Case Law Details
VEE ESS Hardwares Vs ACIT (Kerala High Court)
Kerala High Court held that issuance of notice for imposition of penalty under section 271B for failure to furnish audit report after more than four years of completion of assessment is barred by limitation as per section 275(1)(c) of the Income Tax Act.
Facts- Petitioner is a firm engaged in the business of retail trade of Hardwares and Ceramic Tiles. Consequent to a survey carried out u/s. 133A of the Act, petitioner was assessed to income tax u/s. 143(3) of the Act for the assessment year 2017-18, by an order dated 26.12.2019. In the aforesaid order, though AO specifically observed that proceedings for imposition of penalty u/s. 270A ought to be initiated, there was no reference for initiating proceedings u/s. 271B of the Act.
More than four years later, on 21.03.2024, a notice was issued u/s. 274 of the Act proposing to impose penalty u/s. 271B of the Act, for not filing the audit report in the prescribed form as required u/s. 44AB of the Act for the above referred assessment year. By the impugned order dated 25.09.2024, a penalty of Rs.1,50,000/- was imposed upon the petitioner under the said provision. Consequent demand has also been issued. Petitioner challenges the order imposing penalty contending that it was issued beyond the time limit specified in section 275(1)(c) of the Act.
Conclusion- Held that since the assessment order in the instant case does not refer to any proceeding for imposition of penalty under section 271B, the time limit cannot be said to have emanated from the assessment order. However, as the assessment proceedings itself would have revealed the absence of an audit report, as contemplated under sections 44A and 44B, the show cause notice should have been issued within a reasonable time of the assessment order. By applying the provisions of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, the end date for passing orders was extended till 31.03.2022, and the respondents were entitled to issue a notice within a reasonable time of the expiry of the said period. Taking into reckoning the aforesaid statute, the respondents ought to have issued a show cause notice at least in the year 2022. Instead of initiating any proceedings either in 2022 or 2023, they have proceeded to issue the show cause notice only on 21.03.2024. Such a period is beyond the statutory contemplation. The show cause notice in the instant case is hence time-barred under section 275(1)(c) of the Act.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
Petitioner challenges an order of penalty imposed under section 271B of the Income Tax Act, 1961 (for short ‘the Act’) on the ground of limitation.
2. Petitioner is a firm engaged in the business of retail trade of Hardwares and Ceramic Tiles. Consequent to a survey carried out under section 133A of the Act, petitioner was assessed to income tax under section 143(3) of the Act for the assessment year 2017-18, by an order dated 26.12.2019. In the aforesaid order, though the Assessing Officer specifically observed that proceedings for imposition of penalty under section 270A ought to be initiated, there was no reference for initiating proceedings under section 271B of the Act. More than four years later, on 21.03.2024, a notice was issued under section 274 of the Act proposing to impose penalty under section 271B of the Act, for not filing the audit report in the prescribed form as required under section 44AB of the Act for the above referred assessment year. By the impugned order dated 25.09.2024, a penalty of Rs.1,50,000/- was imposed upon the petitioner under the said provision. Consequent demand has also been issued. Petitioner challenges the order imposing penalty contending that it was issued beyond the time limit specified in section 275(1)(c) of the Act.
3. A statement has been filed on behalf of the respondents pleading that petitioner was required to tax audit its returns and books of account as per section 44AB of the Act and ought to have furnished the audit report within the due date for filing the return of income. Since petitioner had not furnished the audit report at any time during the course of the assessment proceedings, it was liable to be imposed with penalty. After referring to section 275(1)(c) of the Act, it was pleaded that, though the assessment order was issued on 26.12.2019, there was no reference at all to any penalty proceedings under section 271B of the Act, while the show cause notice for imposing penalty was issued only on 21.03.2024 and hence the proceedings are not barred by time.
