Joseph Domnic Dsouza Vs ITO (ITAT Mumbai)
Penalty Initiated Under Section 271AAC Cannot Be Imposed Under Section 271(1)(c): ITAT Deletes ₹17.18 Lakh Levy
Summary: The Assessing Officer completed a reassessment alleging unexplained cash deposits of ₹55.62 lakh and expressly directed initiation of penalty under section 271AAC. Yet the penalty eventually imposed was ₹17,18,658 under section 271(1)(c). The Mumbai Tribunal held that proceedings initiated under one specific penal provision could not be converted into a penalty under another provision when the assessment order contained no satisfaction or direction for doing so.
The assessee’s appeal against the underlying addition was still pending before the Commissioner (Appeals). The Tribunal nevertheless decided the penalty appeal because the defect appeared on the face of the assessment order and did not depend on whether the addition would ultimately survive.
The Assessment and the Conflicting Penalty Orders
Joseph Domnic Dsouza had not filed a return for assessment year 2016–17. Following information available with the department and in the absence of compliance during reassessment, the Assessing Officer passed an ex parte order on 15 February 2024, determining income at ₹55.62 lakh. The amount was attributed to cash deposits in a Bank of Baroda account allegedly maintained by the assessee.
The assessment order itself was inconsistent in its description of the addition. It initially referred to section 68, later described the amount as unexplained money under section 69, and directed taxation under section 115BBE. But its concluding penalty direction was explicit: proceedings under sections 271AAC and 272A(1)(d) were being initiated. It did not direct initiation under section 271(1)(c).
Despite that direction, the Assessing Officer passed a penalty order on 21 August 2024 under section 271(1)(c), imposing ₹17,18,658. The penalty order stated that proceedings under that section had been initiated during assessment. The Commissioner (Appeals) confirmed the levy, principally referring to the assessee’s failure to provide supporting material, without resolving the objection about how the penalty had been initiated.
The Assessee’s Jurisdictional Objection
Before the Tribunal, the assessee argued that the penalty order could not travel beyond the satisfaction recorded in the assessment order. The recorded decision to initiate penalty under section 271AAC did not amount to an unstated decision to initiate proceedings under section 271(1)(c). The two provisions carry different statutory conditions and consequences.
The assessee also disputed the addition itself. His case was that he was a non-resident during the relevant period and that the Bank of Baroda account did not belong to him. He pointed out that parts of the assessment order referred to assessment year 2019–20 and financial year 2018–19, although the assessment before the Tribunal related to assessment year 2016–17. Those contentions remained part of the pending quantum appeal.
The Revenue relied on the lack of a return and the alleged failure to explain the deposits. It suggested that the penalty appeal could await the outcome of the quantum appeal. The Tribunal considered the initiation point independently of those factual disputes.
Why the Pending Quantum Appeal Did Not Require a Remand
A penalty based on an addition may ordinarily have to await the result of an appeal against that addition. Here, however, the question was whether section 271(1)(c) proceedings had ever been validly initiated. The answer lay in the assessment order, so the Tribunal found no need to send the penalty appeal back merely to await the quantum decision.
The Tribunal noted that, for the year concerned, section 271(1)(c) required the Assessing Officer to arrive at the requisite satisfaction during the assessment proceedings concerning concealment of income particulars or furnishing inaccurate particulars. Section 271(1B) deems satisfaction where the assessment order contains a direction to initiate penalty under section 271(1)(c). That deeming rule still requires the relevant direction to exist.
No such direction appeared in Dsouza’s assessment order. Nor did it record a finding about concealment or inaccurate particulars. Instead, it specifically named section 271AAC. The Tribunal distinguished this from a case involving a general penalty direction or an incorrect section in a later notice despite clear satisfaction in the assessment order. On these facts, the assessment order had selected a different penal provision.
A Later Notice Could Not Change the Earlier Record
The penalty order’s statement that section 271(1)(c) proceedings had been initiated could not override the contemporaneous assessment order. The Tribunal held that a later recital cannot retrospectively create satisfaction that was never recorded. Issuing a subsequent notice under section 271(1)(c) could not cure the absence either: a notice gives effect to a valid initiation; it does not independently supply it after assessment has concluded.
