Commissioner of Income Tax,
Authority on Advance Ruling (AAR)
Sh. Ramesh Chander, is an Indian Revenue Service (IRS) officer of 1990 batch and is currently posted as Commissioner of Income Tax (Authority for Advanced Rulings), Delhi. He had worked extensively in the field of International Taxes, Transfer Pricing, Alternate Dispute Resolution and other direct taxation fields. The views are personal.
In a case where the Law mandates penalty order to be passed by the AO only with the approval of the Range Head (Joint/Additional Commissioner) it is important to bear in view that the Range Head cannot accord approval mechanically to the proposals sent to him. In law he is expected, so as to enthuse confidence of the taxpayers in his Institution, to act dispassionately without getting influenced by the tentative views of the AO. He is expected to consider the facts, evidences as a neutral judge and only in very deserving cases to give approval so that penalty really deters the delinquent and does not break him. At the same time, Jt. Commissioner has to be careful in ensuring that his approval should not in any manner be such whereby more prejudice to the assessee than what the AO had originally proposed, is caused. It is important to note that in the process of granting approval Range Head cannot make out a new case much different from what the AO had proposed.
Even if the penalty proceedings are not criminal in nature, they are certainly intended to punish. A penalty may be the subject matter of a breach of a complaint. In ordinary parlance, the word ‘penal’ may embrace penalties for avoidance of civil liabilities which do not constitute offences against the state. Penalty provisions are intended to be an effective deterrents which are hoped to put a stop to the practice which the legislature considers to be against the public interest. The proceedings for imposition of penalty though normally emanate from the proceedings of assessment yet they are completely independent of the assessment proceedings. Unlike an assessment order, penalty order is not a source of revenue. Findings recorded in the assessment proceedings in so far as ‘concealment of income’ or ‘furnishing of incorrect particulars’ or ‘misreporting or under reporting’ etc. are concerned would not operate as res judicata in the penalty proceedings. It is open to the assessee to make out his case otherwise on merits for non levy of penalty.
It is a settled principle of law that jurisdiction to levy penalty would be with the one before whom default has occurred i.e. the one who has recorded satisfaction and issued notice initiating the penalty proceedings. To see that penalties are not levied indiscriminately law has, in most of the cases, provided for application of mind also of the officers other than the officers levying it. It is precisely for this reason that Section 274 of the Income Tax Act which provides for the procedure to be resorted to for imposing a penalty under Chapter XXI (Penalties imposable) of the Act mandates for the prior approval of the Joint Commissioner or Additional Commissioner (for short also referred to as ‘Jt. Commissioner’) wherever quantum of penalty proposed to be imposed exceeds the prescribed limit of Rs.10,000/- (where the Officer proposing to impose penalty is ITO) and of Rs.20,000/- (where where the Officer proposing to impose penalty is Asstt. Commissioner or Deputy Commissioner). Likewise, there are many penalties which need to be initiated and levied not by the Assessing Officer but by the Range Head i.e. Jt. Commissioner.
Since Penalty is not a source of revenue while in the case of assessment addition is made from the perspective of the Revenue penalty is always levied from the perspective of the assessee i.e. the Assessing Officer (for short ‘AO’) has to put himself into the shoes of assessee and decide if facts/defaults are such that warrant penalty.
As mentioned earlier when the AO decides to issue a notice calling upon the assessee to show cause as to why in the given set of circumstances penalty not be levied very logically it is he alone who should finally decide levy of penalty. However, we also need to appreciate that even if penalty proceedings are independent of the assessment proceedings if the AO alone is asked to decide the penalties so initiated finally it is quite likely that in a very routine manner he may decide to levy penalty in every case as a result of which independent nature of penalty proceedings requiring different look would get compromised. This apart, it is also quite likely that levy of penalty as a fate accompli will, apart from destroying its very ‘independent nature’ also go against the opinion of the Wanchoo Committee that under the Income Tax Act penalty should only be to bend and not break the taxpayer.
