HC Holds Time-Barred Assessment Cannot Sustain Penalty Under Section 271(1)(c)

The Bombay High Court quashed a penalty of Rs 12.11 lakh levied under Section 271(1)(c) of the Income Tax Act, holding that once the Assessing Officer failed to pass an Order Giving Effect (OGE) within the statutory time limit, the assessment proceedings abated and no penalty could survive. The Court held that when the assessment itself ceases to exist in the eyes of law, the very foundation for penalty proceedings also disappears.

The dispute arose after Global Hospitality Licensing SARL, a Luxembourg-based company providing centralized marketing services to Marriott hotels, filed its return for AY 2009-10 declaring nil income and claimed that receipts under the International Marketing Program Participation Agreement (IMPPA) were not taxable in India. During scrutiny, the Assessing Officer treated the receipts as business income taxable at 40%, denied TDS credit, raised a tax demand and initiated penalty proceedings under Section 271(1)(c) for concealment of income and furnishing inaccurate particulars.

In appeal, the Commissioner of Income Tax (Appeals) held that the IMPPA receipts were taxable as royalty, directed the Assessing Officer to apply the beneficial tax rate, verify and grant TDS credit, and provide the assessee an opportunity of hearing before passing an Order Giving Effect. However, no OGE was passed within the limitation period prescribed under Sections 153(5) and 153(3). Despite this, the Assessing Officer proceeded to revive the penalty proceedings and imposed a penalty of Rs.12.11 lakh.

Before the High Court, the assessee contended that failure to pass the OGE within the prescribed period resulted in the assessment proceedings becoming time-barred, leaving no legal basis for continuation of the penalty proceedings.

“An Order Giving Effect passed pursuant to appellate directions is not a mere administrative exercise but a quasi-judicial assessment order determining the assessee’s final tax liability.”

The High Court observed that the appellate directions required the Assessing Officer to re-characterise the income, apply a different tax rate, verify TDS credit and grant an opportunity of hearing. These directions required a fresh quasi-judicial determination and, therefore, the OGE had to be passed within the statutory time limit. Since the Assessing Officer failed to do so, the assessment proceedings abated and the income declared in the return stood accepted.

Rejecting the Revenue’s contention that the delay could be cured by payment of interest under Section 244A(1A), the Court held that the Department cannot take advantage of its own failure to comply with mandatory statutory timelines or validate a time-barred assessment by paying interest.

“Once the assessment no longer survives and the returned income becomes the accepted income, there remains no tax sought to be evaded and the penalty proceedings cannot be sustained.”

Thus, the High Court quashed the penalty order and the consequential demand notice, holding that the penalty under Section 271(1)(c) had no independent existence once the assessment itself had become unenforceable. The Court also directed the Revenue to refund any amount recovered pursuant to the assessment or penalty proceedings along with applicable interest.