The Karnataka High Court has set aside an income tax penalty order passed under Section 270A of the Income Tax Act, 1961, observing that penalty proceedings should not be completed while the related quantum appeal is pending adjudication.
The bench of Justice B.M. Shyam Prasad held that the principle must prevail in the circumstances of the case, even though the taxpayer had failed to respond to the show-cause notice by furnishing details of the pending appellate proceedings.
The dispute arose from an assessment order dated March 17, 2025, concerning Assessment Year 2020-21.
The taxpayer challenged the assessment order before the Commissioner of Income Tax (Appeals). The first appellate authority decided the appeal on September 10, 2025.
Aggrieved by the appellate order, the taxpayer approached the Income Tax Appellate Tribunal’s Bengaluru “A” Bench.
The High Court was informed that the ITAT heard the taxpayer’s appeal on February 26, 2026, and subsequently restored the matter to the Commissioner of Income Tax (Appeals) for fresh consideration on merits.
According to the taxpayer, the outcome of the restored appeal would also directly affect the allegation of misreporting forming the basis of the penalty proceedings under Section 270A.
Despite the restoration of the quantum appeal, the Assessment Unit passed the penalty order on March 27, 2026. A consequential demand notice under Section 156 was also issued on the same date.
Appearing for the taxpayer, counsel submitted that the penalty order could not be allowed to stand when the underlying assessment dispute had been restored for reconsideration.
The taxpayer argued that the question of whether there was any misreporting of income would necessarily depend upon the final outcome of the appeal pending before the Commissioner of Income Tax (Appeals).
The department opposed the petition by pointing out that the taxpayer had not responded to the show-cause notice dated March 20, 2026.
It was contended that the taxpayer failed to place the details of the pending appellate proceedings before the authority during the penalty proceedings.
The High Court, however, held that this omission would not justify completing the penalty proceedings while the related appeal remained pending.
“It is trite that the penalty proceedings need not be completed when the appeal is pending,” the Court observed.
The Court held that this principle must prevail in the facts of the case, notwithstanding the taxpayer’s failure to respond to the show-cause notice and furnish particulars of the pending proceedings.
While interfering with the penalty order and consequential demand notice, the High Court protected the Revenue’s right to initiate penalty proceedings afresh, depending upon the outcome of the restored appeal.
The Court clarified that its order would not prejudice the Revenue’s right to commence appropriate penalty proceedings subject to the decision of the Commissioner of Income Tax (Appeals) in the restored matter.
The Karnataka High Court allowed the writ petition and set aside the impugned penalty action, leaving the Revenue free to proceed in accordance with the outcome of the pending appellate proceedings.
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