Penalty for Wrong Assessment Year Quashed: Tribunal Must Reconsider Tax Penalty Mix-Up

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Case Name

M/s. SSS PROJECTS LTD. (Rep. by its Managing Director Sri. K. Sathish Kumar) vs. Deputy Commissioner of Income Tax (High Court of Karnataka)

ITA No. 249 of 2011

Date: 1st February 2021

Key Takeaways

• Penalty must match the correct assessment year: The court found that imposing a penalty for the wrong year is not a minor mistake that can be ignored under Section 292B (of Income Tax Act, 1961).
• Section 292B (of Income Tax Act, 1961) has limits: This section protects against clerical errors, but not substantive mistakes like penalizing the wrong year.
• Case remitted for fresh decision: The Tribunal must reconsider the penalty, and all legal questions remain open for argument.
• No opinion on merits: The High Court did not decide whether financial incapacity excuses penalty, leaving that question open.

Issue

Does a penalty under Section 221 (of Income Tax Act, 1961) remain valid if it is imposed for the wrong assessment year, and can such an error be excused under Section 292B (of Income Tax Act, 1961)?

Facts

• Who’s involved?
• M/S. SSS Projects Ltd. (the assessee) and the Deputy Commissioner of Income Tax (the revenue).
• What happened?
• The company filed its tax return for 2008-09, paid the assessed tax, and believed it was compliant.
• The Assessing Officer, however, imposed a penalty of ₹50,00,000 for 2008-09, apparently based on facts from 2007-08, when the company had defaulted due to financial hardship.
• The company appealed, but both the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld the penalty.
• The company then appealed to the High Court, arguing that the penalty was wrongly imposed for 2008-09, not 2007-08, and that this was not a mere clerical error.

Arguments

Assessee (M/S. SSS Projects Ltd.)

• The penalty for 2008-09 was unjustified because there was no default that year; the default was in 2007-08.
• The authorities failed to consider this argument and simply maintained the penalty.
• The error was not a minor technicality but a substantive mistake, so Section 292B (of Income Tax Act, 1961) (which excuses clerical errors) should not apply.

Revenue (Deputy Commissioner of Income Tax)

• The company admitted to defaulting in 2007-08 due to lack of funds.
• The wrong year mentioned in the penalty order was just a typographical error, which Section 292B (of Income Tax Act, 1961) covers.
• Cited legal precedents to argue that such mistakes do not invalidate proceedings if the intent and substance are correct.

Key Legal Precedents

• Section 221 (of Income Tax Act, 1961): Deals with penalties for default in payment of tax.
• Section 292B (of Income Tax Act, 1961): States that proceedings are not invalid due to minor mistakes, defects, or omissions if the substance is correct.
• SKY LIGHT HOSPITALITY LLP vs. ASSISTANT COMMISSIONER OF INCOME-TAX (2018) 92 93 (SC): Supreme Court held that a wrong name in a notice is a clerical error that can be corrected under Section 292B (of Income Tax Act, 1961).
• COMMISSIONER OF INCOME-TAX vs. JAGAT NOVEL EXHIBITORS § LTD. (2012) 18 138 (DELHI): Delhi High Court held that technical mistakes do not invalidate proceedings if there’s no confusion or prejudice.
• COMMISSIONER OF INCOME TAX, SILIGURI vs. SHYAMAL SARKAR (2017) 84 146 (CALCUTTA): Calcutta High Court reinforced the presumption that official acts are regularly performed.

The High Court distinguished these cases, saying they only apply to minor errors, not substantive mistakes like penalizing the wrong year.

Judgement

• Decision: The High Court quashed the Tribunal’s order upholding the penalty for 2008-09 and sent the case back to the Tribunal for a fresh decision.
• Reasoning: The penalty was imposed for the wrong assessment year, which is not a minor error covered by Section 292B (of Income Tax Act, 1961). The authorities had relied on facts from 2007-08 but penalized the company for 2008-09, which was incorrect.
• Orders: The Tribunal must reconsider the case, and all legal questions remain open for argument. The High Court did not express any opinion on whether financial incapacity excuses penalty or on the merits of the case.

FAQs

Q1: Why was the penalty quashed?

A: Because it was imposed for the wrong assessment year (2008-09 instead of 2007-08), which is a substantive error, not a minor clerical one.

Q2: What is Section 292B (of Income Tax Act, 1961), and why didn’t it save the penalty?

