The Income Tax Appellate Tribunal, Jaipur, has held that penalties under Sections 271AAC(1) and 272A(1)(d) of the Income Tax Act cannot be sustained when the underlying income addition on which they are based is subsequently deleted by the Commissioner of Income Tax (Appeals). This ruling reinforces the principle that penalty proceedings are derivative and cannot exist independently of a valid tax liability.
Background & Facts
The Dispute
The appellant, DugdhUtpadak Sahakari Samiti Lasadiya, a cooperative society engaged in dairy production, faced two separate penalty proceedings initiated by the Assessing Officer (AO) for Assessment Year 2019-20. The first penalty was levied under Section 271AAC(1) for an addition of Rs. 81,82,058/- under Section 69A read with Section 115BBE, representing unexplained money. The second penalty was levied under Section 272A(1)(d) for non-compliance with notices issued during assessment proceedings, amounting to Rs. 20,000/-. Both penalties were confirmed by the National Faceless Appeal Centre (NFAC), Delhi.
Key Facts
- The AO made an addition of Rs. 81,82,058/- under Section 69A on 29.08.2024, treating it as unexplained income.
- On the same date, the AO levied penalty under Section 271AAC(1) at 10% of the tax on the addition, resulting in Rs. 4,90,923/-.
- The AO also levied penalty of Rs. 20,000/- under Section 272A(1)(d) for alleged non-compliance with notices.
- The assessee filed an appeal against the assessment order before the CIT(A) on 13.03.2025, with a delay of over five months.
- The CIT(A) condoned the delay in filing the appeal and, vide order dated 11.12.2025, deleted the entire addition of Rs. 81,82,058/- under Section 69A, thereby cancelling the consequential tax under Section 115BBE.
- The CIT(A) also accepted the assessee’s explanation for non-participation in assessment proceedings, finding sufficient cause for the delay.
Procedural History
- 29.08.2024: AO passed assessment order and levied penalties under Sections 271AAC(1) and 272A(1)(d).
- 13.03.2025: Assessee filed appeal before CIT(A) against assessment order, with delay of 207 days.
- 11.12.2025: CIT(A) passed order condoning delay and deleting the entire addition of Rs. 81,82,058/- under Section 69A.
- 2025: NFAC, Delhi, confirmed both penalties in separate orders.
- 18.03.2025: ITA No. 1834/JPR/2025 filed before ITAT Jaipur challenging penalty under Section 271AAC(1).
- 18.03.2025: ITA No. 1835/JPR/2025 filed before ITAT Jaipur challenging penalty under Section 272A(1)(d).
- 29.06.2026: Hearing held before ITAT Jaipur.
- 02.07.2026: Judgment pronounced.
The Parties' Positions
For the Assessee
The assessee contended that since the addition under Section 69A was deleted by the CIT(A), the penalty under Section 271AAC(1) lost its foundation. Regarding the penalty under Section 272A(1)(d), it was argued that the CIT(A) had already accepted the assessee’s explanation for non-compliance with notices, thereby establishing reasonable cause.
For the Revenue
The Revenue did not dispute the deletion of the addition or the CIT(A)’s finding of reasonable cause. The Department’s representative conceded that no counter-arguments could be advanced in light of the CIT(A)’s order.
Relief Sought
The assessee sought deletion of:
- Penalty of Rs. 4,90,923/- under Section 271AAC(1)
- Penalty of Rs. 20,000/- under Section 272A(1)(d)
The Legal Issue
Can a penalty under Section 271AAC(1) or Section 272A(1)(d) be sustained when the underlying income addition or the basis for non-compliance has been deleted by the appellate authority, and reasonable cause for the default has been accepted?
Arguments Presented
For the Appellant
The assessee’s counsel argued that Section 271AAC(1) is a penalty provision triggered only when an addition under Section 69A is upheld. Since the CIT(A) deleted the entire addition, the penalty became legally untenable. The counsel relied on the principle that penalties are ancillary and cannot survive the nullification of their substantive basis. Regarding Section 272A(1)(d), the counsel emphasized that the CIT(A) had expressly found sufficient cause for the delay in filing the appeal and for non-appearance during assessment, thereby negating the requirement for penalty under Section 272A(1)(d), which requires absence of reasonable cause.
For the Respondent
The Revenue did not contest the facts or the CIT(A)’s findings. The Department’s representative acknowledged that the deletion of the addition rendered the penalty under Section 271AAC(1) unsustainable and that the acceptance of reasonable cause by the CIT(A) precluded the imposition of penalty under Section 272A(1)(d).
The Court's Analysis
The Tribunal observed that Section 271AAC(1) imposes a penalty for failure to disclose income under Section 69A, but only if such income is ultimately included in the total income. The Tribunal emphasized that the penalty is not an independent levy but is contingent upon the validity of the addition. The CIT(A)’s order dated 11.12.2025 conclusively deleted the addition of Rs. 81,82,058/-, thereby extinguishing the very foundation of the penalty.
"The penalty levied in the present case has no legs to stand upon."
The Tribunal further noted that Section 272A(1)(d) imposes a penalty for failure to comply with notices issued under the Act, but only if the failure is without reasonable cause. The CIT(A) had explicitly accepted the assessee’s explanation for non-compliance and delay, thereby establishing the existence of reasonable cause. The Tribunal held that it would be manifestly unjust to impose a penalty when the appellate authority has already recognized the validity of the assessee’s explanation and overturned the assessment.
The Tribunal rejected the Revenue’s reliance on the timing of the appeal filing relative to the penalty order, stating that the subsequent appellate outcome governs the validity of the penalty. The Tribunal affirmed that the law does not permit the enforcement of penalties based on assessments that have been rendered legally void by higher authorities.
The Verdict
The appeals are allowed. The penalty of Rs. 4,90,923/- under Section 271AAC(1) is deleted. The penalty of Rs. 20,000/- under Section 272A(1)(d) is also deleted. Both penalties are set aside in their entirety.
What This Means For Similar Cases
Penalty Cannot Survive Deletion of Underlying Addition
- Practitioners must immediately challenge penalties under Section 271AAC(1) when the underlying addition under Section 69A is under appeal and likely to be deleted.
- The mere pendency of an appeal is insufficient; the actual deletion by CIT(A) renders the penalty void ab initio.
- Revenue authorities cannot rely on the timing of appeal filing to uphold penalties once the addition is deleted.
Reasonable Cause Under Section 272A(1)(d) Is a Complete Defense
- If the CIT(A) accepts reasonable cause for delay in filing appeal or non-compliance with notices, the penalty under Section 272A(1)(d) cannot be sustained.
- The acceptance of cause by the appellate authority is binding on the penalty proceedings.
- Practitioners should ensure that all explanations for non-compliance are formally documented and submitted to the CIT(A) for record.
Procedural Fairness Overrides Technical Non-Compliance
- The Tribunal prioritized substantive justice over procedural technicalities.
- Where the appellate authority has overturned the assessment, imposing penalties becomes arbitrary and violative of natural justice.
- This judgment reinforces that penalty provisions must be interpreted restrictively and cannot be used to penalize taxpayers whose liabilities have been extinguished on appeal.
