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Facts
The revenue appealed against the deletion of penalty under section 271(1)(c) by the CIT(A). The original assessment involved a large transfer pricing adjustment on the sale of shares. The assessee's appeal against the quantum addition was admitted by the High Court, raising substantial questions of law.
Held
The Tribunal held that when the High Court admits an appeal on substantial questions of law, the sustainability of the addition becomes debatable. Therefore, the penalty cannot be levied as the assessee cannot be held guilty of concealment or furnishing inaccurate particulars.
Key Issues
Whether penalty under section 271(1)(c) is leviable when the quantum addition is under challenge before the High Court, which has admitted the appeal on substantial questions of law.
Sections Cited
271(1)(c), 274, 271C, 92A, 92B
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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI SOUNDARARAJAN K.
ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER
This is an appeal filed by the revenue challenging the order of the Ld.CIT(A), Bengaluru – 12 dated 13/11/2024 in respect of the penalty proceedings u/s. 271(1)(c) of the Act for the A.Y. 2014-15 and raised the following grounds: “
1. In the facts and circumstances of the case, whether the Ld. CIT(A) justified in holding that penalty cannot be levied when the assessment order is the subject matter of appeal before 1-lon'ble High Court, even though there is no such Page 2 of 7 IT(IT)A No. 2431/Bang/2024 limitation as per provisions of the section 275 of the Income Tax Act, 1961?
2. In the facts and circumstances of the case, whether the Ld. CIT(A) justified in not disposing the appeal based on the merits of the case holding that penalty cannot be levied when the assessment order is the subject matter of appeal before Hon'ble High Court?
3. In the facts and circumstances of the case, whether the Ld. CIT(A) justified deleting the penalty when the Honible high court has not set aside the order of ITAT upholding the quantum addition and the case is still pending for adjudication?”
2. The brief facts of the case are that the assessee is a non-resident foreign company and filed their return of income on 31/03/2015. The case of the assessee was selected for scrutiny through CASS for examining the large international transactions. Notices u/s. 143(2) and 142(1) were issued for which the assessee also appeared and filed their submissions with the documents. During the course of the scrutiny proceedings, it was noticed that the assessee had sold 43,76,771 shares of United Spirits Ltd (USL) to Relay BV at Rs. 1,440/- per share and on that basis, the AO had referred the matter to the transfer pricing officer for computing the arms length price in respect of the international transaction. The Ld.TPO also passed an order by making a transfer pricing adjustment of Rs. 262,07,66,707/- being the arms length price of the sale of the share of the United Spirits Ltd. to Relay BV an associated enterprises as against the sale consideration declared by the assessee at Rs. 135,37,05,283/-. The AO had issued a draft assessment order on the assessee and the DRP also confirmed the said adjustments. The said assessment order was challenged by the assessee before this Tribunal and the Tribunal also confirmed the said assessment. As against the said order of the Tribunal, the assessee had filed appeals before the Hon’ble Jurisdictional High Court in & 456/2023 and the Hon’ble Karnataka High Court had also admitted the appeals filed by the assessee and framed substantial questions of law. In the said appeal, the assessee had challenged the adjustment made by the AO by treating the transaction as international transaction. Subsequently, the AO had Page 3 of 7 IT(IT)A No. 2431/Bang/2024 initiated the penalty proceedings u/s. 271C of the Act by issuing a notice u/s. 274 of the Act on the ground that the assessee had furnished inaccurate particulars of income. The assessee filed a detailed reply and submitted that penalty need not be levied since there is no concealment of any income or furnishing of inaccurate particulars of any such income. The assessee had also submitted that particulars of income was furnished by the assessee but the department estimated the said income by treating the said transactions as international transactions and therefore it could not be a reason to impose penalty u/s. 271(1)(c) of the Act. The AO not accepted the objections had confirmed the penalty that the assessee had deliberately furnished inaccurate particulars of income during the course of assessment proceedings.
3. As against the said order, the assessee filed an appeal before the Ld.CIT(A) and submitted that the addition or disallowance made on account of international transaction shall not be treated as concealed particulars of income or furnishing inaccurate particulars of income when the assessee proved that the price charged in such transaction was at arms length. The assessee also submitted that there is no non-disclosure of material facts at the time of assessment proceedings and also there was no gross or wilful neglect on the part of the assessee to invoke the penalty provisions u/s. 271(1)(c) of the Act. The assessee also submitted that the order of the Tribunal as against the quantum appeals are under challenge before the Hon’ble Jurisdictional High Court which also admitted the appeals filed by the assessee and framed substantial questions of law and therefore the view of the Tribunal is an arguable one and therefore penalty need not be levied. The Ld.CIT(A) had considered the said submissions and also considered the fact that the Hon’ble Jurisdictional High Court had admitted the appeals of the assessee and framed the substantial questions of law and therefore followed the Hon’ble Jurisdictional High Court judgment reported in (2017) 79 taxmann.com 376 (Karnataka) in the case of CIT Vs. Dr. Harsha N. Biliangady and deleted the penalty levied u/s. 271C of the Act by stating
Page 4 of 7 IT(IT)A No. 2431/Bang/2024 that the addition made in the assessment order is a debatable one and therefore, the penalty need not be levied in such circumstances.
As against the said order, the present appeal has been filed by the revenue before this Tribunal.
At the time of hearing, the Ld.AR furnished the order sheets of the Hon’ble High Court and also the Division Bench judgment of the Hon’ble Jurisdictional High Court reported in (2015) 379 ITR 529 (Karnataka) in the case of CIT vs. Dr. Harsha N. Biliangady and also another Division Bench judgment of the Hon’ble Jurisdictional High Court reported in (2015) 379 ITR 50 in the case of CIT Vs. Ankita Electronics (P.) Ltd. and submitted that in the facts and circumstances, the order of the Ld.CIT(A) has to be confirmed.
