2025 (5) TMI 1783 - AT - Income Tax

Legal Challenge Overturns Tax Penalty Under Section 271AAA for Non-Retroactive Application of Law

The SC/ITAT quashed the penalty imposed under Section 271AAA for Assessment Year 2005-06, finding the provision inapplicable retrospectively. The Tribunal ... Penalty u/s 271AAA - Applicable for AY 2005-06 or not? - HELD THAT:- The provision of Section 271AAA has been inserted by Finance Act 2007 w.e.f. 01/04/2007, thus, the provision of Section 271AAA is not applicable for the year under consideration which is Assessment Year 2005-06. Therefore, invoking the provision of Section 271AAA of the Act by the A.O. is not only erroneous but also without the authority of law. Appeal of the Assessee is allowed. 1. ISSUES PRESENTED and CONSIDEREDa. Whether the penalty imposed under Section 271AAA of the Income Tax Act, 1961 is valid and applicable for Assessment Year 2005-06, given that the provision was inserted with effect from 01/04/2007Rs.b. Whether the assessment and penalty proceedings for AY 2005-06 are valid in the absence of valid notice under Sections 143(3) or 148 of the Income Tax ActRs.c. Whether the assessee's age, ill health, source of income, liquidity constraints, and requests to appropriate seized assets towards tax liability justify waiver or reduction of penalty or tax demandRs.d. Whether the explanation provided by the assessee for non-imposition of penalty can be considered bona fide in the light of the facts and circumstancesRs.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Applicability of Section 271AAA for AY 2005-06Relevant legal framework and precedents: Section 271AAA was introduced by the Finance Act, 2007, effective from 01/04/2007, prescribing penalty for failure to furnish information or documents as required under specified provisions. The assessment year under consideration is 2005-06, preceding the effective date of this section.Court's interpretation and reasoning: The Tribunal emphasized the temporal applicability of Section 271AAA, holding that since the provision came into effect only from 01/04/2007, it cannot be invoked retrospectively for AY 2005-06. The invocation of Section 271AAA for the said year was therefore held to be without jurisdiction and authority of law.Key evidence and findings: The date of insertion of Section 271AAA and the assessment year under consideration were determinative. No contrary statutory provision or judicial precedent permitting retrospective application was presented.Application of law to facts: The penalty order dated 27/09/2013 was based solely on Section 271AAA, which was not applicable for AY 2005-06. Consequently, the penalty order and the appellate order upholding it were quashed.Treatment of competing arguments: The Department relied on the lower authorities' orders to sustain the penalty, but failed to address the temporal inapplicability of Section 271AAA. The Tribunal rejected the Department's stance on this ground.Conclusion: The penalty imposed under Section 271AAA for AY 2005-06 is invalid and unsustainable.Issue (b): Validity of assessment and penalty proceedings in absence of valid notice under Sections 143(3)/147Relevant legal framework and precedents: Notices under Sections 143(3) and 148 are mandatory for making assessments or reassessments. The absence of valid notice vitiates the assessment and any consequent penalty proceedings.Court's interpretation and reasoning: The assessee contended that no valid notice was served before 31.03.2012, rendering the assessment and penalty proceedings void-ab-initio. The Tribunal noted this contention but primarily decided the matter on the applicability of Section 271AAA. The issue was noted as pending before the ITAT and was a ground for relief sought by the assessee.Key evidence and findings: The record indicated challenges to the validity of notices and assessment orders. However, no final adjudication on this issue was recorded in the present order.Application of law to facts: While the Tribunal did not explicitly decide this issue, it acknowledged the assessee's challenge and the ongoing proceedings. The issue remains open for determination in appropriate proceedings.Treatment of competing arguments: The Department did not effectively counter the argument regarding the notice validity in the present appeal.Conclusion: The question of validity of assessment and penalty in absence of valid notice remains pending and was not decided in this appeal.Issue (c): Assessee's age, ill health, source of income, liquidity constraints, and requests to appropriate seized assetsRelevant legal framework and precedents: Principles of natural justice and equitable considerations may be relevant in penalty and tax demand proceedings, especially where the assessee's personal circumstances and ability to pay are concerned. However, such factors do not generally absolve statutory liability unless specifically provided.Court's interpretation and reasoning: The assessee highlighted advanced age (94 years), ill health, sole income source as interest from fixed deposits, liquidity crunch due to seizure of gold jewellery worth over Rs. 80 lakhs, and attachment of house property. Several requests to sell seized jewellery to meet tax liability were allegedly ignored. The assessee argued that holding her liable for default in tax payment and interest was unjust.Key evidence and findings: The record showed seizure of substantial assets and attachment of property. The Tribunal noted these facts but did not find it necessary to delve deeper into these mitigating circumstances because the penalty itself was quashed on jurisdictional grounds.Application of law to facts: Since the penalty was quashed on the ground of inapplicability of Section 271AAA, the Tribunal did not adjudicate on the merits of these equitable considerations. However, these facts were recognized as part of the assessee's defense.Treatment of competing arguments: The Department did not specifically address these mitigating factors in the present appeal.Conclusion: The Tribunal did not decide on these factors but acknowledged the submissions. The penalty was quashed on other grounds, rendering detailed consideration unnecessary.Issue (d): Bona fide nature of assessee's explanation for non-imposition of penaltyRelevant legal framework and precedents: The bona fide nature of explanation is a relevant consideration in penalty proceedings, especially under Section 271AAA or analogous provisions, where the assessee's intent and cooperation are assessed.Court's interpretation and reasoning: The CIT(A) had observed that the assessee's explanation was not bona fide without assigning valid reasons. The assessee challenged this finding.Key evidence and findings: The Tribunal found that the CIT(A) failed to give valid reasons for rejecting the assessee's explanation as not bona fide.Application of law to facts: Since the penalty was quashed on jurisdictional grounds, the Tribunal did not further analyze the bona fide nature of the explanation but noted the procedural lapse by the CIT(A).