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Facts
The assessee filed a return of income for AY 2009-10. The assessment was reopened, and the Assessing Officer made additions for unexplained investment in shares and income from other sources. The CIT(A) deleted one addition and sustained another based on the assessee's admission to buy peace of mind. Subsequently, penalty proceedings were initiated under section 271(1)(c).
Held
The Tribunal held that the penalty proceedings were initiated on a basis different from the one on which the penalty was ultimately levied. The sustained addition was based on an admission made during appellate proceedings to avoid litigation, not on independent findings of concealment. The penalty order was mechanical and lacked proper satisfaction.
Key Issues
Whether the penalty levied under section 271(1)(c) is sustainable when the original addition was deleted, the sustained addition was based on admission for peace of mind, and the penalty proceedings lacked proper satisfaction and were based on inconsistent grounds.
Sections Cited
271(1)(c), 143(1), 148, 147, 143(3), 154, 274, 69
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आदेश / ORDER
PER MAKARAND VASANT MAHADEOKAR,AM:
This appeal by the assessee is directed against the order dated 24.09.2025 passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”], for Assessment Year 2009–10, whereby the CIT(A) confirmed the penalty of Rs. 1,29,410/- levied by the Assessing Officer under section 271(1)(c) of the Income-tax Facts of the Case
The assessee, an individual, filed her return of income for A.Y. 2009–10 declaring a total income of Rs. 62,780/-. The return was processed under section 143(1) of the Act. Subsequently, the assessment was reopened by the Assessing Officer by issuance of notice under section 148 dated 28.03.2013, invoking the provisions of section 147 of the Act. The reassessment proceedings were initiated on the basis of information received from the Investigation Wing relating to alleged bogus share transactions, purportedly linked to entities controlled by Shri Mukesh Choksi. After completion of reassessment proceedings, the Assessing Officer passed an order under section 143(3) read with section 147, determining the total income of the assessee at Rs. 7,09,828/-, as against the returned income of Rs. 62,780/-. The addition primarily related to an amount of Rs. 6,36,866/-, treated as unexplained/bogus share transactions.
Aggrieved by the reassessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals)-1, Thane. Since identical issues arising out of alleged bogus share transactions were involved for A.Ys. 2008–09, 2009–10 and 2010– 11, the CIT(A)-1, Thane disposed of all the three appeals by a
In so far as Assessment Year 2009–10 is concerned, the CIT(A) recorded that the assessee had disclosed in the return of income: Long Term Capital Gain (LTCG) of Rs. 6,47,054/-, Short Term Capital Gain (STCG) of Rs. 72,596/-, and income from other sources of Rs. 52,180/-. Thus, the amounts which were subjected to dispute were already disclosed in the return of income, though claimed under specific heads and with a particular tax treatment.
During the appellate proceedings, the learned Authorised Representative explained that the LTCG of Rs. 6,47,054/- arose from sale of IFCI shares which were purchased in earlier years and sold during the year under consideration. As regards STCG of Rs. 72,596/-, it was submitted that the same had already been offered to tax in the return of income. However, during the course of appellate proceedings, and as recorded by the CIT(A) in paragraph 5.8 of the appellate order, the assessee, to buy peace of mind, agreed to sustain the addition of Rs. 6,47,054/- on account of alleged bogus LTCG, subject to application of tax as per law. The CIT(A)-1, Thane, by the said common order dated 25.05.2018, held as under for A.Y. 2009–10:
Alka Ashok Jagtap - the addition of Rs. 6,36,866/- made by the Assessing Officer as unexplained investment in shares was deleted; - the amount of Rs. 6,47,054/-, though disclosed as LTCG, was sustained as income on the basis of the assessee’s admission; and - the STCG of Rs. 72,596/-, having already been offered to tax, could not be taxed again. Accordingly, the appeal for A.Y. 2009–10 was partly allowed.
Pursuant to the aforesaid appellate order and the rectification order under section 154 dated 19.06.2018, the Assessing Officer, Income Tax Officer, Ward-3(1), Kalyan, passed an order giving effect dated 19.06.2018, determining the revised total income of the assessee at Rs. 7,09,828/-.
