ITAT Sets Aside Penalty Order as core quantum appeal was pending

Murmu Pankaj Kumar Vs ITO (ITAT Bangalore)

In a recent ruling, the Income Tax Appellate Tribunal (ITAT), Bengaluru, has set aside a penalty order issued against taxpayer Murmu Pankaj Kumar, deeming it premature. The penalty, imposed under Section 271(1)(c) of the Income Tax Act, 1961, was issued while the assessee’s appeal against the original assessment order was still pending before the Commissioner of Income Tax (Appeals) [CIT(A)]. The ITAT’s decision highlights a procedural issue where a penalty cannot be finalized before the underlying tax liability is definitively determined.

The case involves Murmu Pankaj Kumar, a pilot with Air India, who had not filed his original income tax return for the assessment year 2016-17. He subsequently filed a return in response to a notice under Section 148, declaring a total income of Rs. 37,42,310. However, the Assessing Officer (AO) completed the assessment and made additions totaling Rs. 6,31,125. These additions included a disallowed deduction of Rs. 2,400 under Section 80D and an unexplained investment of Rs. 6,28,725 under Section 69. Based on this revised income of Rs. 43,73,435, the AO raised a demand of Rs. 5,43,487 and initiated penalty proceedings. The assessee filed an appeal with the CIT(A) against the assessment order on July 3, 2024, but while that appeal was still pending, the AO issued an ex-parte penalty order on July 16, 2024, imposing a penalty of Rs. 1,95,022 for furnishing inaccurate particulars of income. The CIT(A) subsequently upheld the penalty, which led to the assessee’s appeal before the ITAT.

During the hearing, the assessee’s representative argued that the penalty order was premature as the quantum appeal, which challenged the very basis of the penalty, was still pending. This argument was supported by a judicial precedent from the Hon’ble High Court of Karnataka. The court, in the case of Anjanadri Fuel Station V. ITO (WP No. 6164 of 2024), had previously ruled that penalty orders and demand notices should be held in abeyance until the related quantum appeal is resolved. This precedent was based on an earlier decision in Mr. B.S. Uday Shetty Vs. The Assistant Commissioner of Income Tax (W.P. No. 8585/2022). Following this line of reasoning, the ITAT concluded that the penalty order was indeed premature. The tribunal set aside the penalty proceedings and remitted the entire issue back to the CIT(A) for fresh consideration. The decision was pronounced on July 17, 2025, effectively allowing the assessee another opportunity to be heard after the initial quantum appeal is decided. The appeal was partly allowed for statistical purposes, and the ITAT emphasized that the penalty cannot stand on its own when its foundational assessment order is still under dispute.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 27.11.2024 vide DIN & Order No. ITBA/NFAC/S/25/2024-25/1070689919(1) passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2016-17.

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

3. Brief facts of the case are that the assessee is working as Pilot in Air India Limited. The assessee did not file his return of Income for the Asst. year 2016-17 u/s 139 of the Act however filed the return of Income in response to Notice u/s 148 of the Act by declaring the total Income of Rs. 37,42,310/- Thereafter the assessment Order u/s 147 read with section 144B of the Act was passed on 22/01/2024 by making the additions/disallowances of Rs.6,31,125/- as detailed below-

i) Deduction claimed u/s 80D amounting to Rs.2400/-

ii) Rs. 6,28,725/- ( Purchase of Immovable Property Rs.72,83,725/- (-) Home Loan of Rs. 66,55,000/- ) treated as unexplained investment u/s 69 of the Act & taxed u/s 115BBE of the Act.

The AO completed the assessment on 22/01/2024 on a Total Income of Rs. 43,73,435/- and raised total demand of Rs.5,43,487/- u/s 156 of the Act. The AO also initiated the penalty proceedings u/s 271(1)(c) of the Act as well as u/s 271(1)(b) of the Act on or before the completion of the assessment proceedings.

