Penalty Order Is In Limitation If Issued Within Six Months Of Appellate Order: Madras High Court

The Madras High Court on 6 February held that when penalty proceedings arise from assessment orders and the assessment is challenged on appeal, the limitation period for issuing a penalty can be computed from the appellate order. A penalty issued within the prescribed period after the appellate decision is therefore not time-barred.

Justice Senthilkumar Ramamoorthy upheld a penalty imposed on actor Joseph Vijay under the Income Tax Act, 1961, observing that the penalty order dated 30 June 2022 was issued within the statutory period under Section 275(1)(a). The Court noted that appellate proceedings effectively reset the clock for penalty orders arising from assessments.

It held:

“As discussed above, action for the imposition of penalty was initiated in the assessment order dated 30.12.2017. If the said date is construed as the date of completion of proceedings, it falls within financial year 2017-18. If limitation were to be reckoned on the basis of expiry of the financial year in which proceedings were completed, the last date for issuing the penalty order would be 31.03.2018. If determined on this basis, the penalty order dated 30.06.2022 would be beyond the period of limitation.”

The case arose from search proceedings conducted on 30 September 2015 under Section 132 of the Income Tax Act against the petitioner. During the search, the petitioner admitted in a sworn statement that he had received Rs. 5 crore in cash as remuneration in addition to cheque payments of Rs. 16 crore, and further acknowledged additional cash income aggregating to Rs. 15 crore during the financial year 2015-16.

In the return filed for assessment year 2016-17, the petitioner declared a total income of about Rs. 35.42 crore, which included the admitted cash income. However, the assessment order dated 30 December 2017 made certain additions and recorded that penalty proceedings would be initiated under Sections 271(1)(c) and 271AAB of the Act. The petitioner contended that the limitation period for issuing the penalty had expired.

The Court rejected this, holding that Section 275(1)(c) is a residuary provision applicable only when clauses (a) and (b) do not apply. Since the assessment order initiating the penalty was itself under appeal before the Commissioner (Appeals) and later the Income Tax Appellate Tribunal (ITAT), clause (a) of Section 275(1) governed the limitation period.

The Bench explained:

"Clause (b) of Section 275(1) applies where an assessment or other order is the subject matter of revision proceedings. In this case, the revision order dated 30 October 2019 was issued suo motu but later quashed by the ITAT on 13 May 2022. This nullified the revision proceedings. Consequently, clause (b) of Section 275(1) does not apply."

The Court noted that the ITAT order was issued on 22 December 2021, and reckoning six months from the end of that month, the limitation for issuing the penalty expired on 30 June 2022.

Accordingly, the High Court dismissed the writ petition, while leaving it open to the petitioner to challenge the penalty on other grounds before the appropriate appellate authority.

For Petitioner: A.S.Sriraman G.Tarun

For Respondent: A.P.Srinivas, Senior Standing Counsel