The assessee’s alleged non-compliance did not answer this jurisdictional objection. It might bear on an explanation of the deposits, but it could not establish the missing statutory foundation for this particular penalty. The Tribunal accordingly deleted the ₹17,18,658 penalty and allowed the appeal.
Author’s Comments
The case turns on a precise comparison of the assessment order’s concluding direction with the provision used in the final penalty order. The Tribunal treated the express reference to section 271AAC as a deliberate initiation under that provision, not as a clerical omission of section 271(1)(c). That is why the defect was held to go to jurisdiction rather than procedure.
The relief is confined to the penalty under section 271(1)(c). The Tribunal made no final finding on whether the ₹55.62 lakh addition is justified, whether the bank account belonged to Dsouza, or his residential status. The Commissioner (Appeals) must decide the pending quantum appeal independently on its evidence.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid appeal has been filed by the assessee against the order dated 23.01.2026 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], confirming the penalty of ₹17,18,658 levied by the Assessing Officer under section 271(1)(c) of the Income-tax Act, 1961 (“the Act”), for the Assessment Year 2016–17.
2. The assessee has challenged the impugned penalty, inter alia, on the ground that the Assessing Officer, while completing the assessment under section 147 read with sections 144 and 144B of the Act, had initiated penalty proceedings only under section 271AAC and not under section 271(1)(c); and, therefore, the penalty subsequently imposed under section 271(1)(c) is wholly without jurisdiction. Since this ground goes to the very root of the validity of the penalty proceedings and arises directly from the assessment order and the penalty order already forming part of the record, we have taken it up for adjudication at the threshold.
3. The relevant facts, in brief, are that the assessee is an individual who had not filed his return of income for the year under consideration. Reassessment proceedings were initiated on the basis of certain information stated to be available with the Department, and in the absence of compliance by the assessee, the assessment was completed ex parte vide order dated 15.02.2024 under section 147 read with sections 144 and 144B of the Act, determining the total income at ₹55,62,000. The said amount was treated as representing unexplained cash deposits in an account allegedly maintained with Bank of Baroda. Though the assessment order initially refers to the addition as having been made under section 68, the discussion thereafter describes the amount as “unexplained money” under section 69 and directs that the tax be computed in accordance with section 115BBE. At the conclusion of the assessment order, the Assessing Officer specifically recorded that penalty proceedings under sections 271AAC and 272A(1)(d) were being initiated. The relevant direction reads as under:
“The penalty proceedings u/s 271AAC, 272A(1)(d) mentioned in the paragraph above, are being initiated.”
Thus, insofar as the addition of ₹55,62,000 was concerned, the satisfaction recorded by the Assessing Officer was expressly and specifically for initiation of penalty proceedings under section 271AAC. There was no satisfaction recorded, nor was any direction given, for initiation of penalty proceedings under section 271(1)(c) of the Act.
4. Notwithstanding the aforesaid satisfaction recorded in the assessment order, proceedings were subsequently taken up under section 271(1)(c), and the penalty order dated 21.08.2024 proceeded on the premise that penalty under section 271(1)(c) had been initiated in the assessment proceedings for concealment of income. The Assessing Officer rejected the explanation furnished by the assessee and levied penalty of ₹17,18,658, being 100 per cent of the tax stated to have been sought to be evaded. The learned CIT(A), vide the impugned order, confirmed the penalty, principally observing that the assessee had failed to furnish supporting material during the appellate proceedings. However, the learned CIT(A) did not examine the specific jurisdictional objection that the assessment order contained no satisfaction or direction for initiation of penalty under section 271(1)(c).
5. Before us, the learned counsel for the assessee submitted that the quantum appeal arising from the assessment order dated 15.02.2024 is still pending adjudication before the First Appellate Authority. She fairly stated that, ordinarily, where an appeal against the quantum addition is pending, the appeal relating to the consequential penalty may either be kept in abeyance or restored to the file of the learned CIT(A) for being decided after the disposal of the quantum appeal. She. however, submitted that such a course would neither be necessary nor appropriate in the present case because the penalty suffers from an antecedent and incurable jurisdictional defect which is wholly independent of the ultimate outcome of the quantum proceedings. The assessment order unequivocally records initiation under section 271AAC, whereas the penalty has ultimately been imposed under section 271(1)(c), despite the absence of any satisfaction or initiation under that provision. According to him, proceedings initiated under one penal provision could not validly culminate in imposition of penalty under another provision embodying a different statutory charge and distinct conditions.