A: Section 292B (of Income Tax Act, 1961) protects against minor mistakes in tax proceedings, but the court said it doesn’t cover major errors like penalizing the wrong year.

Q3: Did the court decide if financial incapacity excuses penalty?

A: No, the court left that question open for the Tribunal to decide.

Q4: What happens next?

A: The Tribunal will reconsider the penalty, and both parties can argue all legal points afresh.

Q5: What’s the significance of this case?

A: It clarifies that penalties must be imposed for the correct assessment year, and substantive errors can’t be brushed aside as technicalities.

This appeal under Section 260-A (of Income Tax Act, 1961), 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the assessee. The subject matter of the appeal pertains to the Assessment Year 2008-09. The appeal was admitted by a Bench of this Court vide order dated 01.08.2012 on the following substantial question of law:

"Whether the financial incapacity of an assessee to pay the tax does not warrant levy of penalty under Section 221 (of Income Tax Act, 1961)?"

2. Facts leading to filing of this appeal briefly stated are that the assessee is a company. The assessee filed its return of income for the Assessment Year 2008-09 declaring an income of Rs.4,07,660/-. The tax payable on the aforesaid income was assessed at Rs.1,37,619/- which was duly paid by the assessee. The Assessing Officer, however, vide order dated 09.02.2009, levied the penalty of Rs.50,00,000/- for the Assessment Year 2008-09. The assessee further pleaded that it appears that the Assessing Officer had considered the facts of the case for the Assessment Year 2007-08 for levying the penalty for Assessment Year 2008-09 and passed an order under Section 221 (of Income Tax Act, 1961) and raised a demand of Rs.50,00,000/-. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals), who by an order dated 09.02.2010, dismissed the appeal preferred

by the assessee. The assessee thereupon filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal' for short). The Tribunal, by an order dated 14.03.2011, dismissed the appeal preferred by the assessee. In the aforesaid factual background, the assessee has filed this appeal.

3. Learned counsel for the assessee submitted that

even though the assessee had taken a specific ground before

the Commissioner of Income Tax (Appeals) as well as the

Tribunal that the assessee has not committed any default in

the Assessment Year 2008-09, the aforesaid ground was not

adjudicated either by the Commissioner of Income Tax

(Appeals) or by the Tribunal and the order of the Assessing

Officer under Section 221 (of Income Tax Act, 1961) has been maintained. It

is further submitted that the action against the assessee

under Section 221 (of Income Tax Act, 1961) has been taken while taking

into account the facts of the case for the Assessment Year

2007-08 and the demand dated 09.02.2009 has been issued

in respect of Assessment Year 2008-09. It is submitted that

levying of penalty under Section 221 (of Income Tax Act, 1961) suffers from

the vice of non-application of mind and since the specific

ground which has been raised by the assessee has not been

adjudicated by the Commissioner of Income Tax (Appeals) as

well as the Tribunal, the matter deserves to be remitted to

the authorities for decision afresh in accordance with law. It

is also urged that invoking the provisions of Section 221 (of Income Tax Act, 1961) of

the Act is without jurisdiction for non-payment of self-

assessment tax partly, under Section 140A(3) (of Income Tax Act, 1961).

4. On the other hand, learned counsel for the revenue

has invited our attention to paragraph 21(b) of the

memorandum of appeal and has submitted that infact in the

memorandum of appeal itself, the assessee has admitted

that it had committed a default for the Assessment Year

2007-08 in respect of demand of tax on account of paucity of

funds. It is also submitted that on account of typographical

error in the orders passed by the Assessing Officer,

Commissioner of Income Tax (Appeals) and the Tribunal,

reference has been made to the Assessment Year 2008-09

whereas on admitted facts, the penalty has been levied

under Section 221 (of Income Tax Act, 1961) in respect of the Assessment

Year 2007-08. Learned counsel for the revenue has also

referred to Section 292B (of Income Tax Act, 1961) and has submitted that

merely because there is a mistake in mentioning the year of

assessment, the orders cannot be invalidated. In support of

aforesaid submission, reference has been made to Section

292B of the Act as well as the decision of the Supreme Court

in 'SKY LIGHT HOSPITALITY LLP Vs. ASSISTANT

COMMISSIONER OF INCOME-TAX' (2018) 92

TAXMANN.COM 93(SC), decision of Delhi High Court in

'COMMISSIONER OF INCOME-TAX Vs. JAGAT NOVEL

EXHIBITORS (P) LTD. (2012) 18 TAXMANN.COM 138

(DELHI) and decision of Calcutta High Court in

'COMMISSIONER OF INCOME TAX, SILIGURI Vs.