The Ld.DR submitted that the mere fact of admitting the appeal by the Hon’ble High Court would not be a reason to delete the penalty and prayed to set aside the order of the Ld.CIT(A).
We have heard the arguments of both sides and perused the materials available on record.
The only dispute involved in this appeal is whether the penalty levied u/s. 271(1)(c) of the Act deleted by Ld.CIT(A) is correct or not. We have perused the copy of the order sheet furnished by the Ld.AR in which the Hon’ble Karnataka High Court had admitted the quantum appeals filed by the assessee challenging the orders of the Tribunal passed in & 2930/Bang/2018 and framed the following questions of law. “1. Whether, on the facts and in the circumstances of the case and on the grounds urged, the Appellant and Relay B.V which were unrelated at the time of execution of the SPA and the transfer of shares of 1151. can be said to be 'associated enterprises' as per section 92A(2) of the Act, solely on account of the subsequent acquisition of shares in USL by Relay 8.V crossing the threshold of 26% of the Page 5 of 7 IT(IT)A No. 2431/Bang/2024 share capital, and consequently, the transaction is deemed to be an 'international transaction' within the meaning of section 928 of the Act? 2. Whether, on the facts and in the circumstances of the case and on the grounds urged, even if Chapter X is held to be applicable, the transaction, in essence, being entered into between two unrelated parties, the contractually agreed price can only represent the arm's length price? 3. Whether, on the facts and in the circumstances of the case and on the grounds urged, the finding of the Tribunal that the Appellant has transferred its controlling interest in USL to Relay B.V is contrary to the material on record and, thus, is perverse? 4. Whether, on the facts and in the circumstances of the case and on the grounds urged, the Tribunal was right in upholding the adoption of the DCF method by the TPO for computation of the ALP of the transfer of the shares by the Appellant, although the same is not one of the prescribed methods under the Act and the Rules and comparable uncontrolled prices are available in the form of prices quoted on the stock exchange and/or preferential allotment by USL to Relay and open offer to the public?”
It shows that the order of the Tribunal had not attained finality and in fact the Hon’ble High Court, having found that there are substantial question law involved, it admitted the quantum appeals. Therefore, the contention of the Ld.AR has some force and it also got support from the Division Bench judgements of the Hon’ble Karnataka High Court cited supra.
We have also gone through the Division Bench judgments of the Hon’ble Karnataka High Court reported in (2015) 379 ITR 50 in the case of CIT Vs. Ankita Electronics (P.) Ltd. wherein it was held that “the admission of substantial question of law by the High Court leads credence to the bonafide of the assessee and therefore the penalty is not leviable u/s. 271(1)(c) and merely because the claim of the assessee has been rejected by the revenue authorities would not make the assessee liable for penalty.” In the judgment reported in (2015) 379 ITR 529 (Karnataka) in the case of CIT
Page 6 of 7 IT(IT)A No. 2431/Bang/2024 vs. Dr. Harsha N. Biliangady, the Hon’ble Karnataka High Court had held “whether penalty is imposed in respect of any addition where High Court has admitted the appeal on substantial question of law, then sustainability of addition itself becomes debatable and in such circumstances, penalty cannot be levied u/s. 271(1)(c) of the Act.”
The Ld.CIT(A) had considered the principles laid down by the Division Bench judgments of the Hon’ble Jurisdictional High Court and held as follows: “5.1 The appellant challenged the quantum appeal order of the ITAT before the Karnataka High Court on 06.07.2023. The Karnataka High Court in its order dated 29.08.2023 admitted the appeal and framed the substantial questions of law. The appellant contended that once High Court admitted the appeal the issue becomes debatable and accordingly penalty cannot be levied. The appellant relied on Karnataka High Court decision in the case of CIT vs Dr. Harsha N. Biliangady [2017] 79 taxmann.com 376 (Karnataka) wherein it is held that: “8. We do not find any reason to hold that the finding given and the conclusion arrived at by the Tribunal as incorrect. We are also of the opinion that where penalty is imposed in respect of any addition where the High Court has admitted the appeal on substantial question of law, then the sustainability of the addition itself becomes debatable, and in such circumstances penalty cannot be levied under Section 271(1)(c) of the Act. Penalty can only be imposed for concealment of material particulars or furnishing of inaccurate particulars by the assessee. In the facts of the present case, we are of the view that the assessee cannot be held guilty of the concealment of any material particulars of his income or having furnished inaccurate particulars of such income, so as to attract provisions of Section 271(1)(c) of the Act. 9. Appeal is accordingly dismissed at the stage of admission itself as no substantial question of law arises for our consideration.” 5.2 In view of the above decision of the Karnataka High Court, the addition made in the assessment order is debatable and no penalty as such can be levied in such circumstances. Accordingly, penalty is deleted.”
Page 7 of 7 IT(IT)A No. 2431/Bang/2024 12. Considering the issue on hand and also the principles laid down by the Hon’ble Karnataka High Court in the above referred judgments, we do not find any infirmity in the order passed by the Ld.CIT(A) in which the penalty u/s. 271(1)(c) has been deleted. We, therefore dismiss the appeal of the revenue.
In the result, the appeal filed by the revenue is dismissed.
Order pronounced in the open court on 01st April, 2026.
Sd/- Sd/- (PRASHANT MAHARISHI) (SOUNDARARAJAN K.) Vice – President Judicial Member Bangalore, Dated, the 01st April, 2026. /MS /