Delhi ITAT Quashes Section 271(1)(c) Penalty for PF Disallowance as No Satisfaction Was Recorded in Assessment Order

BSC C & C Joint Venture Vs ACIT/DCIT (ITAT Delhi)

Delhi ITAT Quashes Section 271(1)(c) Penalty for PF Disallowance as No Satisfaction Was Recorded in Assessment Order

The Delhi Bench of the ITAT, in BSC C & C Joint Venture v. ACIT/DCIT (AY 2016-17), held that a penalty under section 271(1)(c) cannot be sustained where the Assessing Officer failed to record satisfaction in the assessment order with respect to the specific addition on which the penalty was ultimately levied. Accordingly, the Tribunal quashed the penalty imposed on the disallowance of employees’ contribution to Provident Fund under section 36(1)(va).

The assessee’s assessment resulted in, inter alia, a disallowance of ₹3.55 crore on account of delayed deposit of employees’ contribution to PF under section 36(1)(va). After the disallowance was upheld in quantum proceedings following the Supreme Court’s decision in Checkmate Services Pvt. Ltd., the Assessing Officer levied a penalty of ₹1.21 crore under section 271(1)(c) for furnishing inaccurate particulars of income, which was confirmed by the CIT(A).

Before the Tribunal, the assessee contended that the assessment order recorded satisfaction for initiating penalty only in respect of the Transfer Pricing adjustment and not for the PF disallowance. It was further argued that the PF issue was highly debatable at the relevant time and had been fully disclosed in the Tax Audit Report, with the law being settled against the assessee only subsequently by the Supreme Court in Checkmate Services Pvt. Ltd.

The Tribunal examined the assessment order and found that the Assessing Officer had expressly recorded satisfaction for initiation of penalty only in relation to the Transfer Pricing adjustment. There was no satisfaction whatsoever regarding the disallowance under section 36(1)(va). Holding that recording of satisfaction for the specific addition is a jurisdictional prerequisite for invoking section 271(1)(c), the Tribunal concluded that the penalty proceedings relating to the PF disallowance were without jurisdiction and therefore invalid.

Accordingly, without entering into the merits of the other contentions, the Tribunal quashed the penalty order and allowed the assessee’s appeal, reiterating that penalty proceedings are addition-specific and cannot be sustained in the absence of a valid satisfaction recorded in the assessment order for the particular addition.

Cases Discussed

• Checkmate Services Pvt. Ltd. Vs. CIT-1 (Supreme Court of India), (2022) 143 taxmann.com 178 (SC)
• CIT v. Jai Laxmi Rice Mills (Supreme Court of India), Civil Appeal No. 1457/2008 with Civil Appeal No. 3614/2012
• Commissioner of Income Tax Vs. Alom Extrusions Limited (Supreme Court of India)

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the assessee is directed against the order dated 19.12.2025 of the National Faceless Appeal Centre (NFAC), Delhi, [hereinafter referred to as the `Ld. CIT(A)] arising out of the Assessment Order dated 17.05.2023 passed under section 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the Assessment Unit, Delhi (hereinafter referred to as the ‘AO’) pertaining to Assessment Year (A.Y.) 2016-17.

2. The assessee has raised the following grounds of appeal:-

“1. That on the facts and circumstances of the case, the National Faceless Appeal Centre (NFAC) has erred in law while confirming imposition of penalty of Rs.1,20,82,281/- u/s 271(1)(c) of the Act on additions of Rs.3,55,46,576/- u/s 2(24)(x) on account of late deposit of Provident Fund as confirmed by ITAT, New Delhi without considering the facts:

1.1 That no penalty was initiated against the above-mentioned addition in the Final Order passed on 30.04.2021.

1.2 That this was a debatable issue which travelled upto Supreme Court, and finally got settled in the case of Checkmate Services Pvt. Ltd. Vs. CIT by the Hon’ble Supreme Court.

1.3 That the appellant had made a complete disclosure in the Tax Audit Report in this regard and nothing was hidden from the Department.

2. The appellant craves leave to add, alter, amend or withdraw any of the above grounds of appeal at or before the time of hearing.”