4. Sri. John Varghese, the learned counsel for the petitioner contended that the proceeding for imposition of penalty was initiated and completed almost four and a half years after the assessment proceedings and is hence beyond the time limit stipulated in section 275(1)(c) of the Act. It was further submitted that the proceedings ought to have been initiated within a reasonable time of the assessment order and at any rate within six months from the assessment order. It was submitted that, even if the benefit of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 is applied, still, the respondent cannot have an extended period till 2024. The decision of the Allahabad High Court in Commissioner of Income-tax v. E.C.C. Project Pvt. Ltd. (2015) 374 ITR 44 as well as the decision of the Delhi High Court in Commissioner of Income Tax (TDS)-2, Delhi v. Turner General Entertainment Networks India Pvt Ltd (2024 SCC OnLine Del 7760) apart from that of the Madras High Court in Jagadeesan Jaganathan vs. Joint Commissioner of Income Tax (W.P. No.16335 of 2022) were relied upon.
5. Sri. Jose Joseph, the learned Standing Counsel, on the other hand, countered petitioner’s submissions and pointed out that section 275(1)(c) of the Act postulates completion of proceedings only within six months from the issuance of show cause notice. It was also submitted that since the proceeding for imposing penalty was completed within six months of issuing the show cause notice, there is no merit in the challenge.
6. While considering the rival submissions, it needs to be noted that the assessment was completed under section 143(3) of the Act on 26.12.2019 and in the assessment order, it was observed that a penalty proceeding is being initiated under section 270A of the Act. There is no reference in the assessment order for initiating any proceeding under section 271B of the Act. Of course, under section 271B of the Act, it is not stipulated that it must be initiated ‘in the course of proceedings’ as in the case under sections 270A and 271(1) of the Act. The terminology used in section 271B indicates that even if it is not in the course of proceedings under the Act, a penalty under the said provision can be imposed. Therefore, it is not necessary that the proceedings under section 271B of the Act must be initiated during the course of the assessment proceeding itself. The imposition of penalty under section 271B of the Act is independent of the assessment proceedings. A recitation by the Assessing Officer in the assessment order directing initiation of penal proceedings under section 271B of the Act is not imperative and penal proceedings can be initiated without such a specific direction. With respect, this Court is unable to subscribe to the contrary view of the Allahabad High Court in Commissioner of Income-tax v. E.C.C. Project Pvt. Ltd. (2015) 374 ITR 44).
7. Nonetheless, the requirement of an audit report under section 44AB of the Act will generally become obvious to the Assessing Officer at the time of passing an order of assessment. Penalty proceedings under section 271B of the Act can follow the assessment order. As per section 275(1)(c) of the Act, the penalty proceedings will have to be completed either before the end of the financial year in the course of which action for imposition of penalty has been initiated or within six months of initiating proceedings for imposing penalty. For the purpose of reference, section 275(1)(c) of the Act is extracted as below:
275. Bar of limitation for imposing penalties. –
(1) No order imposing a penalty under this Chapter shall be passed –
a. xxx
b. xxx
c. in any other case, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later.
8. A perusal of the above-extracted provision indicates that the legislative intention is to create a time limit within which the proceedings for initiation and completion of penalty proceedings ought to be carried out. It cannot be kept in an uncertain or indefinite manner.
9. In this context, it is appropriate to refer to the decisions relied upon by the learned Counsel for the petitioner. In Commissioner of Income Tax (TDS)-2, Delhi v. Turner General Entertainment Networks India Pvt. Ltd. (2024 SCC OnLine Del 7760), a Division Bench of the Delhi High Court interpreted the expression ‘action for imposition of penalty is initiated’ as appearing in section 275(1)(c) of the Act, to mean the date on which the first introductory step for such action is taken, which must necessarily mean the start of such an action. In Jagadeesan Jaganathan v. The Joint Commissioner of Income Tax (W.P. No.16335 of 2022) a learned Single Judge of the Madras High Court held that though a time limit for issuance of a notice under section 275(1)(c) has not been specified, it has to be assumed that the notice ought to be issued before the end of the financial year itself. In that case, the assessment order was issued on 31.03.2020 and the court found that since notice should have been issued by 31.03.2020 itself, the last date for passing the order expired on 30.09.2020.
