2025 (4) TMI 1354 - AT - Income Tax

Penalty levied u/s 271(1)(c) - additional income declared before the Settlement Commission including income from salary from foreign entities buffer income and income from house property - order of the Ld. CIT(A) in cancelling the penalty on account of limitation Addition on account of rental income - HELD THAT - We find the major portion of the same is relating to the notional income from house property which was lying vacant. In our opinion although the addition can be made on account of notional income from the house property which is lying vacant however penalty u/s 271(1)(c) of the Act is not warranted. The income tax law is so complex and complicated that it is possible that some omission or error may occur on account of interpretation of the statute in a bonafide manner. Since there is no evidence that the assessee has received any rental income from the house property which was vacant and the addition has been made on account of such notional rent therefore penalty on the amount in our opinion is not justified. We therefore hold that no penalty is leviable on the addition on account of notional house rent. Income from house property - It is the submission of the assessee that due to some arithmetical error there was shortfall in disclosing that rental income but rental income from the above two properties was disclosed. We find some force in the above argument of the Ld. Counsel for the assessee that the same was only an arithmetical inaccuracy and not a deliberate attempt to evade tax for which penalty should not be levied. We accordingly hold that no penalty is leviable on account of this difference in rental income. Buffer income - We do not accept this proposition of the Assessing Officer. This amount in our opinion is an income voluntarily disclosed by the assessee to overcome omission if any. However no such omission or error was found by the AO. Since assessee has not paid tax on the amount disclosed before the Settlement Commission the immunity was withdrawn and the penalty was levied. This being the case we are of the considered opinion that the penalty on this amount of Rs. 50 lakhs disclosed by the assessee as buffer income does not call for levy of penalty u/s 271(1)(c) of the Act. Salary which was not added by the assessee in its return of income being a non-resident we find the Settlement Commission vide order passed u/s 245D(2C) has held that the assessee is a non-resident - We find that two different combinations of the Settlement Commission which consists of very very senior officers of the department are not in agreement with each other regarding the status of the assessee. Under these circumstances alleging the assessee that the assessee has concealed the particulars of his income with respect to salary income by treating himself as non-resident in our opinion is not justified. Although the Settlement Commission in the said order has held the assessee to be a resident Indian however there is a finding of fact by the Settlement Commission that the assessee has not concealed any material facts from the Settlement Commission. This shows the bonafideness of the assessee in disclosing the material facts before the Settlement Commission. It is no doubt an admitted fact that the immunity was withdrawn on account of non-payment of due taxes by the assessee on the basis of the addition made by the Settlement Commission treating the assessee as resident. However we find the assessee subsequently challenged the order of the Settlement Commission treating the assessee as resident and the Hon ble High Court has admitted the substantial question of law. We find in an identical issue had come up before in the case of CIT vs. Nayan Builders and Developers 2010 (9) TMI 1004 - BOMBAY HIGH COURT has to be deleted. We find in that case the Tribunal deleted the penalty on the ground that when the substantial question of law is admitted by the Hon ble High Court penalty is not leviable. We also find merit in the argument of assessee that treating the issue of residential status as a part and parcel of issue of concealment of income is not justified. In our opinion scope of concealment of income ought to be construed / interpreted from the specific clear words which do not include issue of residential status. We therefore hold that the penalty levied by the Assessing Officer is not sustainable on account of substantial question of law being admitted on the issue of salary income and the residential status of the assessee. Period of limitation - We are of the considered opinion that the penalty proceedings initiated by the Assessing Officer are barred by limitation. We find the Settlement Commission vide order dated 27.08.2015 passed u/s 245D(4) had granted immunity to the assessee which was withdrawn by the Settlement Commission on 03.05.2017 vide order passed u/s 245(H)(1A). Therefore the assessee was granted immunity from penalty and prosecution for a period of 20 months and 7 days i.e. between the period from 27.08.2015 till 03.05.2017. This in our opinion has to be added to the two time periods specified in section 275(1)(c). If the first limitation i.e. the expiry of the financial year in which the action for imposition of penalty has been initiated are completed is considered then in view of the order passed u/s 245D(4) dated 27.08.2015 the limitation period after considering the period of 20 months and 7 days is 07.12.2017. However the concealment penalty has been levied on 26.09.2018. Therefore such penalty order is beyond the first date of limitation. Similarly if the period of 6 months from the end of the month in which the action for imposition of penalty has been initiated is considered then such date to be inferred is 29.02.2016 i.e. 6 months from 31.08.2015 i.e. the end date of the month in which 245D(4) order was passed. After adding the immunity period of 20 months and 7 days to 29.02.2016 the second limitation period happens to be 07.11.2017. However the concealment penalty order has been passed on 26.09.2018. Therefore the penalty order has been passed beyond the second date of limitation. If the date of withdrawal of immunity passed by the Settlement Commission u/s 245H(1A) on 03.05.2017 is considered as the date of initiation of penalty proceedings then also the first limitation date ends on 31.03.2018 whereas the penalty has been levied on 26.09.2018 and therefore such penalty order happens to be beyond the date of first date of limitation. So far as the second limitation date is concerned if we consider the end of 6 months from the end of the month in which the penalty proceedings are initiated then the second limitation period ends on 30.11.2017 i.e. 6 months from 31.05.2017 (since the order u/s 245H(1A) was passed on 03.05.2017). Since the penalty order has been passed on 26.09.2018 therefore the said penalty order happens to be beyond the second date of limitation. Since the penalty order has been passed beyond the stipulated period therefore in view of the above discussion and in view of the detailed reasoning given by the Ld. CIT(A) on this issue we hold that such penalty levied by the Assessing Officer being barred by limitation is not sustainable. We therefore uphold the order of the Ld. CIT(A) quashing the penalty being barred by limitation and the grounds raised by the Revenue are accordingly dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

