2025 (5) TMI 755 - HC - Income Tax

Penalty order passed u/s 271 (1) (c) - notice of demand issued u/s 156 - as submitted that any absence of the draft penalty order from the ITBS System the same is not available and on the basis of the order sheet entry it appears that no such draft order was ever generated; hence there is no question of intimating the same to the Petitioner - HELD THAT - No draft penalty order was ever generated by the Respondents under the faceless mechanism for levy of the penalty under Section 271 (1) (c) of the Act which ought to have been generated and communicated to the petitioner to file reply for as required u/s 144B of the Act. It is also not in dispute that no final order for levy of penalty was ever generated or communicated alongwith demand notice u/s 156 of the Act. Therefore subsequent action on the part of the Respondent to communicate such demand as per the order sheet entry dated 21.03.2022 to the CPC which on the basis of the automatic system adjusted the refund for AY 2021-22 is illegal and without any basis. Accordingly the adjustment of refund by the CPC through the Communication issued u/s 245 of the Act for AY 2021-22 is hereby quashed and set aside and the matter is remanded back to the Respondent Nos. 1 and 2 to complete with the procedure prescribed u/s 144B of the Act. The Respondents shall permit the Petitioner to file a reply to the Show Cause Notice for levy of the penalty u/s 271 (1) (c) and thereafter issue a draft order for levy of penalty if required after considering the objections to be filed by the petitioner and after providing due opportunity of hearing to the Petitioner if prayed for.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

(a) Whether the penalty order under Section 271(1)(c) of the Income Tax Act, 1961 (the Act) was validly issued and communicated to the Petitioner in accordance with the procedural requirements, particularly the faceless assessment mechanism and Section 144B of the Act.

(b) Whether the adjustment of the refund for Assessment Year (AY) 2021-22 against the penalty demand under Section 271(1)(c) without issuance and communication of a valid penalty order and demand notice under Section 156 of the Act was lawful.

(c) Whether the Petitioner was entitled to a refund for AY 2021-22 which was erroneously adjusted against a penalty demand that was never formally communicated.

(d) Whether the penalty proceedings should have been kept in abeyance pending disposal of the appeal before the Income Tax Appellate Tribunal (Tribunal).

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity and Communication of Penalty Order under Section 271(1)(c) and Compliance with Section 144B of the Act

Relevant Legal Framework and Precedents: Section 271(1)(c) of the Income Tax Act empowers the Assessing Officer to levy penalty for concealment of income or furnishing inaccurate particulars. Section 144B prescribes the procedure for issuance of penalty orders under the faceless assessment scheme, mandating that a draft penalty order be communicated to the assessee and an opportunity be provided to file objections before the final order is passed.

Court's Interpretation and Reasoning: The Court examined the procedural history and the order sheet entries related to penalty proceedings. It was noted that although the penalty proceedings were initiated and a show cause notice was issued, the draft penalty order was never generated or communicated to the Petitioner as mandated under Section 144B. The order sheet indicated that the final penalty order was approved on 21.03.2022, but no draft order or final order was communicated to the Petitioner. The Respondents admitted a technical failure in the ITBA system which prevented generation and communication of the penalty order and demand notice.

Key Evidence and Findings: The Respondents filed affidavits confirming the absence of any draft penalty order in the ITBA system and acknowledged the technical glitch that prevented issuance of the penalty order and demand notice. The Petitioner's repeated requests to keep the penalty proceedings in abeyance and to be given an opportunity to file legal submissions were not responded to with any formal communication of penalty orders.

Application of Law to Facts: The Court held that the failure to generate and communicate the draft penalty order and final penalty order with demand notice violated the procedural safeguards under Section 144B. Without communication of the draft order, the Petitioner was deprived of the opportunity to file objections, rendering any subsequent penalty demand invalid.

Treatment of Competing Arguments: The Respondents argued that the penalty order was approved and demand notice generated, but the Court found no evidence of communication to the Petitioner. The Respondents' reliance on order sheet entries was insufficient to substitute for formal communication. The Court accepted the Petitioner's contention that no penalty order or demand notice was received.

Conclusion: The Court concluded that the penalty order under Section 271(1)(c) was not validly issued or communicated in compliance with Section 144B, and therefore, the penalty proceedings were not legally effective.

Issue (b): Legality of Adjustment of Refund for AY 2021-22 Against Penalty Demand Without Valid Demand Notice

Relevant Legal Framework and Precedents: Section 245 of the Income Tax Act permits adjustment of refunds against any outstanding demand. However, such adjustment presupposes the existence of a valid demand, which must be communicated to the assessee under Section 156.

