Nagpur ITAT Judgments on penalties, reassessment, TDS disallowance & gratuity exemptions

This article discusses recent judgments from the Nagpur Income Tax Appellate Tribunal (ITAT), focusing on four critical cases: Beantkaur Avtarsingh Juneja v. ITO, Asstt CIT v. KSR Transport, Pramod Narayanrao Ghalani v. ITO, and Ravindra Madhukar Kharche v. Asstt CIT. The judgments cover a range of tax issues, including penalties under section 271B for delayed Tax Audit Report submissions, the validity of reassessment for capital gains, TDS disallowance under section 40(a)(ia), and the treatment of gratuity exemptions under section 270A. Notably, the ITAT ruled that penalties cannot be imposed posthumously on deceased assessees, emphasizing that legal representatives cannot be penalized for the defaults of the deceased. Additionally, the Tribunal determined that reassessment after four years requires the demonstration of significant failure to disclose material facts, which was not the case for KSR Transport. It also highlighted that late submission of Forms 15G and 15H should not result in TDS disallowance if the documents were available. Lastly, it clarified that penalties for misreported gratuity exemptions must consider the intent and context, particularly when claims are made in good faith based on revised regulations. These cases provide essential insights into the implications of procedural compliance and tax liabilities.
I. Beantkaur Avtarsingh Juneja v. ITO ITA 018/NAG/2023 Dated: 25 April, 2024
The Assessee challenged the penalty Imposed by National Faceless Appellate Centre U/S. 271B of the I.T Act for the A.Y 2017/18. The Assesse runs  petrol pump business and was penalized for not submitting a Tax Audit Report within the required time as stated in section 44AB and section 139(1) of the Act.
Fact of the Case:
Income Tax return filled by assessee on 26/09/2018. While the income was accepted non furnishing of TAR within the time allowed led to initiating penalty proceedings under section 271B. After failing to provide a reasonable cause for the delay the assessing officer levied a penalty of Rs. 1,50,000. It was an admitted fact that the assessee had availed ample opportunity to justify the reason for delay and the NFAC confirmed the penalty. The assessee’s reasoning  that a legal dispute over ownership of the petrol pump prevented timely access to books of accounts was not found satisfactory.
Submissions By the Assessee:
The Assesse argued that Tax audit report filled delay because the legal dispute over petrol pump ownership so that she couldn’t get access to the books of accounts. She also submitted that no penalty should be levied inasmuch as the delay was for a reasonable cause.
Observations by the Income Tax Officer :
The ITO impose penalty under section 274(1) interpret with section 271B on basis that the TAR was not submitted on the due date for filing the income tax return. The ITO levied a penalty of Rs.1,50,000 mainly on the basis that the assessee failed to explain any reasonable cause for the delay.
Observations by the CIT :
NFAC as the CIT gave several opportunities but did not find the explanation on the issue of legal dispute and non-access to the books of accounts convincing. NFAC relied upon the judicial precedents and upheld the penalty levied by the ITO by holding that the assessee had failed to demonstrate any reasonable cause for the delay as also contemplated u/s 273B of the Act.
Tribunal’s Decision:
Considering the appeal it was put on record that the appellant had died during the pendency of appeal. The tribunal considered whether a penalty under section 271B of the Act survives or not upon the death of an assessee. It held that, though quasi criminal in character penalties cannot be levied after the death of an assessee while legal representatives can be held liable for tax liabilities of an assessee who has died. The tribunal held that penalising the legal representative would amount to penalizing them for a default committed by the deceased, which is not permissible. Therefore the penalty proceedings abate upon the death of the assessee and the penalty was deleted.
Key Authorities Cited:

ACIT v. Late Shrimant FB Gaekwad (2008) 313 ITR 192 (Guj)
CIT v. Dr. K.C.G. Verghese (2018) 416 ITR 155 (Mad.)
CIT v. Smt. S Gowri (2020) 417 ITR 45 (Mad.)

