AO can initiate penalty proceeding only on issues on which he directs initiation of penalty proceeding in his Assessment Order

CA Sandeep Kanoi

Section 271(1)(c) empowers inter alia the Assessing Officer, where he is satisfied in the course of any proceedings under the Act that the assessee had concealed the particulars of his income or furnished inaccurate particulars of such income, to direct the payment of penalty. Sub-section (1B) was introduced by way of an amendment by the Finance Act, 2008 with retrospective effect from 1 April 1989. Sub-section (1B) reads as follows:-

“(1B)- Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under clause (c) of sub-section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause (c).”

In order that the deeming fiction in sub-section (1B) must apply, two requirements must be fulfilled. The first requirement is that an amount must have been added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment. The second is that the order of assessment or reassessment must contain a direction for the initiation of penalty proceedings under clause (c) of sub-section (1) of section 271. Where both the conditions as aforesaid are fulfilled, the order of assessment must be deemed to constitute satisfaction of the Assessing Officer for initiating penalty proceedings under clause (c).

In the present case, we have duly perused the entire order of assessment under section 143(3) which has been placed on record. From the order, it is abundantly clear that in respect of those heads where the Assessing Officer considered it appropriate to initiate penalty proceedings under section 271(1)(c), he made a specific direction to that effect. In respect of the claim of interest on the SDF loan, there is no direction by the Assessing Officer.

The absence of a reference to the initiation of proceedings under section 271(1)(c) is not an inadvertent omission since it is clear that in respect of several other heads, where the Assessing Officer did consider it appropriate to initiate penalty proceedings, he made an observation to that effect. In fact, even in the concluding part of his order, the Assessing Officer issued a direction for initiating penalty notice under section 271(1)(c) “as discussed above”. The expression “as discussed above” is material because it refers to those heads in respect of which a specific direction was issued by him for initiating steps under section 271(1)(c). Undoubtedly, as held in the decision of the Supreme Court in Mak Data Private Limited Vs. Commissioner of Income Tax¹, the Assessing Officer has to satisfy himself whether penalty proceedings should be initiated or not during the course of assessment proceedings and he is not required to record his satisfaction in a particular manner or reduce it into writing. However, in the present case, there is no direction whatsoever by the Assessing Officer in respect of the specific head of interest on the SDF loan, on which the penalty was deleted by the Tribunal. This omission in the case of the SDF loan stands in sharp contrast to those items where the Assessing Officer has specifically directed the initiation of penalty proceedings under section 271(1)(c). Consequently, and for this reason, we are of the view that the Tribunal was justified in deleting the penalty under section 271(1 )(c) in respect of the SDF loan.