10. In Commissioner of Income-tax vs. Chhajer Packaging and Plastics P. Ltd., (2007 SCC OnLine Bom 1332), a Division Bench of the Bombay High Court observed that, though assessment proceedings were completed on 30.03.1999, the show cause notice was issued on 06.04.1999 and the period of limitation expired within six months from the show cause notice, i.e., October 29, 1999, which would be the last date for the period of limitation computed as per the second part of clause (c) of section 275(1) of the Act. A Division Bench of the Karnataka High Court also considered a similar issue in Shanbhag Restaurant v. The Deputy Commissioner of Income-Tax (2003 SCC OnLine Kar 680) and held that in cases where the proceedings initiated falls under the second part of section 275(1)(c) of the Act, the order of penalty must be passed within six months from the end of the month in which action for imposition of penalty is initiated.
11. In view of the above divergence of opinion amongst different High Courts, it is necessary to consider the question whether the show cause notice issued in the instant case on 21.03.2024 is legally valid.
12. Section 275(1)(c) of the Act provides a time limit for initiation of proceedings for penalty. As per the said provision, two timelines are given. The first timeline is before the end of the financial year in the course of which, action for imposition of penalty has been initiated. The second timeline is within six months from the end of the month in which action for imposition of penalty is initiated.
13. However, it is significant to note that even within the two timelines given, the proceeding for imposition of penalty ought to be completed within a reasonable time. The latter part of section 275(1)(c) of the Act, providing for a period of six months, is clearly indicative that the Income Tax Officers cannot be given a long handle to initiate proceedings at any point of time, according to their caprice. The possibility of initiating proceedings against an assessee cannot be kept pending over his head like a Damocle’s sword, indefinitely. Indisputably, the return filed by an assessee is verified at the time of assessment. Though penalty proceeding under section 271B of the Act is independent of the assessment, as far as the time limit is concerned, it cannot be wholly extricated from the assessment order. Once an assessment is completed, it will act as a leash, compelling the Officers to act within a reasonable time from its completion, for the purpose of imposing a penalty.
14. It needs no elaborate discussion that if no period of time is prescribed by a statute, it must be exercised within a reasonable period which would depend upon the nature of the statute, rights and liabilities thereunder and other relevant factors. The reasonable period, must, no doubt, be found out from the scheme of the statute and in particular the tenor of the provision under consideration. Reference to the decision in State of Punjab and Others v. Bhatinda District Cooperative Milk Producers Union Ltd [(2007) 11 SCC 363] is relevant in this context.
15. The penalty under section 271B is imposed for failure to attach an audit report. The absence of an audit report along with the return will become evident during the assessment proceedings. Bearing in mind the nature of violation for which penalty is imposed under section 271B of the Act, proceedings for imposing penalty cannot be too distant from the assessment order. Thus, if the case falls under the latter part of section 275(1)(c) of the Act, in respect of penalty proceedings under section 271B of the Act, the show cause notice must be issued within a reasonable time of the completion of the assessment proceedings and be completed within six months thereafter. What is a reasonable period will depend upon the facts of each case.
16. Viewed in the above perspective, this Court holds that if a case falls under the latter part of section 275(1)(c) of the Act, proceedings for imposition of penalty under section 271B of the Act must be initiated and completed within a reasonable time of the assessment order.
17. Since the assessment order in the instant case does not refer to any proceeding for imposition of penalty under section 271B, the time limit cannot be said to have emanated from the assessment order. However, as the assessment proceedings itself would have revealed the absence of an audit report, as contemplated under sections 44A and 44B, the show cause notice should have been issued within a reasonable time of the assessment order. By applying the provisions of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, the end date for passing orders was extended till 31.03.2022, and the respondents were entitled to issue a notice within a reasonable time of the expiry of the said period. Taking into reckoning the aforesaid statute, the respondents ought to have issued a show cause notice at least in the year 2022. Instead of initiating any proceedings either in 2022 or 2023, they have proceeded to issue the show cause notice only on 21.03.2024. Such a period is beyond the statutory contemplation. The show cause notice in the instant case is hence time-barred under section 275(1)(c) of the Act.
18. Accordingly, I find that the impugned order imposing penalty under section 271B of the Act is invalid. Hence, Exhibit P2 order is set aside.
This writ petition is allowed.
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