3. Brief facts are that the assessee had filed its return for A.Y. 2016-17 on 30.11.2016 declaring income of Rs. 145,64,82,000/-. The case was selected for scrutiny during the course of which as reference was made to the TPO for determination of Arm’s Length Price (ALP) of the international transactions entered into by the assessee with its Associated Enterprises (AE).

Against the proposed adjustment u/s 92CA of the Act, the assessee filed objection before the Dispute Resolution Panel (DRP) pursuant to the directions of DRP, the AO finalised the assessment u/s 143(3) r.w.s. 144C(13) after making the following additions:-

(i) On account of TP Adjustment – Rs. 1,39,59,008/-

(ii) Disallowance u/s 36(1)(va) – Rs. 3,55,46,576

(iii) Retention money released – Rs. 2,33,25,511/-

Penalty proceedings u/s 271(1)(c) were also initiated

3.1 Aggrieved, the assessee preferred an appeal before the Tribunal. Vide order dated 30.11.2022, the coordinate benches confirmed the disallowance u/s 36(i)(va) on account of late deposit of employee’s contribution to PF account while other grounds were either allowed or remanded back to the AO for fresh consideration.

3.2 Thereafter, Ld. AO proceeded to levy penalty u/s 271(1)(c) on the disallowance of employees contribution to EPF of Rs. 3,55,46,576/- which was confirmed by the coordinate bench in the light o the order of the Hon’ble Apex Court in the case of Checkmate Services Private Limited vs CIT (2022) 143 taxmann.com 178 (SC).

3. After considering the assessee’s submissions, the AO imposed a penalty of Rs. 1,20,82,281/- u/s 271(1)(c) vide order dated 17.05.2023 on the ground that the assessee had furnished inaccurate particulars of income with regard to the disallowance made for late deposit of employees’ contribution to EPF.

3.4 Aggrieved, the assessee preferred an appeal before the CIT(A), who confirmed the levy of penalty vide order dated 19.12.2025.

3.5 Further aggrieved, the assessee has filed the present appeal before the Tribunal.

4. Before us, the Ld. AR has submitted that the levy of penalty is invalid on legal grounds as well as on merits. He has pointed out that no penalty with respect to the disallowance u/s 36(i)(va) was initiated in the assessment order and also that the issue being debatable, was finally settled subsequently by the order of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. v. CIT (supra).

4.1   The Ld. AR has made the following written submissions in respect of each of the grounds: –

” A> NO PENALTY WAS INITIATED IN RESPECT OF THE IMPUGNED DISALLOWANCE OF RS.3,55,46,576/- OF THE EMPLOYEES’ CONTRIBUTION TO PROVIDENT FUND IN THE ASSESSMENT ORDER DATED 30.04.2021:

1. The penalty levied under section 271(1)(c) in respect of the addition of Rs.3,55,46,576/-made under section 2(24)(x) read with section 36(1)(va) is without jurisdiction and liable to be quashed as no satisfaction for initiation of penalty proceedings was recorded by the Assessing Officer in respect of the said addition.

2. A copy of the assessment order dated 30.04.2021 is at Page Nos. 2-10 of the Paper Book. A perusal of the Final Assessment Order dated 30.04.2021 would reveal that the Assessing Officer recorded the following satisfaction:

5.4 Having regard to the addition made to the declared income of the assessee discussed above on account of TPO’s adjustment, I am satisfied that the assessee company has furnished inaccurate particulars of such income, rendering itself liable for initiation of penal proceedings under section 271(1)(c) of the IT Act, 1961 for under reporting of income. The same is being initiated separately.

Para 5.4 of the Order. Kindly see Page No. 9 of the Paper Book

3. The above satisfaction leaves no room for ambiguity. The Assessing Officer specifically recorded satisfaction only in relation to the Transfer Pricing adjustment made pursuant to the order of the Transfer Pricing Officer. Significantly, the Assessing Officer did not record any satisfaction whatsoever in respect of the separate addition of Rs.3,55,46,576/-relating to employees’ contribution to Provident Fund.