Key Point to be learn from this :
1. Proceedings for the purpose of penalty under section 271B of the Income Tax Act are quasi criminal in nature.
2. The representatives of an assessee who died can be held liable for taxes but not penalties.
3. Penalty imposed abates on death of assessee as it is not possible to penalize the legal representative for the default of the deceased.
4. This ITAT ruling is also in consonance with many judicial precedents which differentiate between tax liabilities and penalties that are imposed on deceased individuals.
II. CIT v. KSR Transport No. 364/NAG/2019, Cross Objection No.02/NAG/2020 (Arising out of ITA No. 364/NAG/2019)
Main issue in the appeal filed by Revenue is Asstt. CIT v. KSR Transport in respect of reassessment proceedings under section 143(3) read with section 147 of the Income Tax Act relating to sale of vehicles by the assessee. The ITAT Nagpur Bench held the verdict on validity of the reassessment and the substantial capital gains tax treatment.
Facts of the Case.
The assessee KSR Transport sold vehicles to two sister concerns M/s. KSR Freight Carriers and M/s. Shree Chadda Roadlines. The original assessment under section 143(3) in 2011 added Rs. 2,31,89,907 under section 68 of the Inc
Income Tax Act which was the amount of outstanding liabilities due from the sale of the vehicle. In the reassessment proceedings the Revenue contended that the capital gains on the sale of these vehicles had been incorrectly computed demanding additional taxation under section 50 of the Income Tax Act.
Submissions by the Assessee:
It is urged that reassessment only represented a change of opinion. On the basis that during original assessment proceedings all the relevant details regarding vehicle sale were disclosed and the re assessment has been initiated after the expiry of four years without any failure on their part to disclose material facts.
Observations by the Income Tax Officer
In his ruling the assessing officer argued that the reassessment proved that agreements over the sale of vehicles raised capital gains arising under section 50 of the Income Tax Act and was not captured during the previous assessment. The assessing officer further claimed that the re assessment was lawful due to the discovery of new facts as transpired from the agreements.
Observations by the CIT:
The CIT agreed with the submissions that reassessment was not justified. He held that the issue had already been dealt with during the original assessment. No new material or evidence was presented to substantiate the reassessment beyond the four year limit.
Tribunal’s Decision;
The ITAT ruled in favor of the assessee. It was held that such reassessment as had been done was upon the mere change of opinion, which is not permissible under the eyes of the law. Since original assessment had already addressed all the sales of vehicles and there was no failure on the part of the assessee to disclose relevant information, so reassessment became void. The Tribunal finally determined that no new material existed to serve as grounds to reassess beyond four years.
Key Takeaways

Reassessment after four years: ITAT held that reassessment proceedings initiated after the expiry of 4 years can only be valid if the assessee completely and really fails to disclose material facts. Here all the relevant facts were disclosed by the assessee during the course of the original assessment.
Opinion change: The Tribunal further elaborated that a mere change of opinion on the part of the assessing officer is not a valid ground for reassessment.
Computation of the Capital Gain: The Tribunal overruled the contention of revenue that there was failure computation of capital gains under section 50 as this very issue had been dealt with during original assessment proceedings.

