2025 (11) TMI 1774 - HC - Income Tax

Penalty under Section 271(1)(c) cannot survive when assessee wins quantum appeal on Section 10A dispute

Pr. Commissioner of Income Tax-2 Versus Mahindra Engineering Services Ltd.

HC dismissed Revenue's appeal against deletion of penalty under Section 271(1)(c). The assessee had initially faced penalty for alleged concealment ... Penalty u/s 271(1)(c) - assessee has concealed particulars of income and has furnished inaccurate particulars of income during the assessment proceedings - addition on account of denial of exemption under Section 10A as claimed by the Petitioner and addition on account of capitalization of the expenses on business development - ITAT deleted penalty levy HELD THAT:- Once we find that in the main quantum proceedings, the Assessee has fully succeeded, there was no question of imposing any penalty on the Asseessee under the provisions of Section 271(1)(c) of the I. T. Act. In fact from the record we find that the CIT(A) (in the penalty proceedings) has held in favour of the Asseessee and cancelled the penalty imposed upon the Assessee, insofar as the penalty was levied on the issue of the deduction claimed u/s 10A. CIT(A) infact upheld the penalty only to the extent of the addition made in the quantum proceedings of Rs. 1.79 Crores. The Revenue has not preferred any Appeal from the order passed by CIT(A) (in the penalty proceedings). The Appeal was filed only by the Asseessee and the ITAT quashed even the penalty levied on the Asseessee for the alleged addition of Rs. 1.79 Crores on account of the alleged capitalization of the expenses on business development. Hence, this Appeal if at all, can be only against the order of the ITAT insofar as the Asseessee succeeded before the ITAT (in the penalty proceedings). Once having found that the Asseessee has succeeded entirely in the quantum proceedings, there would be no question of imposing any penalty on the Asseessee. Once this is the case, we find that the order of the ITAT does not give rise to any substantial question of law as projected by the Revenue. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 can be sustained where the assessee has fully succeeded in the quantum proceedings on all issues forming the basis of such penalty. 1.2 Whether, in the circumstances of cancellation of additions in the quantum proceedings and affirmation thereof up to the High Court, any substantial question of law arises from the order of the Tribunal deleting the penalty. 1.3 Whether the Revenue's objection on the ground of low tax effect requires adjudication when the appeal itself fails on merits. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustainability of penalty under section 271(1)(c) when assessee has fully succeeded in quantum proceedings Legal framework (as discussed) 2.1 The Court proceeded on the basis of the statutory scheme of section 271(1)(c) relating to penalty for concealment of income or furnishing inaccurate particulars of income, and its linkage with the outcome of the quantum assessment. Interpretation and reasoning 2.2 The quantum assessment initially involved (a) denial of exemption under section 10A, and (b) addition on account of capitalization of business development expenses amounting to Rs. 1.79 crores (net of depreciation). 2.3 In the quantum appeals, the Tribunal held that (i) the assessee was entitled to deduction under section 10A, and (ii) the business development expenses of Rs. 1.79 crores were revenue in nature and not liable to be capitalized, thereby deleting both additions and granting complete relief to the assessee. 2.4 The Revenue, in its further appeal before the High Court, challenged only the Tribunal's decision granting deduction under section 10A and did not challenge the finding that the Rs. 1.79 crores expenditure was revenue in nature. 2.5 The Court upheld the Tribunal's order allowing the deduction under section 10A. Thus, the assessee's claim under section 10A stood confirmed up to the High Court, and the Tribunal's deletion of the addition of Rs. 1.79 crores remained unchallenged and attained finality. 2.6 In penalty proceedings, the CIT(A) had already cancelled the penalty insofar as it related to the claim under section 10A, and sustained penalty only in respect of the addition of Rs. 1.79 crores. The Revenue did not appeal against this order in penalty proceedings; only the assessee appealed, and the Tribunal deleted the remaining penalty relating to Rs. 1.79 crores. 2.7 The Court held that once, in the main quantum proceedings, the assessee has fully succeeded and the additions forming the basis of the penalty stand deleted and confirmed as such up to the High Court, there remains no foundation in law for levying or sustaining any penalty under section 271(1)(c). Conclusions 2.8 The penalty under section 271(1)(c) cannot survive when the assessee has entirely succeeded in the quantum proceedings and the additions forming the basis of the penalty have been deleted and attained finality. 2.9 The Tribunal was correct in deleting the penalty imposed on the assessee both in relation to the section 10A claim and the alleged capitalization of business development expenses of Rs. 1.79 crores. Issue 2 - Existence of substantial question of law Interpretation and reasoning 2.10 The Revenue proposed a substantial question of law alleging that the Tribunal erred in deleting penalty under section 271(1)(c) on the ground that the assessee had concealed particulars of income and furnished inaccurate particulars. 2.11 The Court examined the status of the quantum proceedings and noted that (i) the Tribunal had deleted the additions on all counts, (ii) this Court had affirmed the Tribunal's order allowing deduction under section 10A, and (iii) the Revenue had not challenged the Tribunal's finding that the Rs. 1.79 crores expenditure was revenue in nature. 2.12 On this factual and legal foundation, the Court held that, since the assessee had succeeded fully in the quantum proceedings and the very basis for levy of penalty no longer existed, no arguable or debatable legal issue survived that could give rise to any substantial question of law with respect to the Tribunal's order deleting the penalty. Conclusions 2.13 The order of the Tribunal deleting the penalty under section 271(1)(c) does not give rise to any substantial question of law. 2.14 The Revenue's appeal was devoid of merit and was liable to be dismissed. Issue 3 - Necessity to decide the objection of low tax effect Interpretation and reasoning 2.15 It was contended on behalf of the assessee that, even if the appeal were considered on merits, it would in any event be liable to be dismissed on the ground of low tax effect, the tax effect being approximately Rs. 1.79 crores as recorded by the CIT(A). 2.16 The Court, having already dismissed the appeal on merits and found no substantial question of law arising, held that it was unnecessary to go into the separate question of low tax effect. Conclusions 2.17 The contention regarding low tax effect was noted but expressly left unadjudicated, as the appeal stood dismissed on merits.