2025 (4) TMI 1447 - AT - Income Tax

Penalty u/s. 271(1)(c) - Addition u/s 68 - HELD THAT - As evident that the addition has been made on a debatable issue. The decisions relied upon by the assessee heavily support its contention that where the High Court has admitted substantial question of law on issue of quantum proceedings on the basis of which penalty was levied it shows that the concealment is not final and the issue is debatable. Therefore there is no case for levy of penalty. We hold that the penalty levied in the present case being on a debatable issue is not sustainable and we direct the deletion of the same. Appeal of assessee allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal were:

(a) Whether the penalty under section 271(1)(c) of the Income-tax Act, 1961 can be sustained when the addition on which the penalty is based is itself under challenge before a High Court and has been admitted for final hearing on substantial questions of law;

(b) Whether the addition of Rs. 70,14,083/- confirmed by the ITAT, but challenged before the High Court, constitutes a settled and final concealment warranting penalty, or is a debatable issue precluding penalty;

(c) The relevance and impact of the High Court admitting the appeal and framing substantial questions of law on the penalty proceedings;

(d) The application of judicial precedents relating to levy of penalty in cases where quantum additions are disputed before higher courts.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Sustainability of penalty under section 271(1)(c) when addition is under challenge before High Court

Relevant legal framework and precedents: Section 271(1)(c) of the Income-tax Act imposes penalty for furnishing inaccurate particulars of income. The levy of penalty presupposes that the addition or concealment is final and not subject to legitimate dispute. Various judicial precedents have held that if the quantum addition is debatable or under challenge before a higher forum, penalty is not leviable. The Tribunal relied on several authoritative decisions including:

• CIT vs. Nayan Builders & Developers (Bombay HC)
• PCIT vs. M/s. Harsh International Pvt. Ltd. (Delhi HC)
• CIT vs. Liquid Investment & Trading Co. (Delhi HC)
• PCIT vs. Dhariwal Industries Ltd. (Bombay HC)
• Other ITAT and High Court decisions reinforcing the principle that penalty cannot be sustained on disputed additions pending adjudication.

Court's interpretation and reasoning: The Tribunal noted that the addition of Rs. 70,14,083/- was confirmed by the ITAT but is currently under challenge before the Hon'ble M.P. High Court, which has admitted the appeal and framed substantial questions of law for final hearing. This admission by the High Court indicates that the addition is not a settled or final issue but rather a debatable question of law and fact. The Tribunal emphasized that penalty proceedings under section 271(1)(c) cannot be sustained on such debatable issues.

Key evidence and findings: The assessee furnished a certificate from the counsel representing the assessee before the High Court along with the status report from the High Court website confirming that the appeal is admitted and pending. The substantial questions of law framed by the High Court specifically challenge the basis of the addition, including the scope of search proceedings under section 153A and the burden of proof under section 68 regarding amounts received from a share broker.

Application of law to facts: Since the addition is under active judicial scrutiny and the High Court has admitted the appeal on substantial questions of law, the Tribunal held that the penalty based on this addition cannot be sustained. The principle that penalty requires concealment or furnishing of inaccurate particulars that are final and not debatable was applied. The Tribunal found that the addition was not final and hence the penalty was not justified.

Treatment of competing arguments: The Department's representative supported the order of the CIT(A) confirming the penalty but could not dispute the legal proposition that penalty is not leviable on debatable additions pending before higher courts. The Tribunal gave due weight to the legal precedents cited by the assessee and the status of the appeal before the High Court.

Conclusions: The penalty levied under section 271(1)(c) on the addition of Rs. 70,14,083/- was not sustainable as the addition was a debatable issue pending final adjudication by the High Court. Therefore, the penalty was deleted.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Considering the question of law framed by Hon'ble High Court as reproduced above, it is evident that the addition confirmed by the ITAT is taken up for consideration by the High Court and therefore, it is evident that the addition has been made on a debatable issue. The decisions relied upon by the ld. Counsel for the assessee heavily support its contention that where the High Court has admitted substantial question of law on issue of quantum proceedings, on the basis of which penalty was levied, it shows that the concealment is not final and the issue is debatable. Therefore, there is no case for levy of penalty."

Core principles established include:

• Penalty under section 271(1)(c) requires that the addition or concealment be final and not subject to legitimate dispute;
• Where the addition is under challenge before a High Court and the appeal is admitted on substantial questions of law, the issue is debatable;
• On such debatable issues, penalty cannot be sustained as it would be unjust to penalize a taxpayer for an addition not conclusively established;
• The admission of appeal by a High Court on substantial questions of law is a significant factor in determining the sustainability of penalty.

Final determination: The penalty imposed on the assessee under section 271(1)(c) amounting to Rs. 23,60,940/- was deleted by the Tribunal.