ITAT Deletes Rs. 22.19 Lakh Penalty u/s 271(1)(c) After Deletion of Capital Gain Addition

The matter concerned a sale transaction involving residential units constructed on a plot originally purchased in 2001. The assessee had invested the capital gains in a new residential property and claimed a deduction under Section 54F. During the assessment, the Assessing Officer accepted the long-term nature of the gain from the land but denied the exemption, stating that the new property was not completed within three years of the sale.

CIT (A) Held: In the first appellate proceedings, the CIT(A) reclassified the entire gain as short-term and thus dismissed the Section 54F claim. The assessee’s appeal before the Tribunal was partly allowed; the long-term character of the capital gain was restored, and the matter was remanded for re-examination of the Section 54F claim. This was ultimately allowed by the CIT(A) in the remand proceedings. However, before that, the Assessing Officer had levied a penalty of Rs. 22.19 lakh under Section 271(1)(c), which was subsequently upheld ex parte by the NFAC due to a lack of response to notices issued only through the ITBA portal.

Issue Raised: Whether the penalty under Section 271(1)(c) was legally sustainable when both the disallowance of exemption and classification of capital gain were subsequently reversed by appellate authorities.

ITAT’s Decision: The Tribunal held that the foundation of the penalty no longer existed. Once the long-term capital gain and the eligibility for exemption under Section 54F were accepted in quantum proceedings, the basis for alleging concealment or furnishing of inaccurate particulars fell apart.

The Tribunal found merit in the assessee’s explanation of the 609 day delay in filing the appeal, that he was under a bona fide belief that no penalty would survive and had not been served any physical notices. All notices were uploaded digitally, and it was only upon subsequent inquiry that the order came to his attention. Accepting this as reasonable cause, the delay was condoned and the penalty was ordered to be deleted. T

The appeal was allowed in full.

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