The Income Tax Appellate Tribunal Delhi has clarified that penalty under Section 271(1)(b) of the Income Tax Act, 1961, cannot be levied separately for each non-compliance with a notice issued under Section 142(1). The Tribunal held that the provision is deterrent in nature and not meant for revenue generation, and thus only one penalty applies for the first instance of default.
The Verdict
The appellant, a Hindu Undivided Family, won partial relief. The Income Tax Appellate Tribunal Delhi reduced the penalty from Rs. 40,000 to Rs. 10,000, holding that Section 271(1)(b) permits only a single penalty for repeated failures to comply with multiple notices under Section 142(1), provided the default is of the same nature. The Tribunal rejected the notion of cumulative penalties for each notice, emphasizing the deterrent, not punitive, intent of the provision.
Background & Facts
The assessee, Sh. Mukesh Singla & Sons (HUF), was undergoing reassessment proceedings for the assessment year 2014-15. During this process, the Assessing Officer issued four notices under Section 142(1) of the Income Tax Act, dated 26 November 2021, 11 February 2022, 2 March 2022, and 9 March 2022. The assessee failed to respond to any of these notices. The AO imposed a penalty of Rs. 40,000 under Section 271(1)(b), calculating Rs. 10,000 for each of the four defaults. The Commissioner of Income Tax (Appeals) upheld this penalty.
The assessee contended that the Karta of the HUF was under severe mental and financial distress due to a fire at his business premises and ongoing litigation related to his business. While the Tribunal acknowledged the hardship, it did not accept this as a legally sufficient reasonable cause for non-compliance. However, it accepted the argument that the nature of the default was identical across all notices.
The appeal was filed before the ITAT Delhi, challenging the quantum of penalty, not the imposition itself.
The Legal Issue
The central question was whether Section 271(1)(b) of the Income Tax Act, 1961, permits the imposition of a separate penalty for each notice issued under Section 142(1) that remains uncomplied with, or whether only one penalty applies for a continuing or repeated default of the same character.
Arguments Presented
For the Petitioner
The appellant’s counsel argued that the failure to comply with all four notices arose from a single, continuous state of non-cooperation rooted in the same underlying cause - distress and operational disruption. Citing the ITAT Delhi’s decision in Smt. Rekha Rani vs. DCIT (ITA No. 6131/Del/2013), the counsel contended that Section 271(1)(b) is not a revenue-generating tool but a deterrent provision. Imposing multiple penalties for identical defaults would amount to double punishment and defeat the legislative intent. The counsel urged that only the first default should attract penalty.
For the Respondent
The Department relied on the orders of the AO and CIT(A), which had imposed the penalty on a per-notice basis. The Department argued that each notice constituted a distinct statutory obligation, and non-compliance with each was a separate offence under Section 271(1)(b). It maintained that the language of the provision did not limit penalty to a single instance and that cumulative imposition was justified to enforce compliance.
The Court's Analysis
The Tribunal rejected the Department’s argument that each notice constituted a separate offence. It emphasized that Section 271(1)(b) penalizes the failure to comply with a notice under Section 142(1), not the issuance of multiple notices. The provision does not specify that penalty is to be levied per notice. The Tribunal observed that the assessee’s non-compliance was not a series of distinct acts but a continuous failure to respond to successive reminders stemming from the same underlying default.
"The provision of Section 271(1)(b) is of deterrent nature and not for earning revenue."
The Tribunal further noted that imposing multiple penalties for identical defaults would lead to disproportionate outcomes, especially where the taxpayer’s conduct does not reflect wilful evasion but rather a persistent, albeit unjustified, omission. It held that the legislative intent behind Section 271(1)(b) is to encourage compliance, not to generate income through multiplicative penalties.
The Tribunal relied on its own precedent in Smt. Rekha Rani, where a similar issue was resolved in favor of a single penalty. It affirmed that the principle of proportionality and the doctrine of reasonable classification under Article 14 of the Constitution support limiting penalty to the first instance of default when the nature of non-compliance remains unchanged.
What This Means For Similar Cases
This ruling provides critical guidance for taxpayers and practitioners dealing with reassessment proceedings. Practitioners can now argue that where a taxpayer fails to respond to multiple Section 142(1) notices due to a single, continuous default, only one penalty under Section 271(1)(b) is legally sustainable. This reduces exposure in cases involving prolonged or iterative notices, particularly in complex reassessments.
However, the ruling does not shield taxpayers who exhibit wilful or repeated non-compliance after being given opportunities to rectify. If a taxpayer responds to one notice but later ignores subsequent notices issued after a material change in circumstances, separate penalties may still apply. The key distinction lies in whether the default is continuous or discrete.
Tax officers must now justify cumulative penalties by demonstrating distinct acts of non-compliance, not merely multiple notices. This decision reinforces proportionality in penalty imposition and aligns with broader principles of administrative fairness under tax law.
