2026 (2) TMI 1306 - AT - Income Tax

Penalty under section 271(1)(c) unsustainable where belated return filed on notice is accepted and reasonable cause is shown.

Penalty under section 271(1)(c) is unsustainable where a belated return filed only after a section 148 notice is accepted in reassessment and no ... Penalty u/s 271(1)(c) - assessee had concealed the particulars of income by not filing the return u/s 139 and by offering income only after issuance of notice u/s 148 - whether the assessee has established a reasonable cause for failure to file return within the time prescribed under section 139(1)? HELD THAT:- The filing of tax audit report within time and the disclosure of financial statements are inconsistent with any design to suppress income. It is not a case where the Department unearthed undisclosed income through investigation. The entire income was offered voluntarily in response to notice and was accepted as such. DR has contended that mistake of accountant cannot constitute a reasonable cause. While it is correct that statutory compliance is the responsibility of the assessee, each case must be examined on its own factual matrix. The surrounding circumstances, conduct of the assessee and contemporaneous material must be considered. In the present case there is no dispute regarding the correctness of returned income, there is no addition made, the tax audit report was filed within time, tax liability was voluntarily discharged prior to completion of assessment and there is no material to suggest deliberate withholding of income. On cumulative consideration of these factors, we are of the view that the omission to file return u/s 139(1), though a default, was not accompanied by any intent to conceal income. The conduct of the assessee reflects negligence or inadvertence rather than concealment. Therefore, in our considered opinion, the assessee has demonstrated reasonable cause for failure to file return within time and consequently the deeming fiction under Explanation 3 cannot be invoked mechanically. Reassessment order ultimately determines income at the returned figure. The show cause notice issued during reassessment had proposed certain variations; however, the final assessment order does not record a specific finding of concealment in respect of any particular addition.Penalty proceedings u/s 271(1)(c) are quasi-criminal in nature and require clear satisfaction as to the precise charge. Appeal of the assessee is allowed. The assessment order must indicate whether the penalty is for concealment of particulars of income or for furnishing inaccurate particulars. In the present case, the initiation is recorded in a routine manner without linking it to any specific addition or inaccurate claim. When the assessment itself has accepted the returned income, levy of penalty solely on the ground of non-filing of return under section 139(1), without establishing concealment of particulars, cannot be sustained. Since the income declared in response to notice under section 148 has been accepted without any addition and no independent detection of concealed income has been brought on record, and considering that reasonable cause for non-filing of return u/s 139(1) stands established, the essential conditions for invoking section 271(1)(c) are not fulfilled. The penalty is therefore unsustainable in law. Appeal of the assessee is allowed. Issues: Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 is sustainable where the return for the assessment year was filed only in response to notice under section 148, the returned income was accepted in reassessment (no addition made), and the assessee alleges reasonable cause for delay in filing.Analysis: The appeal concerns levy of penalty under section 271(1)(c) where the reassessment under sections 147/148 culminated in acceptance of the income declared in the belated return and no independent detection of undisclosed income was made. Explanation 3 to section 271(1)(c) operates only when failure to file return is 'without reasonable cause'; it creates a deeming fiction but is not to be applied mechanically. The assessee filed the tax audit report under section 44AB within the extended due date, the audited financial statements were on record, a computation of income was prepared and tax (net of TDS) was paid prior to filing the belated return, and the assessee promptly responded to the section 148 notice with computation and payment. These surrounding facts and conduct are inconsistent with an intention to conceal and point to inadvertence or negligence rather than deliberate suppression. Penalty proceedings being quasi criminal require clear satisfaction as to the precise charge; where the assessment accepts the returned income and does not record specific findings of concealment or inaccurate particulars linked to any addition, invoking section 271(1)(c) solely because the return was not filed within time is unsustainable.Conclusion: Penalty under section 271(1)(c) is not sustainable; the assessee has shown reasonable cause for delay and the penalty of Rs. 12,51,564/- is deleted, and the appeal is allowed in favour of the assessee.