ITAT Kolkata Annuls Section 271(1)(b) Penalty: Assessment Finalization Under Section 143(3) Indicates Implicit Condonation of Prior Non-Compliance

Introduction

The Income Tax Appellate Tribunal, Kolkata Bench, recently delivered a significant ruling concerning penalty imposition under Section 271(1)(b) of the Income Tax Act, 1961. In the matter of Manoj Kumar Patodia vs DCIT, the Tribunal provided clarity on a crucial procedural aspect: when an Assessing Officer concludes assessment proceedings under Section 143(3) instead of Section 144, any previous instances of alleged non-compliance with statutory notices are deemed to be implicitly condoned. This judgment holds substantial implications for assessees facing penalty proceedings despite eventual assessment completion under normal provisions.

The case pertained to Assessment Year 2006-07, wherein the revenue authorities had imposed a penalty amounting to Rs. 30,000/- under Section 271(1)(b) alleging willful non-cooperation and failure to respond adequately to notices issued under Section 143(2) and Section 142(1) during reassessment proceedings. The controversy arose from information regarding a foreign bank account maintained by the assessee with HSBC Switzerland, which came to the department's knowledge through bilateral information exchange mechanisms under the Double Taxation Avoidance Agreement.

Factual Background of the Dispute

Reassessment Initiation Based on Foreign Account Information

The Government of India obtained specific information from a foreign jurisdiction pursuant to the exchange of information provisions enshrined in the Bilateral Double Taxation Avoidance Agreement with that country. According to the received intelligence, the assessee had been operating a banking account in Switzerland with HSBC Bank. Based on this information, the Assessing Officer developed reason to believe that income had escaped assessment, as this foreign bank account had allegedly not been disclosed either in the regular books of account or in the income tax return filed by the assessee.

Consequently, the case was reopened through issuance of a notice under Section 148 of the Income Tax Act, 1961, triggering reassessment proceedings for the relevant assessment year.

Notices Issued and Alleged Non-Compliance

During the course of reassessment proceedings, the Assessing Officer issued statutory notices under Section 143(2) and Section 142(1) requiring the assessee to provide information and documentation related to the alleged Swiss bank account. Specifically, on 05.02.2015, the assessee was requested to furnish bank statements pertaining to the account purportedly maintained with HSBC in Switzerland.

The assessee maintained his position that he held no bank accounts or assets outside India. According to the revenue authorities, the assessee failed to comply adequately with the notices issued under Section 143(2) and Section 142(1). Furthermore, the assessee declined to execute the "Consent Waiver Form," which would have authorized Swiss authorities to transmit his bank statements directly to Indian tax authorities, a procedure that had been followed by other similarly situated assessees in comparable investigations.

Assessment Completion and Penalty Initiation

Despite the alleged non-compliance, the Assessing Officer proceeded to complete the assessment under Section 147/143(3) of the Act. However, simultaneously, penalty proceedings were initiated under Section 271(1)(b) for the assessee's purported failure to comply with the notices issued during the assessment proceedings. The penalty order imposed Rs. 30,000/- for each instance of non-compliance, culminating in the total penalty amount levied.

Proceedings Before the Commissioner of Income Tax (Appeals)

Assessee's Contentions at First Appellate Level

Aggrieved by both the assessment and penalty orders, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The assessee contended that no genuine default had been committed warranting penalty imposition. Several technical and substantive grounds were raised challenging the validity of the penalty proceedings:

1. The show cause notice dated 05.02.2015 proposing levy of penalty under Section 271(1)(b) was claimed to be defective and legally invalid
2. No separate notice under Section 271(1)(b) for each alleged default was served upon the assessee
3. The assessee had attended proceedings in response to the notice under Section 143(2), thereby complying with statutory requirements
4. A notice under Section 142(1) cannot mandate an assessee to obtain information from third parties or create documents against himself

CIT(A)'s Findings and Order

The Commissioner of Income Tax (Appeals), vide order dated 28.08.2025, dismissed the assessee's appeal and upheld the penalty imposed by the Assessing Officer. The CIT(A) observed that the Assessing Officer had legitimately issued notices under Section 143(2) and Section 142(1) requesting provision of bank statements related to the alleged HSBC Switzerland account.

The first appellate authority noted that documentation available with the department indicated that the assessee was recorded as an account holder with HSBC, and family members were linked to his client profile. This suggested that the assessee had knowingly concealed information regarding his foreign account.

The CIT(A) particularly emphasized the assessee's refusal to sign the "Consent Waiver Form," which was considered part and parcel of the compliance requirements embedded in the notices issued under Section 143(2) and Section 142(1). According to the CIT(A), if the assessee genuinely had no foreign accounts, there would have been no impediment to signing the consent form and cooperating fully with the investigation.

The first appellate authority concluded that there was "wilful attempt in non-compliance" of the statutory notices, justifying the penalty of Rs. 30,000/- under Section 271(1)(b). The CIT(A) further observed that the assessee failed to bring any cogent evidence during appellate proceedings supporting deletion of the penalty, and that the case law citations provided by the assessee were distinguishable on facts and therefore not applicable.

Appellate Proceedings Before the Income Tax Appellate Tribunal

Grounds Raised Before the Tribunal

Dissatisfied with the CIT(A)'s order, the assessee approached the Income Tax Appellate Tribunal, Kolkata Bench, raising multiple grounds of appeal: