ITAT Delhi: Penalty under Section 271(1)(c) Unsustainable When High Court Admits Substantial Question of Law on Reassessment

1. Overview of the Ruling

The Delhi Bench of the ITAT in Ruby Singh Vs DCIT deleted penalty imposed under Section 271(1)(c) for seven assessment years, holding that concealment penalty does not automatically follow merely because the addition has been upheld in quantum proceedings.

Crucially, the Delhi High Court had already admitted substantial questions of law in the assessee’s quantum appeals concerning the legality of the reassessment itself. In such a situation, the Tribunal held that the very basis of the penalty was under serious legal challenge and, therefore, the penalty could not be sustained.

The decision applies to Assessment Years 2013-14 to 2018-19, where reassessments were framed under Section 147 read with Section 143(3), and penalties were levied under Section 271(1)(c).

2. Factual Matrix of the Case

2.1 Reassessment Proceedings

For all seven years (AYs 2013-14 to 2018-19), the Assessing Officer (ACIT, Central Circle-8, Delhi) completed reassessments under:

• Section 147 read with Section 143(3)
• Assessment orders dated 08.02.2022

These reassessments formed the basis for subsequent concealment penalties.

2.2 Lead Year: AY 2013-14 – Nature of Additions

The Tribunal treated AY 2013-14 as the lead year (ITA No. 2827/Del/2026). The key additions in that year were:

1. Credits of ₹25 lakhs and ₹50 lakhs (total ₹75 lakhs)

   • The assessee had received ₹25 lakhs and ₹50 lakhs via bank transfers from a joint bank account of Shri Dalpat Singh and Shri Ummed Singh, maintained with:

     • Bank of Baroda, and
     • State Bank of Bikaner & Jaipur.

   • The assessee furnished:

     • Copies of bank statements of these two persons,
     • Confirmations, and
     • Details of their income-tax assessments.

   • The AO issued summons under Section 131 to the said creditors. As there was no compliance, the AO treated the entire ₹75 lakhs as unexplained and made an addition.

2. Unexplained Credit under Section 68

   • The assessee’s Standard Chartered Bank account reflected a credit of ₹2,96,000/-.
   • The AO found that a part of this, amounting to ₹2,05,000/-, remained unexplained and added it as an unexplained cash credit under Section 68.

2.3 Quantum Appeals

The assessee challenged these additions before the appellate authorities. The sequence was:

• Appeal before CIT(A) – dismissed.
• Further appeal before ITAT (quantum) – also dismissed.

Thus, at the time of initiation of penalty, the additions stood confirmed by the Tribunal in the quantum proceedings.

3. Penalty Proceedings Under Section 271(1)(c)

3.1 Initiation and Levy of Penalty

After the quantum additions were confirmed by the ITAT, the AO initiated penalty under:

• Section 271(1)(c) read with Section 274

For AY 2013-14:

• Penalty was levied at 100% of the tax sought to be evaded
• Amount of penalty: ₹23,11,500/-

The AO’s reasoning was essentially:

• Since the ITAT had sustained the additions,
• The assessee was deemed to have “furnished inaccurate particulars of income”,
• Therefore, penalty under Section 271(1)(c) was justified.

3.2 First Appeal Against Penalty

The assessee challenged the penalty order before CIT(A)-24, New Delhi.

The CIT(A):

• Upheld the levy of penalty via order dated 06.01.2026 for AY 2013-14 (and similar orders for other years).
• Noted that the penalty order dated 29.11.2023 had been passed with prior approval of the Additional Commissioner of Income Tax, Central Range-2, New Delhi under Section 274(2).
• Observed that despite opportunities, the assessee did not substantively respond at the appellate stage except for adjournment requests.

Accordingly, the CIT(A) rejected the contentions that:

• Satisfaction under Section 271(1)(c) was not properly recorded, or
• The penalty was without jurisdiction, or
• The penalty was imposed mechanically based solely on the assessment order.

4. Grounds Raised Before the ITAT in Penalty Appeals

The assessee preferred seven separate appeals before the ITAT (one for each assessment year). In substance, the grounds in AY 2013-14, treated as the lead case, were:

1. Lack of Specific Charge

   • The assessee argued that the penalty order did not clearly spell out whether the charge was:
     • “concealment of income”, or
     • “furnishing inaccurate particulars of income”.

2. Effect of Admission of Question of Law by High Court

   • The assessee contended that when the Delhi High Court has admitted a substantial question of law in the quantum appeal, penalty under Section 271(1)(c) becomes unsustainable as the issue is debatable.