Section 271(1)(c) Penalty Unsustainable When Matter Is Legally Arguable: ITAT

The Tribunal upheld the cancellation of the penalty under Section 271(1)(c) because the High Court admitted the company’s appeal on substantial legal questions, the issue was considered debatable and not a clear case of concealment.

The present case has been filed by the Deputy Commissioner of Income Tax Vs M/s Palmer Investment Group Ltd, challenging the order of CIT(A) dated 13/11/2024 regarding penalty proceedings under section 271(1)(c) of the Act.

Background of the Case

The assessee, a non-resident foreign company, filed its return of income on March 31, 2015. The case was selected for scrutiny under CASS to examine large international transactions. During the assessment, it was found that the company sold over 43 lakh shares of United Spirits Ltd. (USL) to Relay BV at Rs 1,440 per share.

The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) to determine whether the sale price was at arm’s length. The TPO determined that the arm’s length price was significantly higher and made an adjustment of Rs. 262,07,66,707. The Dispute Resolution Panel (DRP) confirmed this adjustment.

The assessee challenged the addition before the ITAT, but the Tribunal upheld the assessment. The assessee then approached the Karnataka High Court, which admitted the appeal and framed substantial questions of law. The High Court has yet to decide the matter.

During the hearing, the assessee challenged the adjustment made by the AO. The assessee further submitted that all material facts were fully disclosed. The assessee said that they had properly given all the details of their income to the tax department. However, the tax department later recalculated or estimated the income differently by treating certain transactions as international transactions. Despite these arguments, the AO imposed a penalty.

The assessee then filed an appeal before the CIT(A), who deleted the penalty. It also relied on Karnataka High Court judgements, which held that when a High Court admits an appeal and frames substantial questions of law, the issue becomes debatable. Therefore, a penalty under Section 271(1)(c) cannot be imposed solely because the tax authorities disallowed the claim.

The CIT(A) relied on earlier rulings of Karnataka High Court, which stated that once a substantial question of law is admitted, it shows that the matter is arguable and not a clear case of concealment or furnishing of inaccurate particulars.

The Revenue argued before the Tribunal that there is no provision under Section 275 of the Act that prevents a penalty from being levied merely because the quantum appeal is pending before the High Court.

Tribunal’s Decision

The tribunal further examined the High Court’s order and observed that substantial questions of law had indeed been framed in the quantum appeal.

The Tribunal also referred to an earlier judgements of Karnataka High Court, which held that if the High Court admits an appeal on substantial questions of law, the addition becomes debatable and the penalty under Section 271(1)(c) cannot be sustained.

After considering all the above facts, the ITAT found no error in the CIT(A)’s decision to delete the penalty. As a result, the Tribunal dismissed the Revenue’s appeal and confirmed the deletion of the penalty.