Levy of penalty under section 271AAC read with 274 stayed pending resolution of substantial question of law; appeal allowed

Levy of penalty under the tax penalty provision was contested on grounds that a substantial question of law raised in relation to assessment years 2013-14 to 2019-20 was pending before the High Court; this pendency formed the basis for setting aside the appellate and penalty orders. The tribunal held that the assessing officer is at liberty to initiate penalty proceedings only after the substantial question of law is decided by the High Court, and the taxpayer's challenge to the penalty proceedings was allowed accordingly.

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Issues: (i) Whether imposition of penalty under section 271AAC(1) read with section 274 of the Income-tax Act, 1961 is maintainable while the assessee's quantum appeal raising a substantial question of law is pending disposal before the High Court; (ii) Whether the penalty order is invalid on the ground that penalty proceedings were initiated without recording a valid satisfaction as required.

Issue (i): Whether imposition of penalty under section 271AAC(1) r/w section 274 is maintainable pending disposal of a substantial question of law admitted by the High Court.

Analysis: The Tribunal noted that the High Court of Delhi has admitted a substantial question of law in the assessee's quantum appeal (order dated 27.03.2025) covering relevant assessment years. The Tribunal treated the admission of the substantial question as making the imposition of penalty debatable and recognised the pendency of the High Court proceeding as material to the appropriateness of continuing with penalty adjudication at this stage. The Tribunal considered the parties' requests and the departmental representative's suggestion to keep the appeal pending until the High Court decision.

Conclusion: The Tribunal set aside the penalty order and the appellate order upholding it, holding that imposition of penalty is not maintainable at this stage and directing that the Assessing Officer may initiate penalty proceedings after the substantial question of law is decided by the High Court. The conclusion is in favour of the assessee.

Issue (ii): Whether the penalty order is invalid for lack of recorded satisfaction prerequisite to initiation of penalty proceedings under section 271AAC(1) r/w section 274.

Analysis: The Tribunal recorded the assessee's contention that initiation of penalty proceedings required recording of a valid satisfaction, which was alleged to be absent. While noting this ground, the Tribunal's operative decision was driven by the pendency of the substantial question of law before the High Court and the debatable nature of the penalty; the Tribunal therefore set aside the penalty order without finally adjudicating the correctness of the recorded satisfaction issue, leaving the Assessing Officer liberty to proceed afresh after the High Court decision.

Conclusion: The Tribunal did not uphold the penalty; it set aside the penalty order and appellate order without making a final finding on the recorded-satisfaction point. The practical effect is favourable to the assessee.

Final Conclusion: The appeal is allowed and both the Assessing Officer's penalty order dated 29.11.2023 and the Commissioner (Appeals)' order dated 13.06.2025 are set aside; the Assessing Officer may initiate fresh penalty proceedings after the High Court decides the admitted substantial question of law.

Ratio Decidendi: Where a substantial question of law raised in the assessee's quantum appeal has been admitted by the High Court and is pending, continuation or final adjudication of penalty proceedings under section 271AAC(1) r/w section 274 may be set aside as debatable pending the High Court's decision, permitting the assessing authority to reconsider initiation of penalty proceedings thereafter.

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