• Whether the penalty levied under section 271(1)(c) of the Income Tax Act, 1961 (the Act) for concealment of income is valid or barred by limitation.
• Whether the Assessing Officer (AO) had jurisdiction to levy penalty after the assessee's application was admitted by the Income Tax Settlement Commission (ITSC) under sections 245C to 245H of the Act.
• Whether the additional income declared before the Settlement Commission, including income from salary from foreign entities, buffer income, and income from house property, constituted concealment of income attracting penalty.
• The treatment and taxability of the assessee's residential status and its impact on the taxability of foreign salary income and consequent penalty proceedings.
• Whether the admission of a substantial question of law by the High Court in respect of the residential status and income issues precludes levy of penalty under section 271(1)(c).
• Whether penalty can be levied on buffer income voluntarily disclosed by the assessee to cover possible omissions or errors.
• Whether penalty can be levied on notional income from vacant house property or on minor arithmetical inaccuracies in rental income declared.
• Whether the directions in the Settlement Commission's order to initiate penalty and prosecution proceedings amount to a binding direction to levy penalty by the AO.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Limitation for levy of penalty under section 271(1)(c)

Legal framework and precedents: Section 275 of the Act prescribes the bar of limitation for imposing penalties. Clause (c) of section 275(1) is relevant, which provides that no penalty order shall be passed after the expiry of the financial year in which the penalty proceedings are initiated or six months from the end of the month in which action for penalty initiation is taken, whichever is later. The Explanation to section 275 excludes from limitation the period during which immunity under section 245H is in force.

Court's interpretation and reasoning: The Tribunal analyzed the timeline of events, including the Settlement Commission's order granting immunity dated 27.08.2015 and its withdrawal on 03.05.2017. The immunity period of 20 months and 7 days must be excluded while computing limitation. Applying this, the first and second limitation dates were calculated as 07.12.2017 and 07.11.2017 respectively, whereas the penalty order was passed on 26.09.2018, beyond these dates. Even if the date of immunity withdrawal (03.05.2017) was considered as the penalty initiation date, the penalty order still fell beyond the prescribed limitation period.

Application of law to facts: The penalty was levied after the limitation period expired, making it time-barred. The Tribunal upheld the CIT(A)'s order deleting the penalty on this ground.

Treatment of competing arguments: The Revenue contended that penalty proceedings were initiated within time and that section 275(1)(c) allows six months from penalty initiation. However, the Tribunal found that the immunity period must be excluded, extending limitation dates, and the penalty order was still beyond these dates. The Revenue's argument that no time limit exists post immunity withdrawal was rejected.

Conclusion: The penalty order dated 26.09.2018 is barred by limitation and hence invalid.

Issue 2: Jurisdiction of Assessing Officer to levy penalty after Settlement Commission's admission of application

Legal framework: Section 245F(2) confers exclusive jurisdiction on the Settlement Commission to deal with tax, penalty, or interest issues once an application is admitted.

Court's reasoning: The assessee argued that after admission by the Settlement Commission, the AO lacked jurisdiction to levy penalty. The Revenue contended that the Settlement Commission's order dated 03.05.2017 withdrew immunity from penalty and prosecution and directed the AO to initiate penalty proceedings.

Application to facts: The Tribunal noted that the Settlement Commission's order explicitly permitted the AO and Pr. CIT to initiate penalty proceedings after withdrawal of immunity. Thus, the AO's jurisdiction to levy penalty was valid post withdrawal.

Conclusion: The AO had jurisdiction to levy penalty after immunity was withdrawn by the Settlement Commission.

