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Calcutta High Court
Principal Commissioner Of Income Tax-9 vs Chandravadan Desai (Huf) on 16 April, 2025
Author: T.S. Sivagnanam
Bench: T.S. Sivagnanam
OD-1
IN THE HIGH COURT AT CALCUTTA
SPECIAL JURISDICTION (INCOME TAX)
ORIGINAL SIDE
ITAT/274/2024
IA NO: GA/1/2024
PRINCIPAL COMMISSIONER OF INCOME TAX-9, KOLKATA
VS.
CHANDRAVADAN DESAI (HUF)
BEFORE :
THE HON'BLE THE CHIEF JUSTICE T.S. SIVAGNANAM
AND
THE HON'BLE JUSTICE CHAITALI CHATTERJEE (DAS)
Dated : 16TH APRIL, 2025
Mr. Prithu Dudhoria, Adv. ...for the appellant
Mr. J. P. Khaitan, Sr. Adv.
Mr. Aritra Nag, Adv. ...for the respondent
HEARD ON : 16.04.2025
JUDGMENT DELIVERED ON : 16.04.2025
T.S. SIVAGNANAM, CJ. :
1. This appeal filed by the Department under Section 260A of the Income
Tax Act, 1961 (the Act) is directed against the order dated 17 th April,
2024 passed by the Income Tax Appellate Tribunal, “B” Bench, Kolkata
(Tribunal) in ITA No.674/Kol/2023 for the Assessment Year 2014-15.
2. The revenue has raised the following substantial questions of law for
consideration :
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“a) WHETHER the Learned Income Tax Appellate Tribunal (ITAT) was
justified in law in quashing the order passed u/s 271(1)(c) upon holding the
penalty proceedings as void ab-initio and bad in law ?
b) WHETHER the Learned Income Tax Appellate Tribunal (ITAT) was
justified in law in not discussing the merits of the case ?
c) WHETHER the Learned Income Tax Appellate Tribunal (ITAT) was
justified in law in not considering the provision of section 171(4) read with section
171(8) of the Income Tax Act, 1961 whereby the assessee would be liable for
penalty despite dissolution of the HUF ?”
3. We have heard Mr. Prithu Dudhoria, learned standing counsel appearing
for the appellant/Department and Mr. J. P. Khaitan, learned Senior
Advocate appearing for the respondent/assessee.
4. The assessing officer completed the assessment for the assessment year
under consideration under Section 143(3) of the Act by order dated
30.12.2016. While completing the assessment, an addition of
Rs.7,29,59,117/- was made on the ground of disallowance of capital loss
on dissolution of the HUF. In the assessment order, the Assessing Officer
has stated that he is satisfied that the assessee has furnished inaccurate
particulars of the income by claiming the said amount as deduction and
hence penalty proceedings under Section 271(1)(c) of the Act is initiated.
The assessee filed a rectification petition under Section 154 of the Act
dated 27.3.2017, in which it was pointed out that the total income has
been assessed at Rs.36,11,706/- by the Assessing Officer. However, the
brought-forward long-term capital loss of previous years amounting to
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Rs.58,93,223/- has not been considered, pursuant to which total income
would be nil. Therefore, the assessee stated that there would not be any
tax payable by the assessee. Necessary documents were also annexed to
the petition filed under Section 154. It appears that no formal orders
have been passed by the Assessing Officer in the petition filed under
Section 154 of the Act. At the same time, no tax has been demanded
from the assessee which would go to show that the entire issue is tax
neutral. Penalty proceedings were initiated, as noted above, on the
alleged ground that the assessee furnished inaccurate particulars of
income by claiming the said amount as deduction. In this regard, a
show-cause notice dated 23.11.2016 was issued to which the assessee
submitted their reply dated 5.12.2016 contending as follows :-
“Your assessee had computed capital gain/loss on sale of
shares which were held as Investment and Trading in the books as
on 31.03.2013 and any further purchase/sale of shares during the
F.Y. 2013-14. The Capital Gain has been computed on the assets
that were held by the HUF and/or acquired by HUF on its own. No
gain/loss has been computed on the assets distributed to its
members upon partition. Further, no capital gain/loss has
been computed by the assessee on the asset (shares)
transferred to its members on partition of said HUF. In view of
the fact that all the assets transferred to its members upon partition
of HUF no loss/gain have been computed as the said distribution
has been done at cost/book value in tune with the provisions the
provisions of Section 47 of the Income Tax Act 1961.”
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5. Though such was the stand taken by the assessee, the Assessing Officer
while passing the order under Section 271(1)(c) of the Act, dated
30.6.2017, held that the added amount is deemed to represent the
income in respect of which particulars have been concealed. Thus, the
reason for levying penalty is contrary to the reason for which the show-
cause notice was issued prior to commencement of the penalty
proceedings. This is a serious error which would result the order as a
nullity. The assessee carried the matter in appeal before the National
Faceless Appeal Centre (NFAC) contending that the order of penalty has
been passed on a non-existent person namely, HUF, which has been
dissolved and the properties have been partitioned to the erstwhile co-
parceners. Further, it was contended that the order of penalty is levied
on the ground of concealment of particulars of income, whereas the
penalty proceedings were initiated on the alleged ground of furnishing
inaccurate particulars. Further, the assessee contended that the
limitation for initiation of the proceedings expired on 30.6.2017 and
therefore, the entire proceedings are ab initio void. The assessee also
placed reliance on various decisions, namely, the decision of the Hon’ble
Supreme Court in CIT vs. Maruti Suzuki India Limited, 416 ITR 613,
wherein the Supreme Court held that the notice and/or the consequent
order issued in the name of the non-existent person renders the entire
proceedings and all consequent actions to be a nullity in the eye of law.
