ITAT sets aside penalties for alleged non-compliance with notices

Background

The Mumbai “F” Bench of the Income Tax Appellate Tribunal has deleted penalties levied on Shamji Kanji Zaru for multiple assessment years, holding that penalty cannot be imposed for a mere technical or venial breach when the returned income has been fully accepted and no incriminating material was found. The assessee had challenged penalties of ₹20,000 levied for each assessment year from AY 2015–16 to AY 2021–22 for alleged non-compliance with notices issued under Sections 143(2) and 142(1) of the Income-tax Act. The assessments were completed under Section 153C read with Section 144, but in every year, the Assessing Officer accepted the returned income without making any additions and raised no tax demand.

The assessee explained that the notices were sent to an email address belonging to a relative, resulting in non-communication of the notices. It was argued that the lapse was inadvertent, not wilful, and did not affect the outcome of the assessments.

Penalty unjustified where breach is technical and causes no prejudice

Allowing the appeals, the Tribunal noted that the assessments for all years were completed accepting the returned income and that no incriminating material was found during the proceedings. It held that even if notices were not complied with, such non-compliance had no bearing on the finalisation of assessments. Relying on the Supreme Court’s decision in Hindustan Steel Ltd. v. State of Orissa and several ITAT precedents, the Bench reiterated that penalty proceedings are quasi-criminal in nature and penalties should not be imposed for technical or venial breaches, particularly in the absence of deliberate defiance of law. The Tribunal concluded that levying penalties merely for procedural non-compliance, when assessments resulted in no additions or tax demand, violated principles of natural justice. Accordingly, it directed deletion of penalties for all the assessment years involved and allowed the appeals in favour of the assessee.