Kumaraswamy Gangadharaiah Kallur Vs DCIT (ITAT Bangalore)
The Income Tax Appellate Tribunal (ITAT), Bangalore, has ruled in favor of the assessee, Kumaraswamy Gangadharaiah Kallur, against the Principal Commissioner of Income Tax (Pr. CIT), Bangalore – 2. The appeal challenged the Pr. CIT’s order dated October 29, 2024, which sought to initiate penalty proceedings under Section 271B of the Income Tax Act, 1961, for the Assessment Year 2014-15. The core issue revolved around the late submission of the tax audit report and whether the Pr. CIT had the jurisdiction under Section 263 of the Act to direct the Assessing Officer (AO) to levy a penalty during reassessment proceedings.
The case originated with the assessee filing their return of income on February 28, 2015, declaring a total income of ₹1,08,58,460. The initial assessment under Section 143(3) of the Act, completed on December 16, 2016, accepted this return. Subsequently, the case was reopened under Section 148 of the Act due to discrepancies noticed regarding credit card transactions and the source of investment in multi-commodity transactions. A reassessment was completed under Section 147 on March 30, 2022, leading to an addition of ₹2,16,18,182 to the assessee’s income under Section 69C of the Act.
The Pr. CIT, upon reviewing the records, observed that the assessee had filed the audit report in Form 3CB dated January 27, 2015, which was beyond the extended due date of November 30, 2014, prescribed under Section 44AB read with a CBDT order. Consequently, the Pr. CIT was of the opinion that the assessee was liable for penalty under Section 271B for the delayed submission of the audit report. However, the AO had not initiated any penalty proceedings in the reassessment order. Viewing this as an error prejudicial to the interest of the Revenue, the Pr. CIT invoked Section 263 of the Act, setting aside the reassessment order and directing the AO to conduct a fresh assessment in accordance with the law and CBDT instructions.
The assessee’s counsel argued before the ITAT that the Pr. CIT lacked the authority under Section 263 to initiate penalty proceedings when the AO had not done so during the assessment or reassessment. It was contended that penalty proceedings are independent and do not necessarily need to be mentioned in the assessment order. The counsel further argued that during the initial assessment under Section 143(3), the AO had the audit report available and chose not to levy a penalty. Moreover, the reasons for reopening the assessment under Sections 147/148 were distinct from the issue of the delayed audit report, and therefore, the Pr. CIT’s jurisdiction under Section 263 was not applicable to this aspect. The counsel relied on unspecified judicial precedents to support their arguments.
The Departmental Representative (DR), on the other hand, supported the Pr. CIT’s order, arguing that the AO was obligated to initiate penalty proceedings in the reassessment order. The DR cited a decision of the ITAT, Mumbai, in the case of Anjis Developers Pvt. Ltd. Vs. PR. CIT, which relied on various High Court judgments, including one from the Allahabad High Court that favored the Revenue’s stance. The DR contended that the AO’s failure to initiate penalty proceedings rendered the reassessment order erroneous and prejudicial to the Revenue’s interest.
After considering the arguments from both sides, the ITAT observed that while the audit report was indeed filed late, no penalty was initiated during the original assessment under Section 143(3). The reassessment was triggered by different reasons, specifically the undisclosed credit card transactions and the unexplained source of deposits for commodity trading, leading to an addition under Section 69C, a fictional provision not related to the assessee’s business turnover taxable under Sections 28 to 44 of the Act. The Tribunal held that the Pr. CIT’s direction to initiate penalty under Section 263 based on the reassessment order was not acceptable, as the basis for the addition was distinct from the delayed audit report.
While acknowledging the DR’s argument that the AO should have initiated penalty proceedings and noting the applicability of the case law cited by the DR, the ITAT emphasized that the Pr. CIT’s jurisdiction in reassessment proceedings is limited to the reasons for reopening the assessment. Since the penalty for the late audit report was not the basis for the reassessment, the Pr. CIT exceeded their jurisdiction by directing the AO to initiate penalty proceedings. The Tribunal further noted that the provisions of Section 44AB, which mandate the audit, are not applicable to fictional income provisions like Section 69C. Consequently, the ITAT set aside the order of the Pr. CIT, allowing the assessee’s appeal.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
