Penalty proceedings cannot be kept alive because department is in appeal before HC against relief given by the ITAT

The Income Tax Appellate Tribunal (ITAT Mumbai) in the matter of The Deputy Commissioner of Income Tax Vs. M/s Knight Riders Sports Pvt Ltd., revenue contended that the department is in appeal before the High Court against the relief given by the Tribunal in the quantum appeal. Therefore, since the issues in the quantum appeal have not reached finality, the penalty proceedings should be kept alive accordingly.

To this ITAT retreated that it is settled position that when the additions made in the assessment order, on the basis of which penalty for furnishing inaccurate particulars is levied, are deleted, there remains no basis at all for levying the penalty. Accordingly, no penalty can survive and the same is liable to be cancelled as in the given case.

Facts of the Case:

The assessee is a 100% subsidiary of Red Chillies Entertainment Pvt. Ltd. The objects of the assessee company amongst others, includes setting up, buying, selling, acquiring, managing, running, operating on outright or in joint-venture or under franchisee or in partnership or under any kind of contract or arrangement for sharing of profits of sports team and sport players, setting up, managing and operating sports academy, promoting developing and managing sports talent, etc. The assessee filed the return of income for A.Y. 2011-12 on 28/09/2011 declaring a total loss of Rs.11,04,28,232/-. The return for A.Y. 2012-13 was filed on 28/09/2012 declaring total income at Nil.

The Assessing Officer while completing the assessment under section 143(3) made the following disallowances which were upheld by the CIT(A) –

i. Disallowance of Franchise fees treating it as capital in nature and after allowing depreciation @ 25%.
ii. Disallowance of Air fare and travelling expenses.
iii. Disallowance of website design charges treating it as capital in nature after allowing depreciation @60%.
iv. Disallowance Lodging & Boarding / food and catering charges.

Subsequently, the Assessing Officer initiated penalty proceedings under section 271(1)(c) for the reason that the assessee has furnished inaccurate particulars. The Assessing Officer held that the CIT(A) in the quantum appeal has upheld the additions / disallowances and, therefore, the provisions of section 271(1)(c) are clearly applicable to the assessee. Accordingly, the Assessing Officer levied a penalty at 100% of tax sought to be evaded to the tune of Rs.4,42,44,913/- for A.Y. 2011-12 and Rs.3,53,05,323/- for A.Y. 2012-13. Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) deleted the entire penalty levied by the Assessing Officer for both the assessment years. The CIT(A) while deleting the penalty considered the relief given by the coordinate bench of the Tribunal in the quantum appeal vide order dated 30.06.2020 for AY 2011-12 (ITA No.4389/Mum/2015) and the order giving effect (OGE) dated 08.03.2022 passed by the Assessing Officer. Aggrieved, the Revenue is in appeal before the Tribunal.

Contention of Revenue:

The Ld.DR submitted that the department is in appeal before the High Court against the relief given by the Tribunal in the quantum appeal. The Ld.DR further submitted that there are contrary views taken by different benches of the Tribunal regarding the treatment of Franchise Fees and reference under section 255(3) for constitution of Special Bench is made before Hon’ble President in the matter of Role Model Support Pvt Ltd vs ACIT in ITA No.3602/Mum/2014. Therefore, it is contended by the ld DR that issues in the quantum appeal have not reached finality and that the penalty proceedings should be kept alive accordingly.

The Ld.AR, on the other hand, submitted that the co-ordinate bench has decided the quantum appeal in favour of the assessee and as of now, the same is binding. The Ld.AR further submitted that it is the settled issue that when the additions or disallowances are deleted in the quantum appeal, the penalty proceedings would not survive. Therefore, the Ld.AR prayed that the CIT(A) has correctly deleted the penalty.

ITAT Order:

We heard the parties and perused the material on record. We notice that the co-ordinate bench in assessee’s own case (supra) has deleted the quantum addition with respect to Franchise Fees and the issues pertaining to disallowance of air fare, travelling expenses, website charges, Lodging & Boarding / food and catering charges have been remitted back to the Assessing Officer for a de-novo adjudication. It is further noticed that the Assessing Officer, in the OGE has deleted major part of the disallowances. In the present case the CIT(A) considered the order of the Tribunal and OGE of the Assessing Officer and deleted the penalty levied under section 271(1)(c) of the Act. It is settled position that when the additions made in the assessment order, on the basis of which penalty for furnishing inaccurate particulars is levied, are deleted, there remains no basis at all for levying the penalty. Accordingly no penalty can survive and the same is liable to be cancelled as in the given case. With regard to the petition for constitution of Special Bench in our considered view until the constitution and pronouncement of the decision of the Special Bench, the decision of the coordinate bench in the quantum appeal is binding on us. In view of these discussions and considering the facts of the present case, we hold that the penalty levied is not sustainable. Therefore, we see no reason to interfere with the decision of the CIT(A). and the appeal of the Revenue for AY 2011-12 is dismissed.

For AY 2012-13, the CIT(A) deleted the penalty after taking into consideration the decision of coordinate bench vide order dated 10.11.2020 (ITA No.6675/Mum/2016) and the OGE of the Assessing Officer dated 08.03.2022 through which the disallowances made are deleted. We have, while adjudicating the appeal for AY 2011-12, already held that when the additions are deleted in the quantum appeal the penalty levied on the same cannot survive. The facts for 2012-13 being identical, our decision in assessee’s own case for AY 2011-12 is mutatis mudandis applicable to the year under consideration also. Accordingly the decision of the CIT(A) to delete the penalty for AY 2012-13 is upheld and the revenue’s appeal is dismissed.

In the result, the appeals filed by the Revenue are dismissed.

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