ITAT Chennai Holds Penalty under Section 271(1)(c) Not Justified When Section 148 Return Is Fully Accepted

Background and Core Dispute

The Chennai Bench of the Income Tax Appellate Tribunal, in the case of Mangadu Natarajan Balasundharam Vs ITO, examined whether penalty under Section 271(1)(c) can survive when a reassessment under Section 147 is completed purely on the basis of income voluntarily disclosed in a return filed in response to a notice under Section 148, without any further addition by the Assessing Officer (AO).

The assessee, an individual, had originally filed a return of income for Assessment Year 2016-17 on 14 October 2016, declaring taxable income of Rs. 10,82,190. Subsequently, the AO received an investigation report from the DDIT (Investigation) indicating that the assessee had omitted to declare income from sale of plots jointly held with two other co-owners.

Armed with this information, the AO proceeded to reopen the assessment by:

1. Issuing a notice under Section 148A(b),
2. Passing an order under Section 148A(d), and
3. Issuing notice under Section 148 for reassessment.

In compliance with the notice under Section 148, the assessee filed a fresh return on 27 April 2023, disclosing total income of Rs. 93,19,140, which included Long-Term Capital Gains (LTCG) of Rs. 82,36,957 from sale of the plots.

The reassessment under Section 147 was then completed by the AO by fully accepting the income as declared in this return filed in response to the Section 148 notice. No additional income was brought to tax and no separate disallowance was made.

Despite this, the AO initiated and levied penalty under Section 271(1)(c) on the premise that the assessee had concealed income in the original return by not including the LTCG, and accordingly imposed penalty of Rs. 16,96,813, being 100% of the tax allegedly attributable to the concealed portion of income.

The Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre [CIT(A)/NFAC] confirmed the penalty. The assessee challenged this before the ITAT.

Chronology of Events

Original Return and Subsequent Investigation

• The assessee filed the original return for AY 2016-17 on 14.10.2016, offering income of Rs. 10,82,190.
• The DDIT (Investigation) later provided information that the assessee had sold certain plots of land, co-owned with two others, and had not reflected resultant LTCG in the original return.
• Based on this, the AO considered that income chargeable to tax had escaped assessment.

Initiation of Reassessment

To reopen the completed assessment, the AO followed the new reassessment procedure:

1. Notice under Section 148A(b) was issued to the assessee, granting an opportunity to respond to the information suggesting escapement of income.
2. An order under Section 148A(d) was passed, deciding to proceed with the reassessment.
3. Thereafter, a notice under Section 148 was issued, formally reopening the assessment for AY 2016-17.

Return under Section 148 and Reassessment Order

In response to the reassessment notice:

• The assessee filed a fresh return on 27.04.2023, declaring total income of Rs. 93,19,140.
• This amount expressly included LTCG of Rs. 82,36,957 from the sale of plots of land.
• While completing the reassessment under Section 147, the AO:
  • Accepted the income exactly as disclosed in the return filed in response to Section 148,
  • Did not make any further additions or disallowances,
  • Recorded that the assessee had even offered capital gains from certain transactions not featured in the original investigation report.

This conduct indicated that the reassessment was completed solely on the basis of voluntary disclosure made by the assessee in the Section 148 return.

Penalty Proceedings under Section 271(1)(c)

AO’s Reasoning

After accepting the reassessment return, the AO initiated penalty proceedings under Section 271(1)(c) alleging:

• The assessee had concealed income and
• Had furnished inaccurate particulars of income by not declaring LTCG in the original return filed under Section 139(1).