2025 (10) TMI 49 - HC - Income Tax

Penalty under s.270A quashed for Transfer Pricing; matter remanded; virtual hearing under Faceless Penalty (Amendment) Scheme, 2022 ordered

HC quashed and set aside the penalty under s.270A arising from a Transfer Pricing adjustment and remanded the matter to Respondent No.1. The court ... Penalty u/s 270A - addition on account of a Transfer Pricing Adjustment - HELD THAT:- Petitioner has entered into an APA with the CBDT on 21st December 2021. It is also not in dispute that as per the provisions of Section 92CD(1), the Petitioner filed its return of income on 30th March 2022 and offered to tax a sum of approximately Rs. 14.16 Crores towards Transfer Pricing Adjustment as per the APA entered into between the Petitioner and the CBDT. The tax on this amount has also been paid by the Petitioner as admitted by the Revenue in its affidavit-in-reply. It is also an admitted fact that no order has been passed u/s 92CD(3) on the modified return of income filed by the Petitioner. We find that all these facts have not been taken into consideration by Respondent No.1 before passing the impugned penalty order. Further, no virtual hearing was given to the Petitioner as mandated by the Faceless Penalty (Amendment) Scheme, 2022. We, therefore, are of the view that the impugned penalty order has to go, and the matter ought to be remanded to the 1st Respondent to give a virtual hearing to the Petitioner and thereafter pass any fresh order that he may so choose. We must make it clear that the 1st Respondent shall take into consideration all the facts mentioned in this order before passing any fresh order. 1st Respondent shall also take into consideration that for A.Y.2016-17 on the basis of this very APA, penalty proceedings against the Petitioner were dropped. This would also be an additional fact that the 1st Respondent shall take into consideration before passing any fresh order. The impugned penalty order is hereby quashed and set aside. 1st Respondent shall give a virtual hearing to the Petitioner and only thereafter pass a fresh speaking reasoned order after taking into consideration all that is stated herein above. This entire exercise shall be completed by the 1st Respondent within a period of 12 weeks from today and the Petitioner shall co-operate with the 1st Respondent in that regard. ISSUES PRESENTED AND CONSIDERED 1. Whether a penalty under Section 270A of the Income Tax Act can be sustained where the assessee filed a modified return under Section 92CD(1) pursuant to an Advanced Pricing Agreement (APA), tax corresponding to the APA adjustment was paid, and no order under Section 92CD(3) had been passed by the relevant date. 2. Whether failure to grant a virtual (faceless) hearing as mandated by the Faceless Penalty (Amendment) Scheme, 2022 vitiates a penalty order passed under Section 270A. 3. Whether the writ petition was maintainable in view of the existence of an alternate efficacious remedy of appeal to the Commissioner of Income Tax (Appeals) against the penalty order. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainment of penalty where modified return filed under Section 92CD(1) and no Section 92CD(3) order passed Legal framework: Section 92CD(1) permits filing of a return modified to reflect adjustments effected by an APA entered into with the Board; Sections 92CD(3) and (5) contemplate action by the Assessing Officer on such modified returns. Section 270A provides for imposition of penalty for under-reporting and misreporting of income. Precedent Treatment: No prior judicial authority was cited or relied upon in the judgment to alter or qualify the statutory scheme set out above; the Court proceeded on the statutory text and admitted facts. Interpretation and reasoning: The Court accepted as admitted that (a) an APA had been entered into covering the relevant assessment years, (b) a modified return reflecting the APA adjustment was filed, (c) tax corresponding to the APA adjustment was paid, and (d) no order under Section 92CD(3) had been passed on the modified return prior to the penalty order. The Court found that the Assessing Officer did not take these facts into account when passing the penalty order. The combination of a filed modified return under Section 92CD(1) (with tax paid) and absence of any Section 92CD(3) order meant that the departmental position relied upon in levying penalty was factually incorrect or incomplete. Ratio vs. Obiter: Ratio - where a modified return under Section 92CD(1) is filed pursuant to an APA, tax corresponding to the APA adjustment is paid, and no order under Section 92CD(3) exists, a penalty under Section 270A based on the pre-APA position cannot be