The Delhi High Court has quashed a penalty of over ₹9.30 crore imposed under Section 270A of the Income Tax Act, 1961, holding that once the Income Tax Appellate Tribunal (ITAT) had set aside the underlying assessment order, the very basis for imposing a penalty ceased to exist.
The bench of Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta further observed that the Assessing Officer (AO) acted arbitrarily by proceeding with the penalty despite being aware of the Tribunal’s decision.
The dispute arose from an assessment order, wherein the Assessing Officer made an adjustment relating to Fees for Technical Services (FTS) and subsequently initiated penalty proceedings under Section 270A, alleging misreporting of income.
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Following the assessment, Mixpanel challenged the additions before the Income Tax Appellate Tribunal (ITAT). On 21 May 2025, the Tribunal allowed the company’s appeal, setting aside the assessment order and deciding the FTS issue in favour of the assessee.
Despite the ITAT’s ruling, the Assessing Officer continued with the penalty proceedings and, on 31 March 2026, imposed a penalty amounting to ₹9,30,24,492, prompting the company to approach the Delhi High Court through writ petitions.
Appearing for the petitioner, counsel contended that the penalty order was without jurisdiction and legally unsustainable, as it was entirely founded upon an assessment order that had already been nullified by the ITAT.
The petitioner informed the Court that the Tribunal’s order had been specifically brought to the notice of the Assessing Officer during the penalty proceedings, along with a request to drop the proceedings. Nevertheless, the AO proceeded to impose the penalty.
It was argued that once the assessment itself had been set aside, there remained no basis for alleging either under-reporting or misreporting of income, making the penalty order arbitrary and illegal.
The Income Tax Department opposed the writ petitions, arguing that the assessee had an alternative statutory remedy by way of an appeal before the Commissioner of Income Tax (Appeals). According to the department, the High Court ought not to exercise its extraordinary jurisdiction under Articles 226 and 227 of the Constitution.
The Department also submitted that it was in the process of challenging the ITAT’s order before the High Court when the penalty order was passed. It argued that the Assessing Officer proceeded with the penalty in anticipation of obtaining a stay against the Tribunal’s decision.
The petitioner, however, pointed out that although an appeal had been filed, no stay order had been granted, nor had any stay application been moved by the Department.
Rejecting the Department’s objections, the Division Bench held that the case warranted exercise of writ jurisdiction because the Assessing Officer had acted arbitrarily.
The Court noted that during the pendency of the penalty proceedings, the ITAT had already set aside both the assessment order and the adjustment relating to Fees for Technical Services. Consequently, the very foundation of the tax demand had disappeared.
The Bench observed that once the assessment itself no longer survived, the allegation of misrepresentation or misreporting of income automatically vanished.
The Court emphasized that the findings of the ITAT, being the superior fact-finding authority, were binding upon the Assessing Officer, who was obligated to give effect to the Tribunal’s order rather than proceed with the penalty.
A significant aspect of the judgment concerns the Court’s interpretation of Section 275(1A) of the Income Tax Act.
The Bench observed that the provision clearly contemplates that penalty proceedings should not be finalized while appellate proceedings are pending. The legislative scheme necessarily requires the Assessing Officer to await the outcome of the appeal and thereafter give due effect to the appellate decision.
According to the Court, once the ITAT allowed the assessee’s appeal and eliminated the assessment itself, the Assessing Officer ought to have dropped the penalty proceedings instead of concluding them.
Allowing the writ petitions, the Delhi High Court set aside the penalty order dated 31 March 2026 along with the consequential demand notice.
The Court clarified that if the Department ultimately succeeds in its challenge against the ITAT’s order, it would remain at liberty to initiate appropriate proceedings in accordance with law.
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