2021 (7) TMI 1124 - AT - Income Tax

Rectification of mistake u/s 154 - penalty proceedings u/s 271(1)(c) - as argued there is no addition sustaining which can warrant levy of penalty u/s 271(1)(c) - HELD THAT - Once the entire edifice for levy of penalty has been knocked down, that is, the additions on which penalty was levied has been deleted / quashed by the Tribunal which is an admitted fact and also brought to the notice of Ld. CIT(A) at the first stage itself, then there was no reason that penalty should not have been deleted/quashed. There cannot be a scenario where the addition in the quantum proceedings have been quashed or have been deleted and at the same time the penalty for the same addition is sustained, even if it is due to acquiescence or ignorance of the assessee. Thus, in the interest of substantial justice we deem fit that the penalty levied should have been quashed by the Ld. CIT (A) and the doors for remedy should not have been closed for some technical reasons. Once the levy of penalty itself has no legs to stand, then penalty also cannot subsist. - Decide in favour of assessee.

Summary

Issues:
1. Rectification u/s 154 by the assessee against the withdrawal of appeal before Ld. CIT (A).
2. Validity of penalty proceedings u/s 271(1)(c) due to deletion of additions in quantum proceedings.

Analysis:
1. The assessee filed appeals against penalty proceedings u/s 271(1)(c) before Ld. CIT (A) but later withdrew the appeal erroneously. The application u/s 154 was filed to rectify this withdrawal, stating that the penalty order should be cancelled as additions were deleted in quantum proceedings. Ld. CIT (A) rejected the rectification application, citing no mistake as the withdrawal was conscious. However, the Tribunal noted that the penalty levied had no basis due to deleted additions, and the withdrawal was a mistake. The penalty was quashed, considering substantial justice.

2. The crux of the issue lies in the validity of penalty proceedings u/s 271(1)(c) when additions made by the AO were later deleted in quantum proceedings. The Tribunal emphasized that if the foundation for the penalty, i.e., the additions, no longer existed due to deletion, the penalty could not be sustained. Despite the technicality of the withdrawal, the Tribunal held that the penalty should have been quashed by Ld. CIT (A) upon realizing the deleted additions. The Tribunal allowed the appeals, deleting the penalty levied in all impugned assessment years, emphasizing substantial justice and the lack of a legal basis for the penalty.

This judgment showcases the importance of aligning penalty proceedings with the underlying substantive tax determinations and ensuring that penalties are not imposed when the basis for such penalties ceases to exist. It also highlights the significance of rectification applications under section 154 to correct inadvertent errors and ensure fair treatment for taxpayers.