Court's Interpretation and Reasoning: The Court scrutinized the adjustment made by the Central Processing Centre (CPC) of the refund for AY 2021-22 against the penalty demand for AY 2014-15. It was highlighted that the Petitioner had not received any demand notice under Section 156, which is a prerequisite for such adjustment. The CPC's action was based on automated system updates without verification of the validity of the demand or communication to the Petitioner.

Key Evidence and Findings: The Petitioner's attempts to respond to the intimation under Section 245 were frustrated by technical glitches, and communications to the CPC were met with directions to contact the jurisdictional Assessing Officer. The Respondents admitted that the demand notice was generated due to a technical issue, and no formal communication was made to the Petitioner.

Application of Law to Facts: The Court found that the adjustment of refund without a valid, communicated demand notice was illegal. The automated adjustment violated principles of natural justice and statutory requirements, as the Petitioner was denied the opportunity to challenge or respond to the demand.

Treatment of Competing Arguments: The Respondents contended that the demand notice and penalty order were approved and generated, justifying the adjustment. The Court rejected this argument due to lack of evidence of communication and the admitted technical failure.

Conclusion: The adjustment of the refund against the penalty demand was quashed and set aside as it was done without a valid demand notice and without adherence to due process.

Issue (c): Entitlement to Refund for AY 2021-22

Relevant Legal Framework and Precedents: The Petitioner is entitled to refund of excess tax paid or balance in their favor, subject to adjustment against valid demands under the Act.

Court's Interpretation and Reasoning: Since the penalty demand was not validly communicated and the adjustment was illegal, the Petitioner's entitlement to refund stands unaffected by the invalid demand. The Court directed the Respondents to release the refund forthwith along with applicable statutory interest.

Application of Law to Facts: The refund was adjusted without lawful basis; hence, the Petitioner must be restored the amount adjusted.

Conclusion: The Petitioner is entitled to immediate release of the refund for AY 2021-22 along with interest.

Issue (d): Keeping Penalty Proceedings in Abeyance Pending Disposal of Appeal

Relevant Legal Framework and Precedents: It is a recognized practice that penalty proceedings may be kept in abeyance pending disposal of the substantive appeal to avoid multiplicity of proceedings and ensure fairness.

Court's Interpretation and Reasoning: The Petitioner had repeatedly requested the Respondents to keep penalty proceedings in abeyance pending disposal of appeals before the Tribunal. There was no formal communication from the Respondents acceding to this request. The Court observed that the Respondents proceeded with penalty proceedings without providing the Petitioner an opportunity to be heard or to file submissions, contrary to principles of natural justice.

Conclusion: The Court directed the Respondents to complete penalty proceedings afresh in accordance with law, allowing the Petitioner to file replies and be heard, thus effectively reinstating the principle of abeyance pending appeal disposal.

3. SIGNIFICANT HOLDINGS

The Court held:

"No draft penalty order was ever generated by the Respondents under the faceless mechanism for levy of the penalty under Section 271(1)(c) of the Act, which ought to have been generated and communicated to the petitioner to file reply for as required under Section 144B of the Act."

"No final order for levy of penalty was ever generated or communicated alongwith demand notice under Section 156 of the Act."

"The adjustment of refund by the CPC through the Communication issued under Section 245 of the Act for AY 2021-22 is hereby quashed and set aside."

"The Respondents shall permit the Petitioner to file a reply to the Show Cause Notice dated 24.02.2021 for levy of the penalty under Section 271(1)(c) of the Act and thereafter, issue a draft order for levy of penalty, if required, after considering the objections to be filed by the petitioner and after providing due opportunity of hearing to the Petitioner."

"The Respondents are directed to release the refund for AY 2021-22 forthwith, along with statutory interest as applicable."

Core principles established include the mandatory compliance with procedural safeguards under Section 144B for faceless penalty proceedings, the necessity of communication of penalty orders and demand notices before enforcement actions such as refund adjustment, and the protection of assessee's rights to be heard and to respond to penalty proceedings.

Final determinations on each issue are that the penalty order and demand notice were invalid due to non-communication, the refund adjustment was unlawful and quashed, the Petitioner is entitled to refund release with interest, and the penalty proceedings must be redone in accordance with statutory procedure, allowing the Petitioner due opportunity to respond.