4. The satisfaction recorded by the Assessing Officer is therefore confined exclusively to the Transfer Pricing adjustment and cannot be extended, enlarged or presumed to cover any other addition made in the assessment order.

It is a settled principle of law that penalty proceedings under section 271(1)(c) are addition-specific. The Assessing Officer is required to apply his mind independently to each addition and record his satisfaction that the particular addition represents either concealment of income or furnishing of inaccurate particulars.

The statutory requirement of recording satisfaction is a jurisdictional condition and not a procedural formality. Unless satisfaction is recorded in respect of a particular addition, penalty proceedings cannot be initiated or sustained in relation to that addition.

5. In the present case, the Assessing Officer consciously chose to record satisfaction only with respect to the Transfer Pricing adjustment. No allegation of concealment of income or furnishing of inaccurate particulars was made in relation to the Provident Fund disallowance. The omission assumes greater significance because the impugned disallowance was separately discussed in the assessment order and was based entirely upon disclosed facts available in the Tax Audit Report. Had the Assessing Officer intended to initiate penalty proceedings on this issue, he would have specifically recorded satisfaction in relation thereto.

6. The absence of any such satisfaction clearly establishes that the Assessing Officer did not regard the Provident Fund disallowance as a case warranting penalty under section. 271(1)(c).

7. It is respectfully submitted that jurisdiction for the levy of penalty must emanate from the satisfaction recorded in the assessment order itself. Such jurisdiction cannot subsequently be created by the penalty order, nor can the satisfaction recorded for one addition be borrowed and applied to another addition.

8. Once the Assessing Officer restricted his satisfaction only to the Transfer Pricing adjustment, the scope of penalty proceedings stood confined to that issue alone. The Revenue cannot subsequently expand the scope of penalty proceedings to cover an altogether different addition in respect of which no satisfaction was ever recorded.

9. The Hon’ble Supreme Court in the case of CIT v. Jai Laxmi Rice Mills (Civil Appeal No. 1457/2008 with Civil Appeal No. 3614/2012) (Copy attached at Page Nos. 33-35 the Paper Book), has held that where the requisite satisfaction is absent in the assessment order, the penalty proceedings are rendered invalid. Similarly, various Courts have consistently held that satisfaction must be specific and relatable to the particular addition on which penalty is sought to be imposed.

10. In the appellant’s case, the satisfaction recorded by the Assessing Officer is expressly linked to “TPO’s adjustment”. Therefore, the jurisdictional requirement for initiation of penalty proceedings in relation to the disallowance of employees’ contribution to the Provident Fund remains completely unfulfilled.

11. In view of the above facts and settled legal position, the penalty levied under section 271(1)(c) on the addition of Rs.3,55,46,576/- made under section 2(24)(x) read with section 36(1) (va) is without jurisdiction, bad in law and liable to be deleted in entirety.

B> SATISFACTION RECORDED BY THE ASSESSING OFFICER IS FUNDAMENTALLY DEFECTIVE AND INVALID IN LAW:

16. Without prejudice to the foregoing submissions, it is further submitted that the satisfaction recorded by the Assessing Officer is fundamentally defective and invalid in law.

17. The Assessing Officer recorded the penalty as under:

5.4 Having regard to the addition made to the declared income of the assessee discussed above on account of TPO’s adjustment, I am satisfied that the assessee company has furnished inaccurate particulars of such income, rendering itself liable for initiation of penal proceedings under section 271(1)(c) of the IT Act, 1961 for under reporting of income. The same is being initiated separately.

18. A bare reading of the above satisfaction reveals complete ambiguity and non-application of the mind.

19. Section 271(1)(c), as applicable to the year under consideration, contemplates only two distinct defaults:

(a) concealment of particulars of income; or

(b) furnishing of inaccurate particulars of income.

The Assessing Officer is required to arrive at a clear satisfaction regarding the exact default allegedly committed by the assessee.

20. However, in the present case, while referring to section 271(1)(c), the Assessing Officer simultaneously invoked the concept of “under-reporting of income”.