Thereafter, the Assessing Officer initiated penalty proceedings under section 271(1)(c). Notices under section 274 read with section 271(1)(c) were issued on 17.03.2021 and 11.06.2021. After considering the replies filed by the assessee, the Assessing Officer passed a penalty order dated 16.03.2022 under section 271(1)(c), levying a penalty of Rs. 1,29,410/-, being 100 percent of the tax sought to be evaded, with reference to the assessed income as per the appeal effect order dated 19.06.2018.In the penalty order, the Assessing Officer recorded that since the addition of Rs. 6,47,054/- on account of alleged
8. Aggrieved by the levy of penalty, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC). The CIT(A), NFAC, by order dated 24.09.2025, dismissed the appeal and confirmed the penalty of Rs. 1,29,410/-, holding that the assessee had failed to substantiate her explanation and that the sustained addition justified levy of penalty under section 271(1)(c).
9. Against the aforesaid order of the CIT(A), the assessee is in appeal before us raising following grounds of appeal: 1. “On the facts and in the circumstances of the case, the CIT(A) erred in law and on facts in confirming the penalty u/s 271(1)(c) without appreciating that the penalty was levied solely on account of the addition and not based on any independent finding of concealment or furnishing inaccurate particulars.
2. The entire assessment and penalty proceedings are vitiated as the AO failed to grant cross-examination of untested statement of Shri Mukesh Choksi, the only person whose alleged statement was used to draw adverse conclusions. This violates principles of natural justice as held in: Andaman Timber Industries v. CCE (SC). Kishinchand Chellaram v. CIT (SC).
3. NFAC erred in holding that cross-examination is irrelevant in penalty proceedings. The Appellant submits that penalty proceedings require independent examination of evidence and denial of cross- examination renders the order bad in law.
4. The penalty order is invalid because the assesse has made full disclosure in return of income and during assessment; no falsity found in explanation and disclosure hence there is no concealment.
5. The penalty order is invalid because the AO did not record proper and specific satisfaction as required u/s 271(1)(c) r.w.s 274. The penalty notice is vague and does not specify the limb (“concealment” vs “inaccurate particulars”).
Alka Ashok Jagtap 6. The CIT(A) erred by holding that confirmation of addition automatically implies concealment, contrary to the law laid down in: CIT v. Reliance Petroproducts (P) Ltd. (SC). Khoday Eswara & Sons (SC). Dilip N. Shroff (SC). 7. The CIT(A) failed to consider submissions relating to bona fide conduct, related to earlier penalty orders in AYs 2008–09 & 2010– 11, and the fact that penalty on similar facts was deleted in preceding and succeeding years, demonstrating consistency of conduct and absence of malafide intent.
The NFAC failed to deal with the judicial precedents specifically cited by the Appellant, violating section 250(6), which mandates a speaking order.
Additions is based on presumptive/preponderance of probability and third party statement, which does not arise penalty.
10. Penalty cannot be sustained where the quantum matter is subject to challenge or where the addition is based solely on third-party statements without independent verification.
The penalty of Rs. 1,29,410/- levied u/s 271(1)(c) may kindly be deleted.”
The learned Authorised Representative (AR) for the assessee submitted that the levy and confirmation of penalty under section 271(1)(c) is wholly unsustainable in law as well as on facts and deserves to be deleted in toto. The AR emphasised that the amount of Rs. 6,47,054/-, on which penalty has ultimately been levied, was fully disclosed in the return of income as Long Term Capital Gain (LTCG) for A.Y. 2009–10. Similarly, the amount of Rs. 72,596/- was disclosed as Short Term Capital Gain and offered to tax. The AR submitted that in the reassessment order, the Assessing Officer had treated Rs. 6,36,866/- as unexplained investment in shares under section 69. However, this entire addition was deleted by the CIT(A)-1, Thane in the common appellate order dated 25.05.2018.Thus, the very basis on which penalty proceedings were originally initiated ceased to exist, and
11. The AR submitted that the common CIT(A) order clearly records that the assessee agreed to sustain the addition of Rs. 6,47,054/- only to buy peace of mind. Such an admission, made during appellate proceedings to avoid protracted litigation, cannot be equated with concealment of income. It was argued that an admission made for settlement or to avoid further litigation does not ipso facto establish mens rea or deliberate concealment, particularly when the income was already disclosed in the return.
The learned Departmental Representative strongly supported the orders passed by the Assessing Officer as well as the Commissioner of Income-tax (Appeals).
We have carefully considered the rival submissions, perused the orders of the Assessing Officer, the Commissioner of Income- tax (Appeals), NFAC, the common quantum order passed by CIT(A)-1, Thane dated 25.05.2018, the order giving effect dated 19.06.2018, and the penalty order passed under section 271(1)(c) dated 16.03.2022. We have also examined the material available on record.
