Whether penalty proceedings under Section 271(1)(c) can be initiated and sustained against a HUF which is dissolved before the initiation of such proceedings?

 

The Calcutta High Court’s judgment dated 16 April 2025, in Principal Commissioner of Income Tax-9, Kolkata vs. Chandravadan Desai (HUF) [ITAT/274/2024] was dealing with the issue as to whether penalty proceedings under Section 271(1)(c) can be initiated and sustained against a HUF which is dissolved before the initiation of such proceedings? The HC has confirmed the ITAT’s decision to quash a penalty of ₹7.29 crore under Section 271(1)(c) of the Income Tax Act

Let us have a Short Overview of the case:

Assessment Year: 2014–15:-

Assessment was completed under Section 143(3) on 30.12.2016.An addition of ₹7.29 crore was made by disallowing capital loss allegedly claimed incorrectly on the dissolution of the HUF.

Penalty proceedings under Section 271(1)(c) were initiated for furnishing inaccurate particulars of income. However, the penalty order dated 30.6.2017 ultimately held that the assessee had concealed income, creating an inconsistency between the reason for initiation and the ground for imposition.

Grounds
A. Non-Existence of Assessee
The HUF was dissolved on 26.03.2014, prior to the issuance of the penalty notice and order.

Relying on the Supreme Court’s ruling in CIT v. Maruti Suzuki India Ltd. (2019) 416 ITR 613 (SC), the Court held that any proceeding initiated against a non-existent entity is a nullity.

Also supported by:Sanichar Sah Bhim Sah (Patna HC) – penalty on a dissolved HUF is invalid.

Mahankali Subba Rao (AP HC) – partitioned HUF cannot be penalized under erstwhile law.

B. Violation of Natural Justice
Even if Section 171(1) and (8) were invoked (as the Revenue argued belatedly), individual members of the HUF were not given notice or heard, violating audi alteram partem.

The Court emphasized that no person can be penalized without opportunity to be heard.

C. Inconsistent Penalty Grounds
Penalty notice was issued for furnishing inaccurate particulars, but the order was passed for concealment of income, a fatal legal defect per precedents like:

CIT v. SSA’s Emerald Meadows – wrong initiation reason invalidates penalty.

D. Tax Neutrality
As the long-term capital loss carry-forward set off the total income to NIL, no actual tax liability arose.
The Court endorsed the Gujarat HC’s decision in CIT v. Gujarat Fertilizers & Chemicals Ltd., which held that penalty is not leviable if the tax outcome is neutral.

E.  Genuine Mistake, Not Evasion

The Court accepted that the assessee made an inadvertent claim on mistaken understanding about treatment of partitioned assets, with no intent to evade tax.

The copy of the order is as under:

ITAT-274-2024