21. The expression “under-reporting of income” is not found in section 271(1)(c). It is a concept introduced under section 270A by the Finance Act, 2016. Thus, the satisfaction recorded by the Assessing Officer mixes up two different penalty provisions operating in different fields.

22. This clearly establishes that the Assessing Officer had not applied his mind to the correct statutory provision before recording satisfaction and initiating penalty proceedings.

23. It is settled law that the Assessing Officer must be certain and unequivocal regarding the precise charge for which penalty is sought to be initiated. Penalty proceedings cannot be founded on uncertain, vague, contradictory or mutually inconsistent satisfaction.

24. The use of the expression “under-reporting of income” while invoking section 271(1)(c) creates a serious jurisdictional defect because it becomes impossible to ascertain whether the Assessing Officer intended to invoke the provisions relating to concealment of income, furnishing of inaccurate particulars, or under-reporting of income.

25. Such ambiguity goes to the root of the assumption of jurisdiction and renders the initiation of penalty proceedings invalid.

26. Thus, the penalty levied on the Provident Fund disallowance suffers from a double jurisdictional defect, namely:

(i) no satisfaction was recorded in respect of the impugned addition; and

(ii) the satisfaction that was recorded is itself vague, ambiguous and based upon an incorrect statutory charge of “under-reporting of income” under section 271(1)(c).

27. Accordingly, the penalty proceedings deserve to be held invalid ab initio and the impugned penalty is liable to be deleted on this ground alone.

C> DEBATABLE ISSUE NO PENALTY IMPOSABLE

It is submitted that the claim of the appellant in respect of the late deposit of employees’ contribution to EPF, at the highest, was clearly a debatable issue. A number of Hon’ble Courts had earlier decided the issue in favour of the assessee. The appellant was of the view that as long as the said amounts were paid/deposited before the “due date” of filing of the return of income as prescribed in sub-section (1) of Section 139 of the Act, the same was allowable u/s. 43B(b) of the Act. The view of the assessee company at the time of filing the original/revised return of income was duly supported by the judgment of the Hon’ble Supreme Court in the case of Commissioner of Income Tax Vs. Alom Extrusions Limited, as well as a host of judicial pronouncements, which held the ground at the relevant point of time.

The Hon’ble Delhi ITAT, Bench-G, vide a consolidated order dated 28.02.2022, passed in a batch of 114 appeals, deleted the additions made on account of the alleged late deposit of employees’ contributions towards EPF and ESL A copy of the said order is enclosed herewith and placed at Page Nos. 36-80 of the Paper Book

The judgment of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. Vs. CIT-1 was delivered on 12.10.2022. Hence, the appellant could not add back the above-mentioned amount of the late deposit of EPF to the returned income.

The aforesaid view of the appellant was subsequently found to conflict with the judgment of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. Vs. CIT-1.

Therefore, the appellant, while filing its submissions before the Ld. AO for remanded back case by the Hon’ble ITAT, did not press the above-mentioned ground. The appellant had filed its submissions before the Assessing Officer, while assessment of the remanded back case, on 22.04.2023. The appellant in the submissions gave a detailed status of all the additions and the order of the Hon’ble ITAT in this regard. The appellant made submissions against all the remanded back grounds and did not submit anything with regard to the late deposit of employees’ contribution to EPF, and accepted the said disallowance. Copy of the submissions made on 22.04.2023, along with its acknowledgement, is attached herewith at Page Nos. 81-90 of the Paper Book Your goodself would observe that the appellant did not make any submissions against Ground of Disallowance No. 5 relating to the late deposit of EPF contribution of employees.

The aforesaid facts clearly substantiate the contention of the appellant that disallowance had been made only on account of bona fide difference of opinion between the appellant and the Revenue in respect of a highly debatable/vexed legal issue.

The entirety of the facts and circumstances clearly point out that the appellant did not file inaccurate particulars of income in claiming deduction of the aforesaid amount, and the disclosures made by the appellant in this regard were bona fide and were not false or fanciful. Being so, it is respectfully submitted that no penalty under section 271(1)(c) of the Act was leviable upon the appellant.”