sustained without taking the modified return and absence of Section 92CD(3) order into account. Obiter - the Court noted the absence of demand because tax was paid; this factual observation informs outcome but is not stated as a broader principle beyond the case facts. Conclusions: The impugned penalty could not stand without consideration of the modified return and related APA compliance; the penalty order was thereby unsustainable on the record as it stood and required reconsideration. Issue 2: Requirement of a virtual (faceless) hearing under the Faceless Penalty (Amendment) Scheme, 2022 Legal framework: The Faceless Penalty (Amendment) Scheme, 2022 prescribes mandatory procedure for faceless/virtual hearings in penalty proceedings under the Income Tax Act. Precedent Treatment: The Court did not rely on or distinguish prior authorities on faceless hearing requirements; it adjudicated based on the Scheme's mandate and the admitted fact that no virtual hearing was granted. Interpretation and reasoning: The Court held that the Scheme's mandate to afford a virtual hearing is mandatory in the penalty context described. The record showed that the Petitioner requested a hearing (or was entitled to one) and did not receive any virtual hearing before the penalty order was passed. That procedural lapse amounted to a breach of the Scheme and vitiated the penalty order. Ratio vs. Obiter: Ratio - failure to grant the mandatory virtual hearing under the Faceless Penalty (Amendment) Scheme, 2022 vitiates a penalty order; such hearing must be given before imposing penalty under the Scheme. Obiter - none beyond the clear procedural consequence stated. Conclusions: The absence of the mandated virtual hearing required quashing of the penalty order and remand for a fresh hearing and decision in accordance with the Scheme. Issue 3: Maintainability of writ petition in presence of alternative remedy of appeal to CIT(A) Legal framework: Principles of writ jurisdiction require withholding of discretionary relief where an efficacious alternate statutory remedy is available, unless exceptional circumstances justify interference. Precedent Treatment: The Court acknowledged the Department's preliminary objection invoking availability of appeal to CIT(A) but proceeded to exercise jurisdiction given the admitted facts and the nature of the relief sought. Interpretation and reasoning: The Court considered that the issue involved admitted factual errors in the penalty order (non-consideration of the modified return and absence of Section 92CD(3) order) and a clear procedural breach (no virtual hearing). Given these circumstances, the Court exercised writ jurisdiction notwithstanding the alternate remedy, because the facts showed a substantive and procedural defect requiring immediate remedy and remand for compliance with mandatory procedure. Ratio vs. Obiter: Ratio - where a penalty order contains admitted factual misapprehension (failure to consider a statutorily-filed modified return and payment under an APA) and a breach of mandatory procedural requirements, the Court may entertain writ jurisdiction despite existence of appeal remedy. Obiter - procedural availability of appeal is not determinative where immediate rectification of fundamental defects is warranted. Conclusions: The preliminary objection was rejected in the exercise of discretion; the writ petition was entertained and relief granted because of the combined factual and procedural infirmities. Remedial Direction and Scope of Remand (Interconnected to Issues 1-3) Legal framework & Reasoning: In light of the foregoing, the Court directed quashing of the impugned penalty order and remand to the officer for granting a virtual hearing and for passing a fresh speaking reasoned order after considering the APA, the modified return under Section 92CD(1), the absence of any Section 92CD(3) order, payment of tax as per the APA, and the fact that penalty proceedings were previously dropped for a related assessment year on the basis of the same APA. Ratio vs. Obiter: Ratio - requirement that a fresh order on penalty must be preceded by the mandated virtual hearing and must take into account the APA-related facts and the status of Section 92CD(3) proceedings; the remand must result in a speaking, reasoned decision within a fixed timeframe. Obiter - suggestion that prior administrative treatment (e.g., dropping penalty for another year) is an additional relevant fact to be considered on remand. Conclusions: The penalty order was quashed and the matter remitted for fresh consideration consistent with statutory obligations and the Faceless Penalty Scheme, to be completed within the specified period; no costs awarded.