M/S. DRAIPL-MSKEL(JV),AHMEDABAD V. THE INCOME TAX OFFICER,WARD-9(2), AHMEDABAD

ITA 1605/AHD/2014

AI Insights

The case involves DRAIPL-KSKEL (JV), a joint venture engaged in infrastructure contracts, which appealed against a penalty of Rs.81,78,770 levied under section 271(1)(c) of the Income-tax Act, 1961. The penalty was based on disallowances made under sections 80IA(4) and 40(a)(ia) during the assessment year 2007-08. The Assessing Officer (AO) had disallowed a deduction claimed under section 80IA(4) on grounds that the assessee was merely a sub-contractor and not eligible for the deduction, and also disallowed certain expenses under section 40(a)(ia) for non-deduction of TDS. The Commissioner of Income Tax (Appeals) upheld the penalty, leading to the current appeal. The Tribunal's decision to set aside the penalty and remand the matter was based on the linkage between the quantum assessment and penalty proceedings, highlighting that the penalty cannot stand if the foundational assessment is unsettled.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 705876 (ITAT-AHMEDABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Assessment Year: 2007-2008
• Other Referred Cases: CIT v. Reliance Petroproducts Pvt. Ltd. (322 ITR 158)
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ABHIJIT
• Assessee Lawyers: DEEPAK RINDANI
• Keywords: Set aside; Opportunity of being heard; Retrospective amendment; Reassessment proceedings; TDS
• Section: 143(3); 271(1)(c); 40(a)(ia)