4.2 On the other hand, Ld. DR has strongly relied on the orders of the lower authorities. Written submissions of the Ld. DR are reproduced below:

“1) No Penalty was initiated by the AO against the addition of Rs. 3,55,46,576/- in the final assessment order dated 30.04.2021.

Reply- In this regard it is submitted that in para 6 of the final assessment order, common penalty proceedings have been initiated for all the penalty proposed for furnishing inaccurate particulars of income. So the objections raised by the Ld. AR is not acceptable and deserve to be dismissed as the penalty proceedings has been rightly initiated under the valid provisions/section of the income tax act.

1.2) Debatable issue-

Reply- (i) The ground of appeal taken by the Ld. AR of the assessee that it was debatable issue which travelled the case of Checkmate Services Pvt ltd. Vs CIT is not denied But as far as statutory provisions of Sec 36(1) (va) r.w.s section 2(24)(x) of the I.TAct are concerned, it is mandatory on the part of employer to get deposited of employees contribution of P.F/ESI or other welfare funds by the due date. These provisions are totally distinct from the employer’s contribution governed by Sec 43(b) and cannot be intermixed with the provisions of Sec 36(1)(va) r.w.s section 2(24)(x) of the I.TAct.

(ii) The distinctions between employees and employer’s contribution has been well recognised by statutory amendments as well as judicial interpretations. Even before the judgement of Supreme Court in Checkmate Services, several high courts such as Gujrat High Court, Kerala High Court and Madras High Court categorically held that belated deposit of Employer’s contribution even if paid before filling of ITR u/s 139(1) is not allowable. So the ground of appeal advanced by the Ld. AR is not acceptable that it was a debatable issue as it is statutory requirement under the provisions of Income Tax Act.

(iii) As per provisions of Section 2(24)(x) ‘Income’ has been defined to include any some received by the assessee from his employees as contribution to any provident fund or Superannuation fund or refund set up under the provision of Employees State Insurance Act 1948. Under the provisions of 36(1) (va), deductions in computing the income refer to Section 28 shall be allowed in respect of any some received from his employees to which the provisions of Sub clause (x) of clause (24) of section (2) of the Income Tax Act provided such some is credited by the assessee to the employees account in relevant fund by the due date. If such some is not deposited by the due date in employees welfare fund account, it will not be allowable deduction.

1.3) The observation of the Ld. AR during the course of argument it is pointed out that in para 5.4 of assessment order it is mentioned that penalty proceedings are liable to be initiated u/s 271(1)(c) of the IT Act for ‘under reporting’ of income is a bonafide typing mistake and covered under the provisions of sec 292B of the I.T Act wherein it is mentioned that no return of income, assessment, notice, summon or other proceedings by reason of any mistake, defect or omission in such return of income is in substance and effect in conformity with or according to the intent and purpose of this act.

So, in view of the above submissions it is concluded that penalty proceedings u/s 271(1)(c) have been rightly initiated in the assessment order and imposed under the provisions of Income Tax Act. Objections raised by the Ld. AR of assessee are not acceptable/tenable and may kindly be dismissed.”

5. We have heard the rival submissions and perused the material available on record. At the outset, we note that in the assessment order, the AO has recorded satisfaction for initiating penalty proceedings u/s 271(1)(c) as under:

” 5.4 Having regard to the addition made to the declared income of the assessee discussed above on account of TPO’s adjustment, I am satisfied that the assessee company has furnished inaccurate particulars of such income, rendering itself liable for initiation of penal proceedings under section 271(1) (c) of the IT Act, 1961 for under reporting of income. The same is being initiated separately.”

(emphasis supplied by us)

5.1 Clearly, the penalty proceedings have been initiated in respect of the addition made on account of TP adjustment. Thus, no penalty proceedings in respect of the additions on account of disallowance u/s 36(1)(va) are seen to have been initiated. In view of the above factual position, as no satisfaction for initiating penalty proceedings in respect of addition u/s 36(1)(va) has been recorded, we are of the considered view that the impugned penalty order is invalid and the same is hereby quashed.

6. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 17.07.2026.