AAR on Prima facie satisfaction for initiation of penalty proceedings required even post-amendment

Background :-Section 271(1)(c) of the Income-tax Act, 1961 (“the Act”) empowers the Assessing Officer (“AO”) to levy penalty if he is satisfied that the assessee has concealed the particulars of income or furnished inaccurate particulars of income.

A new section 271(1B) was introduced by the Finance Act, 2008 with retrospective effect from 1 April 1989, providing that in a case where an addition/disallowance has been made in computing taxable income/loss, a direction given by the AO to initiate penalty proceedings would deem to constitute „ satisfaction? for initiation of penalty proceedings.

Facts:- In the assessment orders passed in the cases of Ms. Madhushree Gupta and British Airways Plc. („assessees?,) certain disallowances/additions were made to the returned income. The AO initiated penalty proceedings under section 271(1)(c) of the Act, by making an appropriate endorsement to the assessment order. here were no reasons recorded by the AO in support of its? satisfaction? of the fact that there was concealment of income or filing of inaccurate particulars, nor did the AO record his satisfaction before initiating penalty proceedings. Hence, the Tribunal deleted the penalty imposed against which the Department preferred an appeal before the High Court.

In response, the assessees filed a writ petition before the Delhi High Court challenging the constitutional validity of the provisions of section 271(1B) of the Act on the basis that the same is arbitrary, ultra vires and in violation of Article 14 of the Constitution of India. The writ petition also challenged the retrospective operation of section 271(1B).

Assessee’s contention

• Section 271(1B) is in violation of Article 14 of the Constitution as there is no nexus between the object sought to be achieved by the legislature and the impugned provisions which confers wholly arbitrary power to the AO as there are no in-built guidelines laid down for exercising such power.
• The impugned provision deprives the assessee a right to seek judicial review and limits the power of the Court to judicially review orders initiating penalty proceedings.
• “Satisfaction” which is required to be arrived at by the AO before initiation of penalty proceedings cannot be legislatively presumed.
• Before initiation of penalty proceedings, the AO has to arrive at a prima facie satisfaction during the course of any proceedings before him.
• No plausible reason has been given with regard to the provision coming into force retrospectively with effect from 1 April 1989.

Revenue’s contention

• Section 271(1B) does not forclose the right of judicial review as the writ courts were fully competent to exercise their extra-ordinary jurisdiction vested in them in a case where the AO acts arbitrarily irrespective of the stage of the proceedings. A mere apprehension of bias or abuse of power would not be a good ground to strike down the impugned provision.
• The legislative intent for introduction of section 271(1B) was that the satisfaction is required to be recorded in writing by the AO only at the time of levy of penalty and not at the time of initiation of penalty proceedings. Therefore a simple endorsement in the assessment order that penalty proceedings are initiated would suffice.
• The amendment was procedural and did not deal with substantive rights and hence retrospective effect was valid.
• The impugned amendment will not disturb those cases which had attained finality but will affect only those, where penalty proceedings have been initiated or are pending adjudication before a judicial forum.

Ruling of the High Court- Key observations

• Section 271(1B) is not violative of Article 14 of the Constitution of India on the ground of inequality.
• Relying on various Court decisions, the High Court observed that the position of law both pre and post amendment is similar, in as much, the AO will have to arrive at a prima facie „satisfaction? during the course of proceedings with regard to the assessee having concealed particulars of income or furnished inaccurate particulars, before he initiates penalty proceedings.
• At the stage of initiation of penalty proceedings, the order passed by the AO need not reflect „satisfaction vis-a-vis each and every item of addition or disallowance if overall sense gathered from the order is that a further inquiry is required.
• Proceedings for initiation of penalty proceeding cannot be set aside only on the ground that the assessment order states that penalty proceedings are initiated separately, if otherwise the prima facie satisfaction is discernible from the order passed during the course of assessment proceedings.
• The presence of prima facie satisfaction for initiation of penalty proceedings was and remains a jurisdictional fact which cannot be wished away post amendment.
• Section 271(1B) does not do away with the principle that the prima facie satisfaction of the AO must be discernible from the order passed by the AO.
• Section 271(1B) would not debar an assessee from furnishing evidence to rebut the “prima facie” „satisfaction? of the AO since penalty proceedings are not a continuation of assessment proceedings.