Income tax penalty can not be imposed on the HUF which was no longer in existence and dissolved upon partition
In a recent judgment, Hon’ble Calcutta High Court has held that income tax penalty can not be imposed on the HUF which was no longer in existence. Even assuming an addition has been made in the assessment proceedings, that will not automatically warrant levy of penalty.
ABCAUS Case Law Citation:
4533 (2025) (04) abcaus.in HC
In the instant case, an appeal was filed by the Income Tax Department under Section 260A of the Income Tax Act, 1961 (the Act) against the order passed by the Income Tax Appellate Tribunal (Tribunal) for the Assessment Year 2014-15. By the impugned order the Tribunal had quashed the penalty order passed u/s 271(1)(c) holding the penalty proceedings was void ab-initio and bad in law.
The assessing officer completed the assessment for the assessment year under consideration under Section 143(3) of the Act. While completing the assessment, an addition was made on the ground of disallowance of capital loss on dissolution of the HUF.
In the assessment order, the Assessing Officer had stated that he is satisfied that the assessee had furnished inaccurate particulars of the income by claiming the said loss as deduction and hence penalty proceedings under Section 271(1)(c) of the Act was initiated.
The assessee filed a rectification petition under Section 154 of the Act in which it was pointed out that the AO had not considered the brought-forward long-term capital loss of previous years, 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.
No formal rectification order was passed by the Assessing Officer. At the same time, no tax was demanded from the assessee which suggested the entire issue was tax neutral. However, penalty proceedings were initiated, on the alleged ground that the assessee furnished inaccurate particulars of income by claiming capital loss on dissolution of the HUF.
In this regard, the assessee submitted that upon partition of the HUF in full form it mistakenly treated the assets in the hands of erstwhile coparceners to be a transfer. The Capital Gain had 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 had been done at cost/book value in tune with the provisions the provisions of Section 47 of the Income Tax Act 1961.
Not satisfied with the reply of the assessee, the Assessing Officer passed the order under Section 271(1)(c) of the Act, holding that the added amount was deemed to represent the income in respect of which particulars had been concealed.
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 coparceners. 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.
The assessee also placed reliance on various decisions, namely, the decision of the Hon’ble Supreme Court 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 High Court of Patna 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 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 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.
However, the NFAC rejected the appeal of the assessee. Before the Tribunal the assessee challenged the order, both on technical grounds as well as on merits.
The Tribunal first decided the technical aspect of the matter namely, as to whether the penalty can be imposed on the HUF which was no longer in existence.
Tribunal came to the conclusion that the assessee HUF was dissolved and the notice for carrying out the penalty proceedings as well as the penalty order had been issued in the name of a non-existent entity. This fact having not been controverted by the revenue, the Tribunal applied the decision of the Hon’ble Supreme Court and held that the entire penalty proceedings are ab initio void.
One more aspect which was noted by the learned Tribunal was 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, 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.
Before the Hon’ble High Court, the Revenue placed reliance on Section 171 of the Act which provides that a Hindu family hitherto assessed as undivided shall be deemed for the purposes of this Act to continue to be a Hindu undivided family, except where and in so far as a finding of partition has been given under this section in respect of the Hindu undivided family.
The Hon’ble High Court observed that 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.
The Hon’ble High Court further observed 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. The reason for which notice was issued for initiating penalty proceedings, was different from the conclusion which was arrived at by the Assessing Officer while passing the penalty order.
The Hon’ble High Court stated that law is well settled that the penalty proceedings are separate and independent from the assessment proceedings. Even assuming an addition had 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 income by the assessee and the assessee attempted to evade payment of tax.
The Hon’ble High Court pointed out that in the instant case, the assessee upon partition of the HUF in full form mistakenly treated the assets in the hands of erstwhile coparceners 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 was also one more ground for not to levy any penalty on the assessee.
The Hon’ble High Court held that the Tribunal was right in allowing the assessee’s appeal and setting aside the penalty order.
Accordingly, the appeal of the Revenue was dismissed.
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