The issue for our consideration is whether, on the facts and circumstances of the case, the penalty of Rs. 1,29,410/- levied
At the outset, we find that the basis on which penalty proceedings were initiated and the basis on which penalty has ultimately been levied are not the same. In the reassessment order passed under section 143(3) read with section 147, the Assessing Officer had made the following additions for A.Y. 2009– 10: i. unexplained investment in shares of Rs. 6,36,866/-; and ii. income from other sources of Rs. 72,596/-. Penalty proceedings were initiated with reference to the above additions.
However, in the common quantum appellate order dated 25.05.2018, the CIT(A)-1, Thane deleted the addition of Rs. 6,36,866/- in entirety and sustained an altogether different amount of Rs. 6,47,054/- on account of alleged bogus Long Term Capital Gain, while directing that the Short Term Capital Gain of Rs. 72,596/- be taxed at the maximum marginal rate.
Thus, the original addition which formed the very basis for initiation of penalty did not survive.
Alka Ashok Jagtap 18. It is well settled that when the foundation of penalty is removed, the superstructure cannot stand. In the present case, the Assessing Officer has levied penalty without appreciating that the original addition stood deleted and that the sustained amount arose only due to appellate proceedings.
We further find that the amount of Rs. 6,47,054/-, on which penalty has effectively been levied, arose only pursuant to the appellate order of the CIT(A).However, there is no material on record to show that the Assessing Officer recorded any fresh satisfaction regarding concealment of income or furnishing of inaccurate particulars with respect to this amount after the appellate proceedings.
The penalty order proceeds mechanically on the basis of the order giving effect dated 19.06.2018, which is purely a consequential order and cannot substitute the statutory requirement of recording satisfaction under section 271(1)(c).
Penalty proceedings being quasi-criminal in nature, the recording of clear and specific satisfaction is a sine qua non. In the absence of such satisfaction, the levy of penalty cannot be sustained.
Another significant inconsistency which goes to the root of the matter is that the amount of Rs. 6,47,054/- was admittedly disclosed by the assessee in the return of income as Long Term
Alka Ashok Jagtap Capital Gain. Similarly, the amount of Rs. 72,596/- was disclosed as Short Term Capital Gain. Thus, this is not a case of non- disclosure of income, nor a case where particulars were withheld from the Department. The dispute relates only to the head under which the disclosed income was to be taxed and the rate at which it was liable to tax.
It is a settled legal position that where all primary facts are disclosed in the return of income, and the addition arises due to a different legal characterisation of such disclosed income, penalty under section 271(1)(c) is not attracted. The penalty order, however, proceeds on the erroneous assumption that there was concealment of income, without addressing this fundamental factual aspect.
We further note from paragraph 5.8 of the common CIT(A) quantum order that the assessee agreed to sustain the addition of Rs. 6,47,054/- expressly to buy peace of mind. Such an admission, made during appellate proceedings to avoid prolonged litigation, cannot automatically lead to the inference of concealment or furnishing of inaccurate particulars. There is a clear distinction between an addition sustained on concession and a finding of deliberate concealment. The penalty order does not bring any independent material to demonstrate mens rea or contumacious conduct on the part of the assessee.
Alka Ashok Jagtap 25. We also find substance in the contention of the assessee that the computation of penalty itself suffers from serious inconsistencies. The penalty order proceeds on the footing that tax on returned income of Rs. 62,780/- is NIL; and tax on assessed income of Rs. 7,09,828/- represents tax sought to be evaded. This approach ignores the fact that the returned income already included disclosed capital gains and other income, and that the assessed income is the result of appellate modifications. The Assessing Officer has failed to clearly identify the exact amount of income alleged to have been concealed, which is a mandatory requirement for invoking section 271(1)(c).
We also find that the CIT(A), NFAC has confirmed the penalty without addressing the above inconsistencies, particularly: the deletion of the original addition; absence of fresh satisfaction; disclosure of income in the return; and inconsistency in computation of penalty. The appellate order merely reiterates the outcome of quantum proceedings, which is impermissible in penalty matters, as assessment and penalty operate in distinct fields.
Considering the totality of facts, we are of the considered view that the penalty in the present case has been levied without proper jurisdictional satisfaction, on an amount different from the one originally added, despite full disclosure of income in the return, and by mechanically relying on appellate consequences. Such a levy cannot be sustained in law.
In view of the above discussion and the glaring factual and legal inconsistencies noted hereinabove, we hold that the levy of penalty of Rs. 1,29,410/- under section 271(1)(c) is unsustainable.
Accordingly, the penalty levied by the Assessing Officer and confirmed by the CIT(A), NFAC is deleted.
Order pronounced in the open court on 27.01.2026.