The National Faceless Appeal Centre (NFAC) has deleted a penalty of ₹10,000 imposed under Section 272A(1)(d) of the Income Tax Act, 1961, after accepting that a senior citizen farmer’s limited education, rural background and lack of familiarity with electronic communication constituted a “reasonable cause” for his failure to respond to an online income-tax notice.

The Commissioner of Income Tax (Appeals) observed that the taxpayer’s explanation had neither been found false nor considered unsatisfactory. Applying the protection available under Section 273B of the Income Tax Act, the appellate authority held that the circumstances did not justify sustaining the penalty.

The appeal arose from a penalty order dated August 11, 2023, concerning Assessment Year 2018-19. The assessment had earlier been completed on February 26, 2023, under Section 147 read with Sections 144 and 144B of the Act, determining the taxpayer’s income at ₹5,98,002.

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During the reassessment proceedings, the taxpayer did not comply with a notice issued under Section 142(1) on September 29, 2022. Consequently, penalty proceedings were initiated through a notice issued under Section 274 read with Section 272A(1)(d) on February 23, 2023.

The Assessing Officer subsequently issued several show-cause notices during the penalty proceedings, including notices dated May 15, May 31, June 16 and July 22, 2023. The taxpayer submitted a reply on July 27, 2023, requesting that the penalty proceedings be kept in abeyance under Section 275 until the disposal of the related appeal.

The Assessing Officer did not accept the request and imposed a penalty of ₹10,000 for failure to comply with the notice issued under Section 142(1). Aggrieved by the penalty order, the taxpayer filed an appeal before the income-tax appellate authority.

During the appellate proceedings, the taxpayer admitted that he had failed to furnish a response to the notice and tendered an unconditional apology. He, however, maintained that the omission was inadvertent and arose from genuine practical difficulties rather than any deliberate intention to disregard the proceedings.

The taxpayer explained that he was a senior citizen and a small-scale farmer residing in Mardana village in the West Nimar district of Madhya Pradesh. He stated that he possessed only a basic understanding of income-tax laws and procedures due to his rural background and limited formal education.

It was further submitted that the taxpayer had minimal exposure to computers, the internet and other forms of digital communication. Since the income-tax notice was issued electronically and not served physically, he claimed that he remained unaware of the assessment proceedings until the final assessment order was passed and recovery proceedings commenced.

The taxpayer argued that his inability to respond was attributable to a lack of technical knowledge and familiarity with electronically conducted tax proceedings. His failure, according to the submissions, was neither wilful nor intentional and did not amount to a conscious or contumacious disregard of the law.

Reliance was placed on Section 273B, which provides that no penalty is to be imposed for specified failures, including those covered by Section 272A(1)(d), if the taxpayer proves that there was a reasonable cause for the failure.

The taxpayer also relied upon the Indore Income Tax Appellate Tribunal’s decision in Ankit Khandelwal v. NFAC, where the absence of physical service of notice was treated as a reasonable cause for non-compliance, thereby entitling the taxpayer to the benefit of Section 273B.

Reference was also made to the Ahmedabad Tribunal’s ruling in Bhogibhai Vithalbhai Patel v. ACIT, in which penalty under Section 272A(1)(d) was held to be unjustified in the case of a senior citizen whose failure to respond arose from lapses by his representative and unclear notices.

The taxpayer further cited the Supreme Court’s landmark ruling in Hindustan Steel Ltd. v. State of Orissa. In that decision, the Supreme Court held that penalty should not ordinarily be imposed merely because it is lawful to do so, particularly where the breach is technical or venial or arises from a bona fide belief.

It was also brought to the appellate authority’s attention that the taxpayer had already faced a substantial financial burden in the form of a demand of ₹5,12,442, including interest. He urged that the discretionary power to impose a penalty should be exercised judicially after considering his individual circumstances.

The appellate authority examined Section 272A(1)(d), under which a penalty of ₹10,000 may be imposed for each failure to comply with a notice issued under Section 142(1), a notice issued under Section 143(2), or a direction issued under Section 142(2A).

The NFAC noted that the purpose of the provision is to secure compliance with tax inquiries and investigations. Since the taxpayer had failed to respond to the notice under Section 142(1), the case technically fell within the scope of Section 272A(1)(d).

However, the appellate authority emphasised that Section 273B expressly protects a taxpayer from penalty where a reasonable cause for the failure is established. The applicability of the penalty provision, therefore, had to be considered alongside the statutory reasonable-cause exception.

Accepting the taxpayer’s explanation, the Commissioner of Income Tax (Appeals) observed that he was a senior citizen and small-scale farmer with limited education, little knowledge of income-tax procedures and minimal familiarity with electronic technology.

The appellate authority recorded that the taxpayer’s rural background, lack of technical proficiency and unfamiliarity with electronic communications constituted a genuine explanation for his inability to respond to the notice. It was also noted that there was no indication of a deliberate or wilful default.

Crucially, the NFAC found that the explanation submitted by the taxpayer had not been shown to be false or unsatisfactory. It consequently concluded that a reasonable cause existed for the alleged non-compliance.

“In the present case, the explanation furnished by the appellant has not been found to be false or unsatisfactory,” the appellate authority observed while granting relief.

Considering the overall circumstances and the protection afforded by Section 273B, the Commissioner of Income Tax (Appeals) directed the deletion of the ₹10,000 penalty imposed under Section 272A(1)(d).

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