Assessee and his wife gifted a hotel property to a family friend, and the assessee voluntarily surrendered long-term capital gain and paid tax. AO accepted taxability of surrendered capital gain but levied penalty under S. 271(1)(c) treating it as concealed income. When an appeal on this penalty was pending, AO obtained sanction for prosecution, and a complaint under S. 276C(1), and S. 277 was filed before the Special Chief Judicial Magistrate (Economic Offence), resulting in a summoning order and issuance of a bailable warrant. Thereafter, CIT(A) deleted the penalty, which deletion was also affirmed by the ITAT.

On an application to the High Court seeking quashing of proceedings of the complaint pending before the court of Special Chief Judicial Magistrate (Economic Offence), Lucknow and the summoning order passed by the Special Chief Judicial Magistrate (Custom), Lucknow, the HC allowed the application and quashed these proceedings, holding that once the ITAT has set aside the penalty order, it would not be appropriate to allow criminal proceedings against the applicant. The High Court also noted that the CIT(A), ITAT and the High Court did not interfere in the order of penalty and the Department could not succeed. Thus, when the subject matter of penalty, which was the very basis on which criminal proceedings had been launched, was set aside, criminal proceedings could not be allowed to continue.