Bombay HC: Penalty Order on Tax Adjustment held unsustainable when Quantum Appeal (the Tax Adjustment itself) pending before ITAT

 In a significant ruling, the Hon’ble Bombay High Court held that a penalty order passed under section 271(1)(c) of the Income-tax Act, 1961 (‘the Act’) is invalid where the appeal relating to quantum matter is pending disposal by the Income Tax Appellate Tribunal (‘ITAT’). The Court clarified that section 275(1)(a) of the Act, contains a substantive statutory bar that prohibits the Assessing Officer (‘AO’) from imposing penalty until the quantum appeal has been disposed of, making any penalty order issued in the interim, legally unsustainable.

In the present case, the assessee, a State electricity transmission company filed an appeal before the ITAT against additions made during the assessment proceedings. While this appeal was still pending, the AO imposed a substantial penalty of approximately Rs. 101 crore under section 271(1)(c) of the Act. Contending that the penalty was premature and contrary to the provisions of the law, the assessee approached the High Court seeking intervention and protection against coercive recovery based on the said order.

Before the Hon’ble High Court, the assessee relied on the language of section 275(1)(a) of the Act, which expressly provides that no penalty order may be passed while the underlying assessment is the subject matter of an appeal before the Commissioner (Appeals) or the ITAT. The Court also took note of its earlier ruling wherein; it had similarly held that penalty proceedings must remain in abeyance until disposal of the quantum appeal. Observing that the AO had acted in disregard of this jurisdictional precondition by finalising penalty while the ITAT appeal was pending, the High Court found the penalty order to be prima facie without authority and accordingly granted ad-interim relief restraining recovery.

This ruling underscores that the embargo under section 275(1)(a) of the Act is a crucial safeguard designed to ensure consistency and fairness between quantum and penalty proceedings. Since the foundation of penalty under section 271(1)(c) of the Act rests on the sustenance of additions in assessment, the penalty cannot be imposed while the quantum remains sub judice. Importantly, in the era of faceless and automated penalty modules, the judgment reiterates that statutory jurisdictional requirements cannot be bypassed.