Reliance was also placed on the decision of the High Court of Patna in
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CIT vs. Sanichar Sah Bhim Sah, 27 ITR 307, wherein it was held that
when the assessee HUF will be completely partitioned, which was
acknowledged by the Assessing Officer in the assessment order passed
for the relevant year and after completion of assessment when the
Assessing Officer issued notice under Section 28(1)(c) and levied penalty
for concealment of income upon the HUF which was non-existent at the
material time, on appeal the penalty was cancelled. Reliance was also
placed on a decision of the High Court of Andhra Pradesh in the case of
Manhakali Subba Rao Mahankali Nageswara Rao vs. CIT, 31 ITR 867,
wherein it was held that the members of erstwhile HUF were not liable to
be penalized under Section 28 of the Act (1921) when the HUF was
partitioned before the issue of penalty notice under Section 28. The
assessee also pleaded that when the entire issue was tax neutral, the
question of imposition of penalty would not arise. In this regard reliance
was placed on the decision of the High Court of Gujarat in the case of CIT
vs. Gujarat Fertilizers & Chemicals Ltd, 36 taxmann.com 533, wherein it
was held that where an exercise of addition/disallowance ultimately
results in tax neutrality, no penalty is leviable under Section 271(1)(c) of
the Act. The contention which was raised by the assessee did not find
favour with the appellate authority and by order dated 9.5.2023, the
appeal was rejected. Challenging the same, the asseessee was on appeal
before the Tribunal. Though the assessee challenged the order, both on
technical grounds as well as on merits, the learned Tribunal after going
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through the facts of the case thought fit to decide the technical aspect of
the matter namely, as to whether the penalty can be imposed on the HUF
which is no longer in existence. After taking note of the facts as well as
the decision relied on by the assesee, the learned Tribunal came to the
conclusion that the assessee HUF was dissolved on 26.3.2014 and the
notice for carrying out the penalty proceedings as well as the penalty
order has been issued in the name of a non-existent entity. This fact
having not been controverted by the revenue, the learned Tribunal
applied the decision of the Hon’ble Supreme Court in Maruti Suzuki India
Limited (supra) and held that the entire penalty proceedings are ab initio
void. One more aspect which was noted by the learned Tribunal is that
the assessee did not challenge the addition made in the assessment
order as it was tax neutral. Apart from that, the revenue also did not
raise a demand on the assessee pursuant to the assessment order dated
30.12.2016, presumably on account of the fact that they were satisfied
with the case pleaded by the assessee in the rectification petition filed
under Section 154 of the Act dated 27.3.2017.
6. Mr. Prithu Dudhoria, learned standing counsel appearing for the
revenue, also placed reliance on Section 171 of the Act. This contention
was not raised by the revenue before the learned Tribunal nor was it one
of the grounds on which the appellate authority sustained the order of
penalty. Nonetheless, we have considered the said submission made by
the learned standing Counsel.
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7. Reference was made to sub-section (1) and sub-section (8) of Section 171
to support the stand of the revenue. Even assuming without admitting
that Section 171 could be relied on by the revenue, it goes without saying
that the individual members of the erstwhile HUF which has since been
dissolved and partitioned completely were never put on notice by the
Assessing Officer before initiating penalty proceedings. This goes to the
root of the matter as a person cannot be condemned without being
heard. Therefore, the argument by relying upon Section 171 does not
take the case of the revenue any forward. One more aspect which we
have taken note of is that partition of the HUF completely was accepted
by the Assessing Officer while completing the assessment under Section
143(3) of the Act and therefore, it will be too late for the revenue to now
turn back and say that they will not recognize the partition of the HUF in
full form. As already noted, the reason for which notice was issued for
initiating penalty proceedings, is different from the conclusion which was
arrived at by the Assessing Officer while passing the penalty order dated
30.6.2017. This is also yet another incurable defect which is called for
interference of the penalty order. At this juncture, we need to point out
that the law is well settled that the penalty proceedings are separate and
independent from the assessment proceedings. Even assuming an
addition has been made in the assessment proceedings, that will not
automatically warrant levy of penalty. There is a mandate cast on the
revenue to show with sufficient material that there was a concealment of
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income by the assessee and the assessee attempted to evade payment of
tax. In the instant case, the assessee upon partition of the HUF in full
form mistakenly treated the assets in the hands of erstwhile co-
parceners to be a transfer. This was subsequently ascertained during the
course of the assessment proceedings and the assessee put forth the
case to be a one of genuine mistake. If that be the case on facts, it is also
one more ground for not to levy any penalty on the assessee.
8. Thus, we are of the view that the learned Tribunal was right in allowing
the assessee’s appeal and setting aside the penalty order.
9. For the above reasons, the appeal filed by the revenue is dismissed and
the substantial questions of law are answered on the above terms against
the revenue.
10. Consequently, the stay application IA No: GA/1/2024 is also dismissed.
(T.S. SIVAGNANAM, CJ.)
I agree.
(CHAITALI CHATTERJEE (DAS), J.)
sm /SN
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