The Income Tax Appellate Tribunal, Delhi, has held that a penalty order under Section 271C of the Income Tax Act, 1961, passed after the statutory limitation period is void ab initio. This decision reinforces the non-negotiable nature of limitation under Section 275(1)(c) and aligns with the jurisdictional High Court’s interpretation that the limitation period begins with the initiation of penalty proceedings by the Assessing Officer.
Background & Facts
The Dispute
The appellant, Oxigen Services (India) Private Limited, was assessed for the Assessment Year 2013-14. The Assessing Officer received a reference from the Assistant Commissioner of Income Tax, Circle 76(1), Delhi, dated 11.09.2015, alleging failure to deduct tax at source under Chapter XVII-B of the Income Tax Act for the Financial Year 2012-13. Based on this, a show cause notice was issued on 26.11.2015, and a penalty order under Section 271C was passed on 19.04.2016, amounting to Rs. 4,43,734.
Key Facts
- The alleged default pertains to non-deduction of TDS during Financial Year 2012-13
- The reference from ACIT was received on 11.09.2015
- Show cause notice issued on 26.11.2015
- Penalty order passed on 19.04.2016
- The appellant challenged the penalty before the Commissioner of Income Tax (Appeals)
- The CIT(A) dismissed the appeal on 08.05.2018
Procedural History
- 11.09.2015: Reference received by AO from ACIT, Circle 76(1), Delhi
- 26.11.2015: Show cause notice issued under Section 271C
- 19.04.2016: Penalty order passed by AO
- 08.05.2018: CIT(A) dismissed appeal against penalty
- 26.02.2026: Hearing before ITAT Delhi
- 15.04.2026: ITAT delivered judgment allowing appeal
Relief Sought
The appellant sought quashing of the penalty order dated 19.04.2016 on the ground that it was barred by limitation under Section 275(1)(c) of the Income Tax Act.
The Legal Issue
The central question was whether the penalty order under Section 271C, passed on 19.04.2016, was valid given that the limitation period for passing such an order under Section 275(1)(c) expired on 31.03.2016.
Arguments Presented
For the Appellant
The appellant’s counsel relied on the judgment of the Delhi High Court in PCIT v. Turner General Entertainment Network India Pvt. Ltd. [2024] 168 taxmann.com 634, and PCIT v. Mahesh Wood Products (P) Ltd. [2017] 82 taxmann.com 39. It was argued that the limitation period under Section 275(1)(c) begins from the date the Assessing Officer recommends initiation of penalty proceedings to the ACIT, not from the date of the show cause notice. The penalty order was passed after 31.03.2016, which was the last date for issuance under the statute, rendering it time-barred.
For the Respondent
The Department’s representative contended that the penalty proceedings were initiated promptly upon receipt of the reference and that the delay was minimal. It was argued that the CIT(A) had correctly upheld the penalty and that the technicality of limitation should not override substantive liability.
The Court's Analysis
The Tribunal examined the language of Section 275(1)(c), which mandates that a penalty order under Chapter XXI must be passed within two years from the end of the financial year in which the proceedings for the assessment were completed. For AY 2013-14, the relevant financial year is 2012-13, and the limitation period expired on 31.03.2016.
The Tribunal noted that the penalty order was passed on 19.04.2016, which is 19 days beyond the statutory deadline. It then turned to the binding precedent of the Delhi High Court in PCIT v. Mahesh Wood Products (P) Ltd., which held that the limitation period commences from the date the AO recommends initiation of penalty proceedings to the ACIT, not from the issuance of the show cause notice. The Court emphasized that the discretion of the ACIT to issue the notice does not extend the limitation period.
"The starting point would be the 'initiation' of penalty proceedings. Given the scheme of Section 275(1)(c) it would be the date on which the AO wrote a letter to the ACIT recommending 'initiation' of the penalty proceedings."
The Tribunal found that even if the AO’s recommendation was made on the date of the reference (11.09.2015), the limitation period would still have expired on 31.03.2016. The penalty order dated 19.04.2016 was therefore clearly time-barred.
The Tribunal rejected the Department’s argument that substantive liability should override procedural limitation, holding that limitation is a statutory bar that cannot be waived by consent or overlooked on grounds of convenience.
The Verdict
The appeal was allowed. The penalty order dated 19.04.2016 under Section 271C is quashed as it was passed beyond the limitation period prescribed under Section 275(1)(c). The order of the CIT(A) dated 08.05.2018 is set aside. No costs are awarded.
What This Means For Similar Cases
Limitation Is Absolute Under Section 275(1)(c)
- Practitioners must now treat the 31.03.2016 deadline for FY 2012-13 as non-negotiable for any penalty under Section 271C
- Any penalty order passed after 31.03.2016 for that year is void, regardless of the merits of the case
- The burden is on the Department to prove the order was passed within the limitation period
Initiation Date Determines Limitation Clock
- The limitation period begins from the date the AO recommends penalty initiation to the ACIT, not from the show cause notice or final order
- Delay by the ACIT in acting on the AO’s recommendation does not extend the limitation period
- Practitioners should scrutinize AO correspondence for the earliest recommendation date to challenge late penalties
Strategic Use of Jurisdictional Precedents
- PCIT v. Turner General and PCIT v. Mahesh Wood Products are now binding on ITAT Delhi for limitation challenges
- Appeals against penalties for FY 2012-13 and similar years should be framed around Section 275(1)(c) and the initiation date
- Even if the assessee defaulted, the penalty is unenforceable if the order is late
