The Income Tax Appellate Tribunal (ITAT), Bangalore, has clarified a critical aspect of penalty jurisprudence under Section 271(1)(c) of the Income Tax Act, 1961. The Tribunal held that when a quantum addition is under appeal before the High Court on substantial questions of law, the issue becomes debatable, and penalty cannot be levied. This ruling reinforces the principle that penalties are not automatic and must be grounded in clear concealment or furnishing of inaccurate particulars, not mere disagreements on legal interpretation.
Background & Facts
The Dispute
The appellant, M/s. Palmer Investment Group Ltd., a non-resident foreign company based in the British Virgin Islands, filed its return of income for the Assessment Year (A.Y.) 2014-15 on 31.03.2015. The case was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) due to large international transactions. During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had sold 43,76,771 shares of United Spirits Ltd (USL) to Relay BV at Rs. 1,440 per share. The AO referred the matter to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP) of the transaction.
Key Facts
- The assessee declared the sale consideration at Rs. 135,37,05,283
- The TPO made a transfer pricing adjustment of Rs. 262,07,66,707, treating the transaction as an international transaction between associated enterprises
- The AO issued a draft assessment order, which was confirmed by the Dispute Resolution Panel (DRP)
- The assessee challenged the assessment order before the ITAT, which upheld the adjustment
- The assessee filed appeals before the Karnataka High Court in ITA Nos. 452 & 456/2023, which were admitted on 29.08.2023 and framed substantial questions of law
- The AO initiated penalty proceedings u/s 271(1)(c) on the ground of furnishing inaccurate particulars of income
- The assessee contended that the transaction was not between associated enterprises and that the price charged was at arm’s length
Procedural History
- 31.03.2015: Return of income filed by the assessee
- Scrutiny Proceedings: Notices u/s 143(2) and 142(1) issued; assessee submitted documents
- TPO Order: Transfer pricing adjustment of Rs. 262,07,66,707 made
- Draft Assessment Order: Issued by AO; confirmed by DRP
- ITAT Order: Upheld the adjustment in ITA Nos. 2929 & 2930/Bang/2018
- 06.07.2023: Assessee filed appeals before Karnataka High Court
- 29.08.2023: High Court admitted appeals and framed substantial questions of law
- Penalty Proceedings: AO issued notice u/s 274 for penalty u/s 271(1)(c); assessee filed detailed reply
- AO Order: Confirmed penalty, holding the assessee furnished inaccurate particulars
- 13.11.2024: Ld. CIT(A) deleted the penalty, relying on Karnataka High Court precedents
- 13.01.2026: Present appeal filed by revenue before ITAT
Relief Sought
The revenue sought to restore the penalty u/s 271(1)(c), contending that the assessee had furnished inaccurate particulars of income. The assessee, however, argued that the issue was debatable as the quantum addition was under appeal before the High Court, and no concealment or wilful neglect was established.
The Legal Issue
The central question before the ITAT was whether penalty u/s 271(1)(c) of the Income Tax Act can be levied when the quantum addition is under appeal before the High Court on substantial questions of law, rendering the issue debatable.
Arguments Presented
For the Revenue
The Ld. Departmental Representative (DR) argued that:
- The mere admission of an appeal by the High Court does not automatically bar the levy of penalty
- The assessee had furnished inaccurate particulars of income, justifying the penalty
- The AO’s findings in the assessment order were binding unless set aside by a higher authority
For the Assessee
Shri Percy Pardiwala, Sr. Advocate, and Shri Ketan Ved, CA, contended that:
- The transaction was not between associated enterprises, and the price charged was at arm’s length
- There was no concealment or furnishing of inaccurate particulars, as the assessee had disclosed all material facts
- The quantum addition was under appeal before the High Court, which had framed substantial questions of law, rendering the issue debatable
- Reliance was placed on the Karnataka High Court judgments in CIT vs. Dr. Harsha N. Biliangady and CIT vs. Ankita Electronics (P.) Ltd., which held that penalty cannot be levied when the sustainability of the addition is debatable
The Court's Analysis
The ITAT examined the principles laid down by the Karnataka High Court in the aforementioned judgments. The Tribunal noted that the High Court had admitted the assessee’s quantum appeals and framed substantial questions of law, indicating that the sustainability of the addition was debatable. The ITAT observed:
"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."
The Tribunal further relied on the judgment in CIT vs. Dr. Harsha N. Biliangady, which 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 ITAT emphasized that penalty u/s 271(1)(c) is not automatic and must be based on clear evidence of concealment or furnishing of inaccurate particulars. Since the High Court had admitted the appeals and framed substantial questions of law, the issue was no longer a settled one, and the levy of penalty was unwarranted.
The Verdict
The ITAT dismissed the revenue’s appeal and upheld the order of the Ld. CIT(A) deleting the penalty u/s 271(1)(c). The Tribunal held that when the quantum addition is under appeal before the High Court on substantial questions of law, the issue becomes debatable, and penalty cannot be levied.
What This Means For Similar Cases
Penalty Not Automatic for Debatable Issues
- Practitioners must argue that penalty u/s 271(1)(c) cannot be levied when the quantum addition is under appeal before the High Court on substantial questions of law
- The mere rejection of the assessee’s claim by revenue authorities does not justify penalty if the issue remains debatable
- Reliance can be placed on Karnataka High Court precedents to challenge penalty levies in similar circumstances
Burden of Proof in Penalty Proceedings
- The revenue must establish clear concealment or furnishing of inaccurate particulars to justify penalty
- If the assessee has disclosed all material facts and the issue is one of legal interpretation, penalty cannot be sustained
- The ITAT’s ruling reinforces that penalties are not punitive but must be based on wilful neglect or deliberate misrepresentation
Implications for Transfer Pricing Disputes
- Transfer pricing adjustments are often contentious and involve complex legal questions
- Assessees can challenge penalties by demonstrating that the arm’s length price determination is debatable
- The admission of appeals by the High Court on substantial questions of law can serve as a strong defense against penalty levies
