Facts of the Case

The assessee, Shri Dinesh Kumar Pahuja, filed two appeals for Assessment Years 2008-09 and 2009-10 against separate appellate orders passed by the Commissioner of Income Tax (Appeals). The assessments were completed under Section 153A read with Section 144 of the Income Tax Act pursuant to search proceedings, wherein additions were made under various heads.The Assessing Officer also initiated penalty proceedings under Section 271(1)(c) of the Act and passed separate penalty orders dated 17.09.2020. The assessee preferred appeals before the CIT(A) both against the assessment orders as well as against the penalty orders. The CIT(A) dismissed the appeals relating to penalty, while the quantum appeals against the assessment orders were still pending adjudication.

Issues Involved

  1. Whether penalty proceedings under Section 271(1)(c) can be sustained when the corresponding quantum appeals are pending adjudication.
  2. Whether the Commissioner of Income Tax (Appeals) was justified in confirming penalty without first deciding the merits of additions.
  3. Whether computation of “tax sought to be evaded” can be finalized prior to determination of quantum additions.

Petitioner’s (Assessee’s) Arguments

The assessee submitted that the quantum appeals against the assessment orders were still pending before the CIT(A). It was contended that unless the additions forming the basis of penalty are finally adjudicated, the quantum of “tax sought to be evaded” remains indeterminate. Therefore, confirmation of penalty at this stage was premature and unsustainable in law.

Respondent’s (Revenue’s) Arguments

The learned Departmental Representative agreed that the quantum appeals were yet to be decided and concurred that the matter may be restored to the file of the CIT(A) for fresh adjudication in accordance with law after disposal of the quantum appeals.

Court Order / Findings

The Tribunal observed that the quantum of additions directly impacts the computation of “tax sought to be evaded” under Section 271(1)(c). Since the CIT(A) has the power to sustain, reduce, delete, or enhance the additions made by the Assessing Officer, the penalty amount could vary substantially depending upon the outcome of the quantum appeals.

The Tribunal held that deciding penalty proceedings prior to adjudication of quantum appeals is premature. Accordingly, the ITAT set aside the impugned penalty orders and directed the CIT(A) to first decide the quantum appeals and thereafter pass fresh orders on penalty, if warranted, in accordance with law after providing reasonable opportunity of being heard to the assessee.

Important Clarification / Legal Principle

Penalty proceedings under Section 271(1)(c) are dependent on the final determination of quantum additions. Until the quantum appeals attain finality, computation of “tax sought to be evaded” remains uncertain. Therefore, penalty orders passed prior to adjudication of quantum appeals are premature and liable to be set aside.

Link to download the order -  https://www.mytaxexpert.co.in/uploads/1770871054_DINESHKUMARPAHUJAALLAHABADVS.ASSISTANTCOMISSIONEROFINCOMETAXCENTRALCIRCLEALLAHABAD.pdf  

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