The Delhi High Court recently quashed an Income Tax Appeal filed by the Revenue, ruling that delayed order levying penalty on an Assessee under Section 271C of the Income Tax Act, 1961 for default in timely deduction of Tax Deducted at Source (TDS) is unsustainable in law. The Income Tax Appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961 sought to impugn an Order passed by the Income Tax Appellate Tribunal (ITAT). The Bombay High Court identified that the only question arising for consideration in the present appeal is whether the order by the Revenue levying penalty on the Respondent-Assessee under Section 271C of the Act is barred by limitation.

The brief facts entail the Assessee’s filing of returns of income for Assessment Year (A.Y.) 2011-12 on 30.11.2011, declaring a total loss of Rs.2,62,04,18,432/-. The Revenue, on the basis of the tax audit report furnished by the assessee contended that the assessee had failed to deduct Rs.5,00,40,103/- as TDS which was deductable by the assessee. Get a Copy of Law and Procedure for Filing of Appeals, Click here The Assessee’s case was selected for scrutiny, with assessment proceedings under Section 143(3) concluding on 26.03.2014. Though the Assessing Officer had immediately made a reference to the Joint Commissioner of Income Taxes (JCIT) Range 76, Delhi on 25.09.2014, the JCIT abstained from undertaking process, finally issuing a show-cause (SCN) to the Assessee on 04.08.2015, after the lapse of almost a year, and passing order on 25.02.2016.

The penalty of Rs.5,00,40,103/- levied by the JCIT on the Assessee which was contested by the Assessee before the Commissioner of Income Taxes (Appeals) ( CIT(A) ). The CIT(A) granted relief to the Assessee, noting that “no order imposing penalty could be passed after expiry of six months from the end of the month in which the action for imposition of penalties was initiated” under Section 275(1)(c) of the Income Tax Act, 1961. In Appeal, the ITAT concurred with the decision of the CIT(A) The Division Bench of the Delhi High Court comprising Justice Vibhu Bakhru and Justice Swarana Kanta Sharma referenced the decision of the same Court in Principal Commissioner of Income Tax-5 v. JKD Capital & Finlease Ltd. (2015) where the principle that initiation of penalty proceedings cannot be delayed in an arbitrary manner was laid down; further, the date of on which reference was made to the concerned officer was to be deemed the date of initiation of proceedings. Get a Copy of Law and Procedure for Filing of Appeals, Click here

Referring to the Supreme Court decision in Om Prakash Jaiswal v. D.K. Mittal & Anr. (2000),the Delhi High Court proclaimed that the date when the ‘action for imposition of penalty is initiated’ shall constitute the date of the introductory step for such action. In the given context, the Delhi High Court observed no infirmity with the decision of the ITAT that the penalty proceedings had been initiated at the earliest time on 25.09.2014 while the penalty was passed by the JCIT on 25.02.2016, being wholly barred by limitation, rendering such order infructuous.