Judgement Text

"आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण,अहमदाबाद \bयायपीठ अहमदाबाद \bयायपीठ अहमदाबाद \bयायपीठ अहमदाबाद \bयायपीठ ‘B’ अहमदाबाद। अहमदाबाद। अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, AHMEDABAD ] ] BEFORE S/SHRI SANJAY GARG, JUDICIAL MEMBER AND MAKARAND V.MAHADEOKAR, ACCOUNTANT MEMBER ITA No.1605/Ahd/2014 Asstt.Year : 2007-08 DRAIPL-KSKEL (JV) 2nd Floor, “MSK” Passport Office to Panjarapole Rd. Ambawadi Ahmedabad 380 015. PAN : AAAAD 3825 B Vs. ITO, Ward-9(2) Ahmedabad. (Applicant) (Responent) Assessee by : Shri Deepak Rindani, AR Revenue by : Shri Abhijit, Sr.DR सुनवाई की तारीख/Date of Hearing : 26/06/2025 घोषणा की तारीख /Date of Pronouncement: 04/07/2025 आदेश आदेश आदेश आदेश/O R D E R PER MAKARAND V.MAHADEOKAR, AM: This appeal is filed by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals)–II, Ahmedabad [hereinafter referred to as “CIT(A)”] dated 03.02.2014, confirming the penalty of Rs.81,78,770/- levied by the Assessing Officer under section 271(1)(c) of the Income-tax Act, 1961 [hereinafter referred to as \"the Act\"] for A.Y. 2007–08. Facts in Brief 2. The assessee is a Joint Venture of M/s Dineshchandra R. Agarwal Infracon Pvt. Ltd. and M/s M.S. Khurana Engineering Ltd., constituted for execution of infrastructure contracts. For A.Y. 2007– ITA No.1605 /Ahd/2014 2 08, the assessee filed its return of income on 07.09.2007 declaring Nil income after claiming deduction of Rs.2,42,98,174/- under section 80IA(4) of the Act. The assessment was completed u/s 143(3) on 24.12.2009 determining total income at Rs.2,61,21,380/- after making the following additions: i. Disallowance of deduction u/s 80IA(4): Rs.2,42,98,174/- ii. Disallowance u/s 40(a)(ia): Rs.18,23,203/- 3. Penalty proceedings were initiated u/s 271(1)(c) for furnishing of inaccurate particulars of income in respect of both additions. After issuing show cause and considering the assessee’s replies dated 06.07.2010 and 29.02.2012, the AO levied minimum penalty of Rs.87,36,356/- being 100% of tax sought to be evaded. During the course of penalty proceedings on disallowance under section 80IA(4) the AO held that the assessee was only a sub-contractor of M/s Longjian Road & Bridge Co. Ltd., which had been awarded the project by NHAI. Accordingly, the assessee did not satisfy the conditions under section 80IA(4)(i)(b) which requires a direct agreement with Central/State Government or statutory authority. Relying on the Explanation inserted by Finance (No. 2) Act, 2009 with retrospective effect from 01.04.2000, the AO held the assessee was ineligible for deduction. On disallowance under section 40(a)(ia), the AO observed that interest payments made to SREI Infrastructure Finance Ltd. included financial charges liable for TDS under section 194A. As no tax was deducted, disallowance u/s 40(a)(ia) was made. The assessee’s defence that TDS was not deductible due to composite EMI payments was rejected. The AO noted that despite the legal restrictions being applicable and known to the assessee, it proceeded to claim deduction of Rs.2,42,98,174/- under section 80IA(4), which in the view of the AO constituted a deliberate and unjustified attempt to reduce its taxable income by furnishing inaccurate particulars. ITA No.1605 /Ahd/2014 3 According to the AO, the failure to deduct TDS despite being aware of the legal requirements amounted to a default attracting penal consequences under section 271(1)(c). Therefore, the AO held that the assessee furnished inaccurate particulars of income and levied minimum penalty of Rs.87,36,356/- under section 271(1)(c). 4. The CIT(A), in the appellate proceedings, held that the assessee’s claim under section 80IA(4) was not tenable, as the facts clearly showed the assessee was a sub-contractor and not a developer. Reliance was placed on the language of the Explanation inserted below section 80IA(13). On disallowance under section 40(a)(ia), the CIT(A) held that the assessee was liable to deduct TDS on financial charges, and failure to do so attracted the deeming fiction under section 271(1)(c), read with Explanation 1. The CIT(A) held that both disallowances — under section 80IA(4) and 40(a)(ia) were made after detailed examination of facts and law, and the assessee’s explanations in penalty proceedings were not bona fide. Though the assessee relied on the Supreme Court decision in CIT v. Reliance Petroproducts Pvt. Ltd. (322 ITR 158), the CIT(A) held that the said judgment did not apply to the facts under consideration. According to him, the assessee in this case had falsely claimed an inadmissible deduction and failed to discharge the onus under Explanation 1. He thus treated the claim as falling under “furnishing of inaccurate particulars” rather than a mere unsustainable legal claim. 5. Aggrieved by the order of CIT(A), the assessee is in appeal before us raising following grounds: 1. The Learned Commissioner of Income Tax (Appeals) - II, Ahmedabad erred in confirming the levy of penalty of Rs.81,78,770/- levied u/s. 271(1)(c) of the Act as a result of disallowance of claim of deduction of income of the appellant u/s. 80IA(4)of the Act. ITA No.1605 /Ahd/2014 4 2. The Learned Commissioner of Income Tax (Appeals) - II, Ahmedabad erred in upholding that inaccurate particulars of income were furnished by the appellant. 3. The Learned Commissioner of Income Tax (Appeals) - II, Ahmedabad failed to appreciate that the appellant had substantiated its explanation for claiming deduction u/s. 80-IA(4) of the Act. 4. The appellant craves leave to add, amend, alter and withdraw any ground of appeal anytime up to the hearing of this appeal. 6. During the course of hearing, the Ld. AR brought to our notice that in the assessee’s quantum appeal in ITA No. 2449/Ahd/2010, the Co-ordinate Bench vide order dated 29.04.2025 has restored the matter to the file of the AO. The AR therefore prayed that the present penalty proceedings be also restored to the file of the AO, as the levy of penalty under section 271(1)(c) is contingent upon the outcome of the quantum proceedings. The Ld. DR raised no objection. 7. We have considered rival contentions and carefully perused the material available on record. It is an admitted position that the quantum assessment order, which forms the basis of the present penalty proceedings, has been set aside by the Co-ordinate Bench in ITA No. 2449/Ahd/2010, vide order dated 29.04.2025. The Bench directed the Assessing Officer to verify the nature of contract, flow of payments, and whether the assessee was substantively acting as a developer and not a sub-contractor and then pass a de novo assessment order in accordance with law. 8. It is a well-established legal principle that the validity and sustainability of penalty proceedings under section 271(1)(c) are intrinsically linked to the outcome of the quantum assessment. The very foundation of a penalty proceeding rests upon the existence of a definitive and conclusive finding in the quantum proceedings that the ITA No.1605 /Ahd/2014 5 assessee has either concealed income or furnished inaccurate particulars. If that foundational determination itself is unsettled or subject to further verification, the superstructure of penalty imposed upon it cannot logically be sustained in isolation. 9. When the assessment or disallowance forming the basis of the penalty is set aside, either for fresh examination or for lack of proper inquiry, the resultant legal position is that there no longer exists a definitive determination of concealment or inaccuracy. In such a scenario, continuing with penalty proceedings without the re- established findings in quantum would amount to prejudging the outcome of an issue that is yet to be conclusively determined. It is therefore necessary, both as a matter of fairness and legal coherence, that the penalty proceedings also be restored to the same stage and re-examined in alignment with the final outcome of the quantum proceedings. 10. Moreover, penalty under section 271(1)(c) is not an automatic consequence of an addition or disallowance; it requires a deliberate satisfaction of the conditions stipulated under the provision. Where the quantum addition is itself subject to re-examination, the prerequisite conditions for invoking penalty stand unresolved. As such, the fate of the penalty proceedings must await the finality of the quantum assessment. Accordingly, when the substantive matter is remanded for fresh adjudication, it becomes imperative that the penalty proceeding be similarly remanded, so that both issues can be adjudicated in harmony and in accordance with the ultimate determination of the facts and law. 11. Therefore, in the interest of justice and in view of the dependency of penalty on quantum determination, we deem it ITA No.1605 /Ahd/2014 6 appropriate to set aside the penalty order to the file of the Assessing Officer to be adjudicated afresh in accordance with the outcome of the quantum reassessment proceedings. 12. The impugned order of the CIT(A) is hereby set aside. The matter is restored to the file of the Assessing Officer, who shall re-examine the issue of levy of penalty u/s 271(1)(c) after passing the reassessment order in compliance with the quantum remand direction of the Co-ordinate Bench dated 29.04.2025. The assessee shall be given a proper opportunity of being heard before passing such order. 13. In the result the appeal of the assessee is allowed for statistical purposes. Order pronounced in the Court on 4th July, 2025 at Ahmedabad. Sd/- Sd/- (SANJAY GARG) JUDICIAL MEMBER (MAKARAND V. MAHADEOKAR) ACCOUNTANT MEMBER Ahmedabad, dated 04/07/2025 "