3.1 Being aggrieved by the Order of the AO dated 22/01/2024 passed u/s 147 read with section 144B of the Act, the assessee preferred an appeal before the ld JCIT(A)/CIT(A) on 03/07/2024 vide e-filing Acknowledgement No. 567915240030724 which is still pending for disposal.

3.2 During the pendency of the quantum appeal before the ld. JCIT(A)/CIT(A), the AO had passed ex-parte penalty Order u/s 271(1)(C) of the Act on 16/07/2024 by imposing the penalty of Rs.1,95,022/- on the assessee for furnishing inaccurate particulars of income of Rs.6,31,125/-

4. Being aggrieved by the Order of Penalty dated 16/07/2024 passed u/s 271(1)(C) of the Act, the assessee preferred an appeal before the ld. CIT(A)/NFAC.

4.1 The ld. CIT(A)/NFAC dismiss the appeal of the assessee by observing that the assessee is under a mandatory obligation to disclose all the material facts in the return of income so that the Assessing Officer can arrive at his correct income for the year. Under no circumstances, the assessee is allowed under the Income-tax Act to file inaccurate particulars and present a very different picture than the real One and accordingly the AO is entirely justified in imposing the penalty of Rs. 1,95,022/-

5. Again aggrieved by the Order dated 27/11/2024 of the ld. CIT(A)/NFAC, the assessee has filed the present appeal before this Tribunal. Before us, the assessee has also filed written submission along with the copy of the Order of Hon’ble High Court of Karnataka at Bengaluru dated 14/08/2024 in the case of Anjanadri Fuel Station V. ITO in WP No. 6164 of 2024 (T-IT).

6. Before us, at the outset, the ld. A.R. of the assessee drew our attention on the Form No.35 along with the Acknowledgement for filing the quantum Appeal before the ld. CIT(A)/NFAC and submitted that the said appeal is still pending before the ld. CIT(A)/NFAC for disposal. Further ld. AR of the assessee relying on the Order of the Hon’ble High Court of Karnataka at Bengaluru dated 14/08/2024 in the case of Anjanadri Fuel Station V. ITO in WP No. 6164 of 2024 (T-IT) prayed that the penalty order may also be remitted back to the file of ld. CIT(A)/NFAC as the quantum appeal is still pending for disposal.

7. The ld. D.R. on the other hand supported the order of authorities below.

8. We have heard the rival submissions and perused the material available on record. It is the grievance of the assessee that despite pendency of the quantum appeal before the ld. CIT(A)/NFAC, the Authorities below have proceeded to issue penalty notices and show cause notices followed by the penalty Order/Appellate Order. It is an undisputed fact that the quantum appeal in the case of the assessee for the impugned assessment year is still pending before the ld. CIT(A)/NFAC for disposal. Further, the Hon’ble High Court of Karnataka at Bengaluru vide order dated 14/08/2024 in the case of Anjanadri Fuel Station V. ITO in W.P. No. 6164 of 2024 (T-IT) by relying its own Order in the case ofMr. B.S. Uday Shetty Vs. The Assistant Commissioner of Income Tax– W.P. No. 8585/2022 dated 21/04/2022 has held that where the assessee has file an appeal against the Original Assessment Order, it would be necessary to keep the penalty orders and demand notice in abeyance till disposal of the quantum appeal. Before us also, the ld AR of the assessee fervidly argued that as the quantum appeal is pending before the ld. CIT(A)/NFAC, the issue of penalty may also be remitted back to the file of ld. CIT(A)/NFAC.

8.1 We are also of the considered opinion that if the quantum appeal before the ld. CIT(A)/NFAC is still pending for the disposal, the hearing of the penalty appeal by us at this stage is premature. If an order of assessment or reassessment which forms the basis for the penalty is pending, then the penalty cannot stand by itself and is liable to be set aside. Accordingly, the entire issue of penalty proceeding is also set aside to the file of the ld. CIT(A)/NFAC for fresh consideration in accordance with law. Needless to say a reasonable opportunity of being heard must be granted to the assessee. It is ordered accordingly

9. In the result, appeal filed by the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 17^th July, 2025