Section 271(1)(c) Penalty Cannot Survive When Reassessment Is Quashed: ITAT Chennai

Raju Chandrasekar Vs ITO (ITAT Chennai)

Penalty Cannot Survive When Reassessment Is Quashed: ITAT Chennai Deletes Section 271(1)(c) Penalty for AY 2015-16

The Chennai Bench of the ITAT allowed the assessee’s appeal for AY 2015-16 and set aside the penalty imposed under section 271(1)(c), holding that the penalty had no legs to stand once the quantum reassessment itself was quashed.

The Tribunal noted that the reassessment for the relevant year had already been set aside by the ITAT in the assessee’s quantum appeal, on the ground that the notice under section 148 was issued by the Jurisdictional Assessing Officer (JAO) instead of the Faceless Assessing Officer (FAO), in violation of the post-29.03.2022 faceless reassessment scheme, following the jurisdictional Madras High Court ruling in TVS Credit Services Ltd. Since the very foundation of the reassessment was held to be invalid, the consequential penalty levied under section 271(1)(c) automatically collapsed.

The ITAT reiterated the settled principle that penalty proceedings are dependent on the existence of a valid quantum assessment. Where the assessment is annulled or set aside on jurisdictional grounds, the penalty order arising therefrom cannot survive. However, the Tribunal clarified that since liberty had been reserved in the quantum order to the Revenue to seek revival of the reassessment in the event of a favourable Supreme Court decision, the penalty proceedings could also be revived if and when the quantum assessment itself is lawfully restored.

With these observations, the ITAT deleted the penalty for the present and allowed the assessee’s appeal.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated 08.07.2025 passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The order of the CIT(A)-NFAC arises out of the order of the AO imposing penalty u/s.271(1)(c) of the Act. The relevant Assessment Year is 2015-16.

2. The Ld.AR submitted that as against the quantum assessment, the Tribunal in ITA No.3000/CHNY/2025 had set aside the reassessment order for the reason that the notice u/s.148 of the Act was issued by the Jurisdictional Assessing Officer [JAO] instead of Faceless Assessing Officer [FAO]. The Tribunal followed the judgment of the Hon’ble Jurisdictional High Court in the case of TVS Credit Service Ltd., vs. DCIT in WP No.22402 of 2024 (judgment dated 24.06.2025). The copy of the Tribunal order in ITA No.3000/CHNY/2025 dated 17.12.2025 has been placed on record. The Ld.AR submitted that in light of the quantum assessment order being set aside, the penalty order u/s.271(1)(c) of the Act which arise out of the quantum assessment needs to be quashed.

3. The Ld.DR supported the order of the AO and the First Appellate Authority.

4. We have heard rival submissions and perused the material on record. The present appeal emanates from an order imposing penalty u/s.271(1)(c) of the Act. It is an admitted fact that quantum assessment has been set aside by the Tribunal since notice u/s.148 of the Act was issued by the JAO instead of FAO. Therefore, the penalty order arising from the quantum assessment does not have foundational basis and hence, the same is set aside. However, in the quantum assessment, the Tribunal had kept open the rights of the contention of the Revenue to revive the quantum assessment if the Revenue succeeds before the Hon’ble Apex Court. The relevant portion of the order of the Tribunal in the quantum assessment which gives liberty to the Revenue to revive the appeal reads as follows:-

“8. In light of the above, we set aside the impugned notice issued under section 148 of the Act and consequential order passed pursuant thereto. However, in the light of the Para No.8 of the decision of the jurisdictional High Court in the case of TVS Credit Services Ltd., supra, we also keep open of rights and contentions of parties including liberty to approach this bench, in case, the Revenue succeeds before the Apex Court for revival of this appeal.”

5. In the event, the Hon’ble Supreme Court reverses the judgment of the Hon’ble Jurisdictional High Court in the case of Hexaware Technologies Ltd., vs. ACIT, (supra) the quantum assessment gets revived. Therefore, the penalty imposed u/s.271(1)(c) of the Act (the appeal filed by the assessee before the ITAT) also needs to be revived for adjudication on merits.

6. With these observations, the appeal of the assessee is disposed of.

Order pronounced in the open court on 22nd January, 2026 at Chennai.