Unexplained cash can lead to a notice from the Income Tax Department, and sometimes even a penalty. But what happens if the penalty is imposed under the wrong section?In one such case, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that a tax officer cannot impose a penalty under one provision of the Income Tax Act when the assessment order records that proceedings were being initiated under different provisions.
What the case is about
A man had not filed an income tax return for assessment year 2016-17. The tax department subsequently completed a reassessment without his participation and, on February 15, 2024, assessed his total income at Rs 55.62 lakh.The amount was treated as unexplained cash deposits in a bank account that the department attributed to him. The assessment order referred to Section 68 at one point and later treated the amount as unexplained money under Section 69. It also directed that tax be charged under Section 115BBE.Also Read | Retired bank employee got Rs 12.27 lakh leave encashment and claimed Rs 3 lakh exemption in 2020, but government later hiked limit to Rs 25 lakh in 2023; ITAT Chennai allows full tax exemptionAt the end of the assessment order, the officer recorded that penalty proceedings were being initiated under Sections 271AAC and 272A(1)(d).The tax department also imposed a penalty, but under Section 271(1)(c), which deals with concealment of income or furnishing inaccurate particulars of income. On August 21, 2024, the officer levied a penalty of Rs 17,18,658, calculated at 100% of the tax sought to be evaded.The man challenged the penalty, but the National Faceless Appeal Centre, Delhi, upheld it on January 23, 2026. He then approached the tribunal.
Why he won relief from penalty in ITAT
His objections went beyond the penalty. He argued that he was a non-resident and that the bank account did not belong to him. He also pointed out references in the assessment order to assessment year 2019-20 and financial year 2018-19, rather than the year under consideration.Those issues concern the underlying tax assessment, which the man has challenged separately. The tribunal did not decide them in this appeal. It focused on whether the officer could legally impose a penalty under Section 271(1)(c) when the assessment order had recorded the initiation of proceedings under other provisions.Also Read | Man opted for VRS after employer shut plant, got Rs 65.21 lakh and reported it as advance salary in ITR; Section 89 relief was denied, but ITAT Pune later ruled it a non-taxable capital receiptThe tribunal went back to the assessment order to establish exactly what the officer had recorded. Its finding was straightforward: the order mentioned Sections 271AAC and 272A(1)(d), but contained no corresponding direction to initiate penalty proceedings under Section 271(1)(c).That omission was central to the case. Section 271(1B) provides for deemed satisfaction in specified circumstances where an assessment order contains a direction to initiate penalty proceedings under Section 271(1)(c). The tribunal found that the necessary direction was missing here.The officer could not simply switch to a different penalty provision later, the tribunal held. Sections 271AAC and 271(1)(c) are distinct provisions, and initiating proceedings under one does not amount to initiating them under the other.There was also a problem with the penalty order itself. It stated that proceedings under Section 271(1)(c) had been initiated during the assessment. But the assessment order did not support that statement. The tribunal held that the later order could not make good the missing requirement or change what had been recorded earlier.Amit Gupta, Partner at Saraf and Partners says that the judgement emphasizes on the rule of the law with respect to distinction between penalty proceedings, vis-à-vis, underlying assessment proceedings.“It’s important to note that proceedings for imposition of penalty even though the same may emanate from assessment, are independent,” he tells TOI.According to Gupta, the judgement goes to highlight that the taxpayer can very well challenge the vires of the penalty proceedings independently and the merits/validity of the assessment or reassessment in pursuance of which penalty is levied can be challenged separately but cannot be the subject matter of penalty proceedings.Also Read | Woman declared Rs 67.4 lakh ancestral jewellery in her ITR which led to additions by tax department; ITAT Mumbai deleted it on basis of old records, but rejected her Rs 12 lakh HUF brokerage claimChapter XXI in the Income tax Act, 1961 enacts provisions for the levy, imposition and collection of penalty. It plays an integral role for the effective implementation of the tax statute and acts as an important deterrent for the evasion of tax by taxpayers.Section 271(1) makes appropriate provision to regulate levy of penalties on assessee in case of concealment of income or furnishing of inaccurate particulars of such income.“Accordingly, the existence of conditions stipulated in Section 271(1)(c) are a sine qua non for initiation of penalty proceedings under Section 271 and such existence should be clearly reflected in the underlying assessment order,” Gupta explains.“Furthermore, power to impose a penalty under section 271(1) hinges upon the satisfaction of the concerned officer in the course of assessment proceedings and it cannot be exercised if he is not satisfied and has not recorded his satisfaction about the existence of conditions,” he adds.Equally essential is the direction to initiate proceedings under Section 271(l)(c) which is pre-requisite for initiation of the penalty proceedings because of the deeming provision contained in Section 271(1B) of the ITA.In this backdrop, ITAT held the penalty initiation under Section 271(1)(c ) was without jurisdiction since the Assessing Officer had specifically initiated penalty proceedings under Section 271AAC (applicable to certain unexplained income taxable under Section 115BBE) and not under Section 271(1)(c) relating to concealment of income or furnishing inaccurate particulars.Also Read | Man paid Rs 1.73 crore for Gurgaon flat, waited over a decade without possession; builder alleges homebuyer bought it for commercial gain, consumer commission awards refund with 12% interest & Rs 4 lakh“Since the assessment order contained no satisfaction or direction for initiation of penalty under Section 271(1)(c), the subsequent levy under that provision was held to be invalid and an incurable jurisdictional defect since penalty provisions are distinct and cannot be interchanged. Initiation under Section 271AAC cannot be treated as initiation under Section 271(1)(c),” Gupta says.The tribunal explained that the validity of the penalty was a separate question from whether the Rs 55.62 lakh addition would ultimately stand. Even if the addition were upheld, the penalty could not survive without valid initiation under Section 271(1)(c).Nor did the tribunal see a reason to wait for the pending appeal over the addition. The tribunal therefore deleted the penalty of Rs 17,18,658.It’s important to note that the decision is limited to that penalty. It does not establish that the cash deposits were wrongly treated as income, or that the disputed bank account did not belong to the man.