SHYAMAL SARKAR' (2017) 84 TAXMANN.COM 146

(CALCUTTA).

5. We have considered the submissions made on both

sides and have perused the record. Section 292B (of Income Tax Act, 1961)

on which reliance has been placed by the learned counsel for

the revenue, has been reproduced below for the facility of

reference:

"292B. Return of income, etc., not to be

invalid on certain grounds.

No return of income, assessment, notice,

summons or other proceeding, furnished or made

or issued or taken or purported to have been

furnished or made or issued or taken in

pursuance of any of the provisions of this Act

shall be invalid or shall be deemed to be invalid

merely by reason of any mistake, defect or

omission in such return of income, assessment,

notice, summons or other proceeding if such

return of income, assessment, notice, summons

or other proceeding is in substance and effect in

conformity with or according to the intent and

purpose of this Act."

From close scrutiny of Section 292 (of Income Tax Act, 1961) B of the Act, it is

evident that no return of income, assessment, notice,

summons or other proceeding, furnished or made or issued

or taken or purported to have been furnished or made or

issued or taken in pursuance of any of the provisions of this

Act shall be invalid or shall be deemed to be invalid merely

by reason of any mistake, defect or omission in such return

of income, assessment, notice, summons or other proceeding

if such return of income, assessment, notice, summons or

other proceeding is in substance and effect in conformity with

or according to the intent and purpose of this Act. In other

words, any clerical or typographical error or omission in the

return of income, assessment, notice, summons or other

proceeding shall not invalidate the proceedings. The

Supreme Court dealt with the aforesaid provision in SKY

LIGHT HOSPITALITY LLP, supra and held that merely

wrong mention of a name in the notice amounts to clerical

error which could be corrected under Section 292B (of Income Tax Act, 1961) of the

Act. Similarly, the Delhi High Court in the case of

COMMISSIONER OF INCOME TAX, supra has held that

when there is no confusion or prejudice caused due to non-

observance of technical formalities, the proceedings cannot

be invalidated and therefore, a defective notice to an

assessee under Section 292B (of Income Tax Act, 1961) is not invalid. In

COMMISSIONER OF INCOME-TAX, SILGURI, supra, the

High Court of Calcutta has held that there is a presumption in

law that all official and judicial acts were regularly performed

and presumption is reinforced by the admitted position in the

facts of that case. The aforesaid decisions have no

application to the facts of the case for the reasons stated

hereinafter.

6. From the order of penalty, it is evident that same

refers to Assessment Year 2008-09. The aforesaid order has

been affirmed by the Commissioner of Income Tax (Appeals),

by which the penalty was levied by the Assessing Officer in

respect of Assessment Year 2008-09. Similarly, the Tribunal

vide order dated 14.03.2011, has held that the penalty has

been levied in respect of Assessment Year 2008-09. From

perusal of Annexure-B annexed with the memorandum of

appeal, it is evident that the assessee has paid tax in respect

of Assessment Year 2008-09. It is also not in dispute that

admittedly the assessee has committed a default in respect

of Assessment Year 2007-08 and did not pay the tax on

account of financial hardship. However, the authorities under

the Act have taken into account the fact in respect of the

Assessment Year 2007-08 and have held the assessee to be

in default in respect of Assessment Year 2008-09 and have

created the penalty under Section 221 (of Income Tax Act, 1961) in respect

of Assessment Year 2008-09. The aforesaid mistake, if any,

is not same under Section 292B (of Income Tax Act, 1961) under which only

clerical error or accidental omissions can be protected.

Therefore, the decisions on which reliance has been placed

by the learned counsel for the revenue, has no application to

the factual matrix of the case.

7. In view of preceding analysis, we have no option but

to quash the order dated 14.03.2011 passed by the Tribunal

and remit the matter to the Tribunal. Needless to state that

it will be open for the parties to urge their contentions before

the Tribunal and all questions of law are kept open to be

raised before the Tribunal. It is also made clear that this

Court has not expressed any opinion on the merits of the

case by either of the parties. Therefore, in the fact situation

of the case, it is not necessary for us to answer the

substantial question of law which has been framed by this

Court.

In the result, the appeal is disposed of.

Sd/-

JUDGE

Sd/-

JUDGE