When quantum appeal restored, penalty can’t be levied for non-payment of demand

When quantum appeal stands restored to the AO, penalty can not be levied u/s 221(1) of the Income Tax Act for non -payment of the demand.

In a recent judgment, Allahabad ITAT has held that when the quantum appeal stands restored to the file of the AO and the demand has been vacated, the question of levying penalty under section 221(1) of the Income Tax Act 1961 for non -payment of the said demand does not arise.

ABCAUS Case Law Citation:
5077 (2026) (03) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming confirmed a penalty of Rs. 1 Lac levied by the Assessing Officer under section 221 of the Income Tax Act, 1961 (the Act).

The assessment order was passed under section 153D(1)(B) of the Act r.w.s. 143(3). While passing the assessment order, the AO had made some additions and assessed the income of the assessee instead of the declared income.

After assessment, a demand had been raised which became due for payment. Subsequently, a notice under section 221(1) had been issued to the assessee and subsequently the AO had also allowed installments, vide an order. The AO recorded that three more notices under section 221(1) were issued followed by a show cause notice under section 276C(2). However, the assessee expressed its inability to make the payment. Subsequently, further notices under section 221(1) were issued.

However, assessee did not make any payment within the allowed time limit. Therefore, the AO after examining the ITR which showed that the assessee had sundry debtors of large amount held that the assessee had sufficient funds but was willfully avoiding the payment of tax.

Accordingly, he decided to impose a penalty (being the average 10% of balance demand) by treating the assessee in default under section 220(2) of the Income Tax Act. 

Before the Tribunal, the assessee submitted that the penalty was not leviable because the ITAT had restored the assessment back to the file of the AO, the demand no longer survived and therefore, the penalty was not maintainable.

The Revenue did not dispute the fact that following the restoration of the assessment back to the file of the AO, the earlier demand did not survive.

The Tribunal held that since the quantum appeal stood restored to the file of the AO and the demand had been vacated, the question of levying penalty under section 221(1) for non -payment of the said demand does not arise.

Therefore, the penalty was deleted. 

Download Full Judgment Click Here >>

• After notice u/s 143(2) is issued, processing u/s 143(1) is not permissible
• Assessment Order without digital or manual signature is non-est and illegal
• Once ITR is filled in response to notice u/s 148 though late, notice u/s 143(2) is must – ITAT
• Petitioner was not disqualified in tender for giving EMD by way of FD not DD
• State Bank of India elects four Directors in its Central Board