Calcutta High Court Upholds Quashing Of ₹7.29 Crore Penalty Imposed On Dissolved HUF

A division bench of Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das) upheld the ITAT order which had relied on a Supreme Court ruling to declare the penalty action void-ab-initio.

The Top Court had in CIT vs. Maruti Suzuki India Limited held that notice and/or consequent order issued in the name of a non-existent person renders the entire proceedings and all consequent actions to be a nullity in the eye of law.

The penalty proceedings were initiated against the HUF under Section 271(1)(c) of the Income Tax Act, 1961 for allegedly furnishing inaccurate particulars of income, by claiming the said amount as deduction.

The Assessing Officer later passed an order confirming the penalty and held that the added amount is deemed to represent the income in respect of which particulars have been concealed.

The assessee contended that the order of penalty was passed on a non-existent person namely, HUF, which has been dissolved and the properties have been partitioned to the erstwhile coparceners.

Reliance was also placed on a decision of Andhra Pradesh High Court in Manhakali Subba Rao Mahankali Nageswara Rao vs. CIT, wherein it was held that the members of erstwhile HUF were not liable to be penalized when the HUF was partitioned before the issue of penalty notice.

Further, it was contended that the order levied penalty on the ground of concealment of particulars of income, whereas the penalty proceedings were initiated on the alleged ground of furnishing inaccurate particulars.

The ITAT had come 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 was issued in the name of a non-existent entity.

The High Court was also of the view that the learned Tribunal was right in allowing the assessee's appeal and setting aside the penalty order. It observed,

“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.”

It also noted that 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,” the Court said.

It also pointed out that 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 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 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 is also one more ground for not to levy any penalty on the assessee,” the Court said and dismissed Revenue's appeal.

Appearance: Mr. Prithu Dudhoria, Adv. for the appellant; Mr. J. P. Khaitan, Sr. Adv. Mr. Aritra Nag, Adv. for the respondent

Case title: Principal Commissioner Of Income Tax-9, Kolkata Vs. Chandravadan Desai (HUF)

Case no.: ITAT/274/2024

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