Issue 3: Concealment of income relating to salary from foreign entity and residential status

Legal framework and precedents: Section 6(1)(c) of the Act defines residential status, which determines taxability of global income. The Supreme Court decision in Reliance Petro Products (P) Ltd. held that the return of income filed is material for penalty purposes. The Settlement Commission's orders under sections 245D(2C) and 245D(4) held conflicting views on the assessee's residential status.

Court's interpretation: Initially, the Settlement Commission held the assessee to be a non-resident in the order dated 26.05.2014 but later, in the order dated 27.08.2015, held the assessee to be a resident under section 6(1)(c), making his foreign salary taxable in India. The Tribunal observed that two different benches of the Settlement Commission disagreed on residential status. The Commission also found no attempt to conceal material facts and granted immunity initially.

Application of law to facts: The Tribunal held that since the residential status was a debatable legal issue and the High Court admitted the assessee's writ petition challenging the resident status, penalty for concealment on the foreign salary income was not justified. The Tribunal relied on decisions of the Bombay High Court which held that penalty cannot be levied when a substantial question of law is admitted by the High Court.

Treatment of competing arguments: The Revenue argued that concealment was established as the assessee did not offer global income in returns and the Settlement Commission held him resident. The Tribunal rejected this, emphasizing the bonafide dispute on residential status and the admitted substantial question of law.

Conclusion: Penalty for concealment on foreign salary income is not sustainable due to the debatable nature of residential status and admission of substantial question of law by the High Court.

Issue 4: Penalty on income from house property and buffer income

Legal framework: Penalty under section 271(1)(c) requires concealment or furnishing inaccurate particulars of income. Notional income and arithmetical inaccuracies are generally not penalizable unless deliberate concealment is proved.

Court's reasoning and findings: The AO levied penalty on income from house property amounting to Rs. 3,88,920/- and buffer income of Rs. 50,00,000/- disclosed before the Settlement Commission but not in returns. The AO held ignorance of law no excuse and treated buffer income as concealment.

Application to facts: The Tribunal found that the notional income from vacant house property was a matter of interpretation and did not constitute deliberate concealment. Similarly, minor arithmetical errors in rental income disclosure were not deliberate concealment. The buffer income was voluntarily disclosed by the assessee to cover possible omissions and no incriminating material was found against it.

Treatment of competing arguments: The Revenue contended that non-disclosure in returns warranted penalty. The Tribunal rejected this, emphasizing the absence of concealment intent and voluntary disclosure.

Conclusion: No penalty is leviable on income from house property or buffer income.

Issue 5: Effect of Settlement Commission's directions and immunity withdrawal on penalty proceedings

Legal framework: The Settlement Commission under section 245H(1A) can withdraw immunity from penalty and prosecution. The AO is then empowered to initiate penalty proceedings.

Court's reasoning: The Settlement Commission initially granted immunity but later withdrew it due to non-payment of tax and interest. The Commission directed the AO and Pr. CIT to initiate penalty proceedings.

Application to facts: The AO acted on the Commission's direction and initiated penalty proceedings. The Tribunal held this to be lawful and in accordance with statutory provisions.

Conclusion: The AO's initiation of penalty proceedings post immunity withdrawal was valid and in compliance with the Settlement Commission's order.

Issue 6: Whether admission of substantial question of law by High Court precludes penalty levy

Legal precedents: The Bombay High Court decisions in CIT vs. Nayan Builders and Developers and Pr.CIT vs. Dhariwal Industries Ltd. held that when a substantial question of law is admitted by the High Court in respect of the quantum of income, penalty under section 271(1)(c) is not leviable.

Court's interpretation: The Tribunal followed these precedents, observing that the admitted writ petition challenging residential status and consequent taxability of foreign salary income constitutes a substantial question of law.

Application to facts: Since the High Court admitted the writ petition on the key issue, penalty for concealment on that ground was not sustainable.

Conclusion: Penalty is not leviable where substantial question of law is admitted by the High Court.

3. SIGNIFICANT HOLDINGS

"The penalty order u/s 271(1)(c) of the IT Act, 1961 passed on 28.09.2018 by the AO is held to be barred by limitation of time and hence, bad in law."

"The Assessing Officer had jurisdiction to initiate penalty proceedings after withdrawal of immunity by the Settlement Commission vide order u/s 245H(1A)."

"The issue of residential status being a debatable legal question, admitted by the Hon'ble High Court, penalty for concealment on foreign salary income is not sustainable."

"No penalty is leviable on notional income from vacant house property or on minor arithmetical inaccuracies in rental income, as these do not constitute deliberate concealment."

"Voluntary disclosure of buffer income to cover possible omissions does not attract penalty under section 271(1)(c)."

"When a substantial question of law is admitted by the High Court in respect of the quantum of income, penalty under section 271(1)(c) cannot be levied."

"The Settlement Commission's direction to initiate penalty proceedings after withdrawal of immunity is binding and lawful."