III. Pramod Narayanrao Ghalani v. ITO ITA No. 59/Nag./2020
This Case discuss issue of disallowance U/S.40(a)(ia) of the I.T Act concerning TDS not deducted on the interest payable to lenders for unsecured loans. Dispute over the disallowance of the interest payments supported by declarations in Form 15G and 15H since no such forms were submitted to the tax authorities within the given time.
Fact  of the Case:
Pramod Narayanrao Ghalani is a businessman who works with civil contracts. During a assessment it was discovered that he had paid interest to some lenders for un secured loans. This happened because he did not deduct TDS from the interest payments. The assessee argued TDS was not needed the lenders provided Forms 15G and 15H. But the AO noticed that these forms were not submitted to the Income Tax Commissioner so the interest payments were not allowed under section 40(a)(ia).
Submissions by the Assessee:
Assessee argued Forms 15G & 15H have filed correctly at the time of assessment TDS on interest payments was not necessary. It is further submitted that where the assessee fails to file forms with the Commissioner within the specified period it should not attract disallowance under Section 40(a)(ia).
Observations by the Income Tax Officer:
The AO while accepting the submission of Form 15G and 15H disallowed the interest payment of Rs, 2,81,733 on account of the fact that the declaration were not submitted to the Commissioner within the required time frame.
Observations by the CIT:
CIT issued a direction to the assessing officer to verify whether the forms were submitted in time. Sufficient relief should be allowed if they were submitted within time. The direction, however, left scope for ambiguity since it did not deal with the ultimate question of whether delay in submission of those forms to the Commissioner was justified in allowing disallowance under Section 40(a)(ia) of the Income tax Act.
Tribunal’s Decision:
The ITAT noted that U/S. 197A of the I.T Act the submission of Form 15G and 15H exempts to deductor to deduct TDS. The ITAT ruled that even if there was a late in submitting these forms to the Commissioner the assessee should not be penalized for non deduction of TDS. The ITAT emphasized that the disallowance u/s. 40(a)(ia) cannot be imposed merely due to non submission of forms within the deadline  especially when there is no requirement to deduct TDS. As a result the Tribunal allowed the appeal, setting aside the disallowance made by AO.
Key points from this to be taken : –
1. Form 15G & Form 15H Declarations: – Submission of forms remove need to pay TDS on interest paid/ payable
2. Section 40(a)(ia): Delays in submission such documents commissioner would not attract any disallowance u/s. 40(a)(ia) if such forms are available although submitted during the assessment proceeding.
3. Tribunal’s Decision: As mentioned earlier the tribunal reiterated that disallowances cannot be done for mere procedural lapses and relief shall be granted when there is no substantial violation of law.
IV. Ravindra Madhukar Kharche v. Asstt. CIT ITA No. 228/NAG/2023
This issue related to the Maharashtra State Electricity Generation Co. Ltd.’s Employee who is also an Assesse. This appeal filed against penalty levied U/S. 270A of the I.T Act1961 by NFAC. Alleged delay by the assessee in reporting income relating to excess claim of gratuity exemption. The ITO levied the penalty of Rs. 6,02,858 in the revised ITR filed by the assessee. The dispute revolved around whether the assessee who served both as  government and non government employee was entitled to higher exemption limit for gratuity.
Facts of the Case:
1. The assessee, being an individual and employee of MSEGCL retired on 31st May 2016.
2. He initially filed ITR wherein total income was Rs. 44,68,490 and gratuity exemption up to Rs. 10 Lakhs were claimed.
3. The assessee later revised the ITR claiming enhanced exemption of Rs. 20 Lakhs for gratuity based on the revised CBDT notification and sought a refund of Rs. 3,09,000.
4. The recalculated ITR was scrutinized and two additions were made:
a. Disallowance of Rs. 10 Lakhs under gratuity exemption
b. Addition of Rs. 21,550 being the said short income from interest so brought.
5. Penalty of Rs. 6,02,858 under Section 270A for reported mis reporting  of income.
Submissions by the Assesse:
1. Gratuity Exemption: The demand of exemption of Rs. 20 Lakhs was raised in good Faith based on the belief that part of the gratuity received from government service was entitled to a higher exemption limit.
2. Interest Income: The difference in interest income was due to the delayed reporting by the bank/financial institution in Form 26AS and not a purposeful attempt to under report income.
Observations by the Income Tax Officer:
ITO restrained the assessee’s gratuity exemption claim to Rs. 10 Lakhs which was non-government grantees, because MSEGCL became a nongovernment organization after the restructuring of that company.
The officer rightly interpreted that the exemption claimed by the assessee is over claimed and the income misreported under section 270A and levied penalty.
The ITO drew attention to the inconsistency in the interest income as appearing on Form 26AS with the amount added to the total income at Rs. 21,550.
Observations by the CIT:
CIT has held that penalty u/s 271AAA was rightly levied by the ITO by holding that income had been wrongly reported by the assessee in the revised ITR.
The CIT felt that there was no merit in the contention of the assessee whereby enhanced gratuity demand was claimed as a genuine mistake of fact and failed to take into account the peculiar employment position of the assessee who served both in governmental and non governmental capacities.
Tribunal’s decision:
Considering the facts and circumstances, the Tribunal held as under:
1. Interest Income: The error had arisen on account of delayed filing by the bank in Form 26AS. Hence, addition did not attract any penalty.
2. Gratuity Exemption: The belief of the assessee relating to the grant of enhanced gratuity exemption was bonafide. It had been held by the Tribunal that the assessee had both served the government and was a non-government employee also and the same was causing confusion for correct application of exemption limit.
3. Penalty: Held that the penalty imposed under Section 270A was inappropriate because the mistake committed by the assesse is made in good faith and also with no intention of wrongfully reporting the income.
Appeal allowed and the penalty set aside
Key Takeaways
1. Genuine Mistake: The Tribunal held that a bonafide mistake in claiming tax exemptions, no matter how mistaken, does not attract a penalty provided the claim has been made in good faith.
2 .Interest Income: Differences due to delay in reporting the same in Form 26AS cannot be treated as misreporting of income, therefore not attractable with penalties.
3. Duality in Employment Status: The Tribunal recognized the complication of cases where an individual has served in both government and non-government capacities affecting the correct application of tax exemptions.
4. Discretionary nature of Penalties: The Tribunal held that any imposition of penalties is discretionary and applied with consideration of all facts and circumstances put before the court.
5. Principles of Tax Law: The judgment only reiterates that wherever there is any doubt or ambiguity in tax laws benefit of doubt has always to go to the assessee particularly