As already indicated it is but a human behaviour that AO who is an interested party in the proceedings would finally also levy penalty where he had initially decided to initiate it. Hence, to ensure dispassionate consideration even under the Income Tax Act, 1922 all penalties were required to be levied by the Inspecting Assistant Commissioners (present day Range Head). Under the extant Income Tax Act, 1961 also prior to 01-04-1989 certain penalties especially those exceeding the prescribed limit were required to be levied only by the Range Head.
Even post 1989 amendment fundamentally as a safety valve and to see that penalty is not levied routinely and indiscriminately, the legislature has made provision for prior approval of the Jt. Commissioner before finally levying the penalty. Stage of seeking approval is intended to act as an occasion to dispassionately and independently consider whether the facts and circumstances are really such and are without reasonable explanation where penalty proposed by the AO is required to be made absolute. The Jt. Commissioner is expected to apply mind independently in the context of the facts and circumstances as existing on records and not to go merely by what the AO has proposed. Jt. Commissioner may very well decide to disagree with AO’s proposal to levy the penalty completely or may also vary the quantum of penalty proposed. However, while varying the penalty proposed it will not be within the competence of the Jt. Commissioner to enhance it or to decide it for being levied under some other section or clause as such an attempt, on his part, would tantamount substituting AO’s satisfaction which he cannot do under the existing position of law where under it is he (AO) and none else who has to feel satisfied about the quantum of penalty or about the clause under which it is to be levied.
In the context of according of approval by the Jt. Commissioner, it will be relevant to note that earlier, as mentioned in para 4.1 above, law required Jt. Commissioner (at that time IAC who was equivalent to present day Jt. CIT) himself to decide whether to levy or not to levy penalty and the Assessing Officer’s job was limited only to making suitable reference to him wherever the quantum of penalty imposable exceeded the prescribed limit.
In the context of according of approval ready reference be made of the phrase ‘no order imposing a penalty under this chapter..’ as used u/s 274(2) which itself indicates that the question of approval would only arise where the Assessing Officer finds a case to be fit for levy of penalty of the proposed quantum which exceeds the prescribed limits. On receipt of reference from the AO, it will not be permissible for the Jt. Commissioner to vary it to the detriment of the assessee. We need to appreciate that such an action on the part of the Joint Commissioner to enhance the quantum of penalty or to levy it under a clause other than the clause under which reference is made by the AO, apart being violative of the principles of natural justice would, as a fate accompli get quashed in appeal. When the Assessing Officer who is enshrined with the authority under the law to pass order to levy penalty himself under a certain clause or section of the Act or considering the specific facts of the case including the quantum of penalty it will not be within the competence of the Jt. Commissioner to view differently to levy penalty of more quantum or under a different clause and for the obvious reason of there being difference of opinion between two Income- tax authorities penalty so levied in all likelihood would get deleted.
Above apart it needs to be remembered that now here law requires joint assessment or joint investigation or joint adjudication and hence any interpretation so as to argue in favour of to be complied with by the AO will tantamount going against this principle and will throttle AO’s independence while acting in the quasi judicial capacity. As per the scheme of the Act in the context of the limited role assigned in the ‘according of approval’ Jt. Commissioner does not act in quasi judicial capacity and has to merely see whether in the facts and circumstances of the case AO is justified in proposing levy of the penalty. Any other interpretation will go against the settled principle of law as per which the quasi judicial authority is supposed to function under no external pressures or influence whether of the higher authority or otherwise and has to arrive at his own conclusion.
Mandate of the law is very clear that the Joint Commissioner cannot accord approval mechanically to the proposals sent to him by the Assessing Officer. As a matter of fact, he is expected, so as to enthuse confidence of the taxpayers in his Institution, to act dispassionately without getting influenced by the tentative views of the Assessing Officer. He is expected to consider the facts, evidences as a neutral judge and only in very deserving cases to give approval so that penalty really deters the delinquent and does not break him. At the same time, Jt. Commissioner should be careful in ensuring that the approval communicated by him should not in any manner be such whereby more prejudice to the assessee than what the AO had originally proposed, is caused. Likewise, in the process of granting approval Jt. Commissioner cannot make out a new case much different from what the AO had proposed. If these precautions are taken not only the Taxpayers would have more confidence in the process of approval it will also result in avoiding infructuous penalty proceedings.