ITAT Mumbai Quashes Penalty u/s 271(1)(c) Where High Court Admits Substantial Question of Law

April 15, 2026 : The Mumbai Bench of the Income Tax Appellate Tribunal has held that penalty under Section 271(1)(c) of the Income Tax Act cannot be sustained where the underlying quantum issue has been admitted by the High Court as a substantial question of law, as such admission renders the issue debatable and establishes the bona fide nature of the assessee’s claim.

A Bench comprising Sandeep Singh Karhail (Judicial Member) and Bijayananda Pruseth (Accountant Member) allowed the appeals filed by Small Industries Development Bank of India (SIDBI) and quashed the penalty imposed for Assessment Years 2014–15 and 2015–16.

Background

The dispute arose from penalty proceedings initiated in relation to disallowance of a claim towards proportionate amortised lease premium paid to the Mumbai Metropolitan Regional Development Authority (MMRDA) for leasehold land. The Assessing Officer treated the expenditure as capital in nature during scrutiny assessment and disallowed the deduction. The penalty levied under Section 271(1)(c) was upheld by the Commissioner of Income Tax (Appeals).

Before the Tribunal, the assessee argued that the very issue forming the basis of disallowance had already been admitted by the Bombay High Court in earlier years as a substantial question of law. It was contended that once such admission occurs, the issue becomes debatable, and penalty cannot be imposed.

Tribunal’s Findings

The Tribunal noted that the jurisdictional High Court had indeed admitted the question of whether lease premium paid to MMRDA constitutes revenue expenditure eligible for deduction.

Relying on settled legal principles, the Bench observed that no penalty is leviable where the quantum issue is admitted by the High Court, as such admission indicates that the issue is not free from doubt and is open to legal debate.

The Tribunal further held that:

• Admission of a substantial question of law supports the bona fide nature of the assessee’s claim.
• Penalty under Section 271(1)(c) requires clear evidence of concealment or furnishing of inaccurate particulars, which was absent in the present case.
• Mere disallowance of a claim does not automatically justify penalty.

Reliance on Precedents

The Bench placed reliance on:

• PCIT v. Harsh International (P.) Ltd., where it was held that once a substantial question of law is framed, the issue becomes debatable and penalty cannot survive.
• CIT v. Reliance Petroproducts Pvt. Ltd., wherein the Supreme Court of India ruled that mere rejection of a claim does not amount to furnishing inaccurate particulars of income.

Conclusion

Applying these principles, the Tribunal concluded that the penalty imposed under Section 271(1)(c) was unsustainable in law. It accordingly quashed the penalty orders for both assessment years and allowed the appeals.

Cause Title: Small Industries Development Bank of India v. DCIT
Case No.: ITA Nos. 526 & 527/Mum./2026
Coram: Sandeep Singh Karhail (JM) & Bijayananda Pruseth (AM)