUF ceased to exist prior to the issuance of penalty proceedings, rendering such proceedings void ab initio.