Facts of the Case

The assessee, an individual, filed her return of income for Assessment Year 2014-15 declaring total income of ₹18,20,730. The case was selected for scrutiny and assessment was completed under Section 143(3) at a total income of ₹42,18,190 after making various disallowances, including disallowance of ₹23,44,055 on account of unsubstantiated processing charges. Penalty proceedings under Section 271(1)(c) were initiated, and penalty of ₹7,24,315 was imposed by the Assessing Officer vide order dated 29.06.2017 for furnishing inaccurate particulars of income.

The penalty order was confirmed by the CIT(A), NFAC, by order dated 12.09.2025, primarily on the ground that the quantum addition had been upheld in appellate proceedings and that the assessee failed to offer any bona fide explanation. Aggrieved, the assessee preferred an appeal before the Tribunal.

Issues Involved

Whether penalty imposed under Section 271(1)(c) could survive when the underlying quantum addition forming the basis of penalty had been set aside by the Tribunal for de novo assessment.

Petitioner’s Arguments

The assessee contended that in her own case for the same assessment year, the coordinate bench of the ITAT had already set aside the quantum addition relating to processing charges and restored the matter to the file of the Assessing Officer for fresh assessment after allowing opportunity to produce supporting bills and vouchers. It was argued that once the quantum addition itself no longer survived, the penalty imposed on such addition automatically became unsustainable.

Respondent’s Arguments

The Revenue relied on the order of the CIT(A) confirming the penalty and contended that the penalty was rightly imposed for furnishing inaccurate particulars of income.

Court Order / Findings

The ITAT Kolkata examined the records and took note of the coordinate bench decision in the assessee’s own case wherein the quantum addition of ₹23,44,055 had been set aside and the assessment was restored to the Assessing Officer for de novo adjudication. The Tribunal held that since the very basis of levy of penalty no longer survived, the penalty imposed under Section 271(1)(c) could not be sustained. The Tribunal further observed that penalty proceedings are consequential to assessment proceedings and where the assessment itself is set aside, the penalty cannot stand independently. However, liberty was granted to the Assessing Officer to re-initiate penalty proceedings, if warranted, after completion of the fresh assessment.

Important Clarification

The Tribunal clarified that penalty under Section 271(1)(c) is dependent on the existence of a sustainable quantum addition. Where the assessment is set aside for fresh adjudication, the penalty imposed on the basis of such assessment does not survive, though the Assessing Officer may initiate fresh penalty proceedings depending upon the outcome of the reassessment.

Final Outcome

The appeal filed by the assessee was allowed. The penalty of ₹7,24,315 imposed under Section 271(1)(c) for Assessment Year 2014-15 was quashed, with liberty granted to the Assessing Officer to reinitiate penalty proceedings, if so warranted, after completion of the de novo assessment.

Source Link - https://itat.gov.in/public/files/upload/1767179253-g6G64A-1-TO.pdf

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