6. The learned counsel further submitted that the assessee also has a strong prima facie case in the quantum proceedings. The specific case of the assessee is that he was a non-resident during the relevant period and that the Bank of Baroda account in which the alleged cash deposits of ₹55,62,000 were stated to have been made did not belong to him. This fact had been duly intimated to the Department, and the very foundation of the quantum addition has been challenged before the First Appellate Authority. It was pointed out that the assessment order itself contains several incongruities, inasmuch as it repeatedly refers to Assessment Year 2019–20 and Financial Year 2018–19, though the assessment framed is for Assessment Year 2016–17; it invokes sections 68 and 69 interchangeably in respect of the same amount; and the underlying bank account itself has been denied by the assessee. Thus, according to the learned counsel, even on merits the penalty could not have been confirmed while the very existence and ownership of the alleged bank account remained a matter of dispute in the pending quantum appeal. She, however, submitted that the assessee’s principal challenge before the Tribunal is jurisdictional and can be decided independently of the quantum appeal.
7. The learned Departmental Representative relied upon the orders of the authorities below and submitted that the assessee had neither filed a return of income nor satisfactorily explained the source of the alleged cash deposits during the assessment proceedings. It was contended that the assessee had not made effective compliance before the lower authorities and, therefore, the Assessing Officer was justified in imposing the penalty. As regards the pendency of the quantum appeal, the learned Departmental Representative submitted that the matter could, if considered appropriate, be restored to the file of the learned CIT(A) for deciding the penalty appeal after disposal of the quantum proceedings.
8. We have heard the rival submissions and perused the material available on record. It is an admitted position before us that the assessee’s appeal against the quantum addition is still pending before the First Appellate Authority. Ordinarily, where the very addition forming the substratum of the penalty is under consideration before the appellate authority, it may be appropriate to defer the adjudication of penalty or restore the matter for being decided after the quantum appeal. However, such a course is warranted only where the penalty proceedings have been validly initiated and their ultimate fate is dependent upon the survival or deletion of the quantum addition. In the present case, the challenge is of a more fundamental character. The assessee contends that the Assessing Officer never assumed jurisdiction to initiate penalty under section 271(1)(c), and that the penalty order passed under the said provision travels beyond the satisfaction recorded in the assessment order. This jurisdictional objection arises from the face of the assessment order itself, requires no further investigation of facts and does not depend upon the result of the pending quantum appeal. Therefore, merely restoring the penalty matter to await the decision in the quantum appeal would serve no legitimate purpose if the penalty proceedings themselves lack a valid statutory foundation.
9. The assessment order makes a conscious, categorical and unambiguous reference to the initiation of penalty under section 271AAC. It is not a case where the assessment order contains a general direction for initiation of penalty without mentioning the applicable provision, nor is it a case where an incorrect provision has merely been mentioned in the notice while the requisite satisfaction under section 271(1)(c) is otherwise discernible from the assessment order. Here, the Assessing Officer, after treating the amount as income falling within the ambit of sections 68 or 69 and directing its taxation under section 115BBE, specifically chose to initiate penalty proceedings under section 271AAC. There is no observation anywhere in the assessment order that the assessee had concealed the particulars of his income or furnished inaccurate particulars thereof, nor is there any direction to initiate proceedings under section 271(1)(c). On the contrary, the only recorded satisfaction relating to the disputed addition is under section 271AAC.
