NEMCHAND JAIN & SONS vs. DEPUTY CIT, (ITAT kolkata)
IT(SS)A No. 21/Kol/2008; Block period 1989-90 to 1999-2000
Decided on 23rd October, 2009
Gist of decision:
It is a settled principle that the power of levying penalty or not is discretionary and not mandatory. The law requires that whenever the AO is to exercise his discretion then it is the AO alone who is to exercise that discretion and the appellate authority cannot exercise that discretion on the part of the AO. The appellate authority when called upon to do so can only decide whether the discretion so exercised by the AO which has been upheld by the CIT(A) can be sustained under law or not. In order to decide whether discretion has been exercised by the AO or not this examination and finding can be given only on a perusal of the reasons set out in the penalty order. The reasons cannot be supplemented. The purpose and rationale for adhering to the reasons is to provide a safety from the excesses of arbitrariness as once the reasons are given they cannot be modified, changed, supplemented subsequently to justify the action. The reasons as such under law are required to be set out for the action at the time the action is taken. A bare perusal of the penalty order shows that the action has been levied solely on the ground that the appeal filed in the quantum proceedings is withdrawn. This fact alone has led the AO to conclude that the assessee is deemed to have accepted as undisclosed income which amounted to wilful and intentional evasion. The reasons set out in the penalty order do not inspire any confidence in coming to the conclusion that the AO has applied his mind. The imposition of penalty is mechanical and considered to be automatic by the AO which is not the position of law. From a perusal of the penalty order it is seen that the AO while exercising his discretion has been swayed by one fact alone namely that the assessee has withdrawn the appeal in the quantum proceedings thereby leading automatically to the conclusion that the assessee has evaded wilfully and intentionally. Merely to levy penalty because additions are accepted it cannot be inferred that the assessee has infringed the requirements of law. If that was so there will be no purpose in having a separate penalty proceeding. The very fact that penalty proceedings are separately taken and an opportunity granted to the assessee to show cause and produce evidence etc., shows that before levying penalty it is to be examined whether there is a deliberate violation of the provisions of law. A perusal of the reasons set out in the penalty order and the reasons for upholding the same in the impugned order clearly demonstrates that this is a case of non-application of mind by the AO. As such neither the legality of the action taken nor the legitimacy of the same can be upheld. The reasons alone are the link between the material on which certain conclusions are based and actual conclusions are drawn. They disclose how the mind is applied to the subject-matter for decision and reveal a rational nexus between the facts considered and the conclusion reached. Only in this way can opinion and decisions recorded be shown to be manifestly just, fair and reasonable which is why the requirement of setting out reasons in the justice delivery system is embedded. Fair play and justice demand that justice must not only be done but must be seen to be done. A perusal of the penalty order and the impugned order does not disclose in any manner that the mind of the authority has been applied relevantly and rationally. The reasons for coming to the conclusion which have been set out by the AO and having done so it is only those reasons which can guide as to what prevailed upon the AO to hold that penalty is to be levied. The decision-making process exhibited by the reasoning recorded in the order can be the sole guiding criteria for the appellate authority to look into the issue for deciding the legality and legitimacy of the action taken.