Income Tax Appellate Tribunal

Star Electricals and Ors. Vs. ACIT

MANU/IL/0208/2021

20.07.2021

Direct Taxation

Penalty levied shall be cancelled, where as a result of final order, the amount of tax, with respect to the default in payment of which the penalty was levied, has been wholly reduced

Both the appeals filed by the respective assessees are directed against the orders passed by Learned Commissioner of Income Tax [CIT(A)] in their respective hands confirming the demand raised by way of penalty under Section 221(1) of the Income-tax Act, 1961 [IT Act] for AY 2007-08.

The assessees submitted that, the A.O. had reopened the assessment of both the assessees for AY 2007-08 and passed the assessment order in their respective hands under Section 144 read with Section 147 of the Act by making disallowances under Section 40(a)(ia) of the Act and also disallowing marketing expenditure. Accordingly, the A.O. raised a demand of Rs. 3.39 crores in the hands of Star Electricals and Rs. 5.09 crores in the hands of Yeshoda Electricals. Both the assessees did not pay the tax demanded by the AO. They challenged the assessment order by filing appeal before CIT(A) and then before ITAT. Before the Tribunal, both the assessees challenged the validity of reopening of assessment also.

The assessee is liable to pay penalty under Section 221(1), if the assessee is in default or is deemed to be in default in making a payment of tax. In the instant cases, the penalty proceedings under Section 221(1) has been initiated by the AO, since both the assessees have failed to pay the demand raised in the reassessment order and hence, they have become "assessee in default". However, the provisions of sub Section (2) further state that the penalty levied shall be cancelled, where as a result of final order the amount of tax, with respect to the default in payment of which the penalty was levied, has been wholly reduced.

In the instant cases, the assessment orders have been quashed by the Tribunal, vide its order in the hands of both the assessees by holding that reopening of assessment is invalid. Hence, the demand has become Nil.

Accordingly, as per the provisions of Sub-section (2) of Section 221, the penalty levied under Section 221(1) is liable to be cancelled, if the order passed by the Tribunal becomes final order. On the contrary, if the revenue challenges the orders passed by the Tribunal by filing appeals before High Court, then the question as to whether the order of the Tribunal is final order or not would depend upon the outcome of the appeals.

The impugned penalty levied in the hands of both the assessees is liable to be quashed. However, in the event of reversal of orders passed by the Tribunal in the quantum proceedings in the hands of both the assessees for AY 2007-08, the impugned penalty levied under Section 221(1) in the hands of both the assesses shall revive. Appeals allowed.

Tags : Assessment Penalty Levy

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