10. Penalty proceedings are not an automatic or inevitable sequel to every addition made in an assessment. Before invoking section 271(1)(c), as applicable to the year under consideration, the Assessing Officer was required to arrive at the requisite satisfaction in the course of the assessment proceedings that the assessee had either concealed the particulars of his income or furnished inaccurate particulars thereof. Section 271(1B) incorporates a statutory deeming of satisfaction where the assessment order contains a direction for initiation of penalty proceedings under section 271(1)(c). However, even this deeming provision necessarily presupposes the existence of such a direction in the assessment order. In the present case, not only is such a direction absent, but the direction actually recorded is for initiation under a different and specific penal provision. Sections 271AAC and 271(1)(c) operate in distinct statutory fields and embody different conditions, charges and consequences. Initiation under section 271AAC cannot be treated as an implied or inchoate initiation under section 271(1)(c), nor can the latter provision be substituted at the stage of imposing penalty.
11. The recital in the penalty order that proceedings under section 271(1)(c) had been initiated separately in the assessment order is demonstrably contrary to the assessment order itself. The assessment order is the primary and contemporaneous record of the satisfaction arrived at by the Assessing Officer, and its concluding direction admits of no ambiguity. A subsequent recital in the penalty order cannot rewrite the assessment order or retrospectively create a jurisdictional satisfaction which was never recorded. Equally, the subsequent issuance of a notice under section 271(1)(c) cannot cure the absence of the foundational satisfaction during the assessment proceedings. A notice must follow and give effect to the satisfaction recorded in the assessment order; it cannot become an independent source of jurisdiction or substitute one penal provision for another after the assessment proceedings have concluded.
12. The pendency of the quantum appeal does not dilute this jurisdictional defect. The survival of the quantum addition and the validity of the penalty proceedings are distinct, though sometimes interrelated, questions. If the penalty had been validly initiated, its fate might appropriately have awaited the outcome of the quantum appeal. However, where the very authority to proceed under section 271(1)(c) is absent, the subsequent result of the quantum appeal cannot retrospectively confer jurisdiction upon the Assessing Officer. Even if the addition were ultimately to be sustained, the penalty under section 271(1)(c) could survive only if it had been validly initiated in accordance with that provision. Conversely, the assessee’s prima facie contention that the alleged Bank of Baroda account did not belong to him, that he was a non-resident and that the assessment order refers to an altogether different assessment year and financial year, may have a material bearing on the quantum appeal; but we need not render any concluded finding on those matters in the present proceedings. They are pending consideration before the competent First Appellate Authority and must be decided independently on the evidence placed before it.
13. The non-compliance attributed to the assessee before the lower authorities also cannot cure the absence of jurisdiction. Such non-compliance may have a bearing on the appreciation of the explanation tendered by the assessee or on the merits of the quantum addition, but it cannot supply the statutory satisfaction required for initiation under section 271(1)(c). The learned CIT(A), while confirming the penalty, failed to address this foundational objection and proceeded primarily on the assessee’s failure to furnish supporting material. Once the assessment order disclosed that penalty had been initiated under section 271AAC alone, the validity of the subsequent levy under section 271(1)(c) was required to be examined before entering into the merits of the assessee’s explanation.
14. We are, therefore, unable to accept the plea that the present penalty appeal should merely be restored to the learned CIT(A) to await the result of the quantum appeal. A remand is not to be ordered as a matter of ritual where the undisputed record itself establishes that the proceedings suffer from an incurable jurisdictional infirmity. Since the assessment order expressly initiates penalty under section 271AAC and contains no satisfaction or direction whatsoever for initiation under section 271(1)(c), the penalty of ₹17,18,658 subsequently imposed under section 271(1)(c) travels beyond the jurisdiction assumed by the Assessing Officer and cannot be sustained. The defect is not procedural or clerical but inheres in the very assumption of jurisdiction under the penal provision ultimately invoked. Accordingly, the impugned penalty is directed to be deleted.
15. Before parting, we make it clear that our decision is confined to the validity of the penalty imposed under section 271(1)(c). Nothing stated in this order shall be construed as expressing any final opinion on the merits of the addition of ₹55,62,000, the ownership of the alleged Bank of Baroda account, the residential status of the assessee or the other factual and legal contentions raised in the quantum appeal. The learned First Appellate Authority shall decide the pending quantum appeal independently, on its own merits and in accordance with law, uninfluenced by the deletion of the penalty on the jurisdictional ground adjudicated herein.
16. In the result, the appeal of the assessee is allowed.
Order pronounced on 23rd September, 2026.
