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Facts
The assessee, Fujiyama Power Systems, a partnership firm, faced a scrutiny assessment for AY 2018-19, which resulted in significant additions to its income and a penalty of Rs. 89,22,970/- under Section 270A for under-reported income. The assessee challenged the assessment order before the Himachal Pradesh High Court, which subsequently set aside both the assessment order and the penalty initiation notice. Despite the High Court's order, the CIT(A) partly sustained the penalty, leading the assessee to appeal to the Income Tax Appellate Tribunal.
Held
The Tribunal held that once the jurisdictional High Court had set aside the foundational assessment order and the notice for initiating penalty, the penalty proceedings, being consequential, could not survive independently. It affirmed that the Assessing Officer lacked jurisdiction to pass the penalty order and the CIT(A) erred in sustaining it even partly. Consequently, the penalty of Rs. 89,22,970/- levied under Section 270A was quashed in its entirety.
Key Issues
Whether a penalty levied under Section 270A of the Income Tax Act, 1961, can be sustained when the underlying assessment order, on which the penalty was based, has been quashed by a superior judicial authority like the High Court.
Sections Cited
Section 270A, Section 143(3), Section 68, Section 2(24)(x) read with Section 36(1)(va), Section 250
AI-generated summary — verify with the full judgment below
Order PER LALIET KUMAR, J.M: This appeal has been filed by the assessee against the order dated 13.06.2025 passed by the Ld. CIT(A), National Faceless Appeal Centre, Delhi, arising out of the penalty order dated 25.11.2021 passed under section 270A of the Income-tax Act, 1961 for the Assessment Year 2018-19, whereby penalty of Rs. 89,22,970/- has been sustained partly.
The ld. CIT(A) is wrong in confirming the validity of penalty order passed by the ld. A.O. u/s 270A of Rs 89,22,970 on the additions made in the assessment order passed u/s 143(3) dated 08.04.2021, ignoring the undisputed fact that the said assessment order as well as the notice initiating penalty u/s 270A dated 08.04.2021 is set-aside/ quashed by the jurisdictional Himachal Pradesh High Court, therefore penalty order passed u/s 270A on the basis of already quashed notice is without jurisdiction and so liable to be quashed.
2. The ld. CIT(A) is wrong in confirming the penalty order passed u/s 270A, ignoring the fact that ld. A.O. did not provided sufficient opportunity of being heard to the assessee.
Briefly, the facts of the case are that the assessee is a partnership firm. For the assessment year under consideration, the assessee filed its return of income on 16.10.2018 declaring total income of Rs. 6,54,01,070/-. The assessment was completed under section 143(3) of the Act vide order dated 08.04.2021, whereby the total income was assessed at Rs. 11,72,22,004/- after making, inter alia, the following additions/disallowances:
2 (i) Addition of Rs. 2,55,000/- under section 68 of the Act on account of unsecured loan; (ii) Disallowance of interest of Rs. 15,300/-; (iii) Addition of Rs. 35,62,089/- on account of delayed payment of employees’ contribution to PF under section 2(24)(x) read with section 36(1)(va); (iv) Addition of Rs. 4,79,88,545/- on account of mismatch of income as per Form 26AS and ITR. 2.1 On the basis of the aforesaid additions, the Assessing Officer initiated penalty proceedings under section 270A of the Act for under reporting of income amounting to Rs. 5,15,65,934/- and ultimately levied penalty of Rs. 89,22,970/- vide order dated 25.11.2021, being 50% of the tax payable on the alleged under-reported income.
Aggrieved by the assessment order dated 08.04.2021, the assessee filed a writ petition before the Hon’ble High Court of Himachal Pradesh, primarily on the ground of violation of principles of natural justice, as adequate opportunity was not provided during the assessment proceedings.
The Hon’ble High Court initially granted interim protection vide order dated 28.05.2021, restraining the department from taking coercive action.
Thereafter, the Hon’ble High Court, vide final judgment dated 16.11.2021 passed in Civil Writ Petition No. 3094 of 2021, allowed the writ petition and categorically set aside the assessment order dated 08.04.2021 along with the consequential notice of demand and notice for initiating penalty. The operative portion of the judgment reads as under: “In view of the afore discussion, we find merit in this petition and the same is accordingly allowed and the impugned assessment order dated 08.04.2021 along with consequential notice of demand and notice for initiating penalty is set aside.” It is an undisputed fact that the aforesaid order of the Hon’ble High Court was passed prior to the passing of the final penalty order dated 25.11.2021, and the same was also brought to the notice of the Assessing Officer during the course of penalty proceedings.
Aggrieved by the penalty order, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A), while passing the impugned order under section 250 of the Act, held that since part of the additions were deleted by the Assessing Officer while 3 giving effect to the order of the Hon’ble High Court vide order dated 30.09.2023, the corresponding part of penalty was liable to be cancelled and the remaining penalty was to be recomputed. Accordingly, the Ld. CIT(A) partly allowed the appeal and directed the Assessing Officer to quantify the penalty relatable to the sustained additions.
Against the order of the CIT(A) the assessee preferred in appeal before the Tribunal.
During the course of hearing, the Ld. AR submitted that the Ld. CIT(A) failed to appreciate the fundamental legal position that once the Hon’ble High Court had set aside the assessment order along with the notice for initiating penalty, the very foundation of the penalty proceedings ceased to exist. It was submitted that penalty proceedings cannot survive independently of the assessment order and, therefore, the entire penalty deserved to be quashed.
The Ld. DR relied upon the order of the Ld. CIT(A).
We have carefully considered the rival submissions and perused the material available on record. The undisputed factual position is that the Hon’ble Jurisdictional High Court, vide order dated 16.11.2021, set aside the assessment order dated 08.04.2021 along with the notice for initiating penalty proceedings. It is a settled principle of law that penalty proceedings are consequential and dependent upon the validity and subsistence of the assessment order. Once the assessment order itself is quashed by a superior judicial authority, the penalty imposed on the basis of such assessment order automatically falls.
The expression “set aside” used by the Hon’ble High Court unequivocally means that the assessment order was quashed and rendered non-est in the eyes of law. There was no liberty granted to sustain or continue the penalty proceedings independently.
In such circumstances, the Assessing Officer had no jurisdiction to proceed with or pass the penalty order dated 25.11.2021, and the Ld. CIT(A) erred in law in sustaining the penalty partly instead of quashing it in toto.
Once the foundation itself is removed, the superstructure cannot survive. Judicial discipline mandates that the orders of the Hon’ble High Court are binding on all subordinate authorities.
4 14. In view of the above facts and the settled legal position, we hold that the penalty levied under section 270A of the Act is without jurisdiction and unsustainable in law. 15. In the result, the appeal filed by the assessee is allowed, and the penalty of Rs. 89,22,970/- levied under section 270A of the Act is hereby quashed in entirety.