Through this article an attempt has been made to explain the circumstances where the revisionary powers of the commissioners u/s 263 can be invoked when the order dropping penalty proceedings u/s 271(1)(c) of the I.T. Act, 1961 was passed by the Assessing Officer.

In the case of M/s. DEF, an India Company, an order was passed by the Assessing Officer dropping the penalty proceedings initiated u/s 271(1)(c) of the I.T. Act, 1961.  However, on going through the case record it was found that while dropping the proceedings, the A.O. had taken into account only the submission made by the assessee firm and had not considered all the facts of the case in totality.  The A.O. did not consider the findings in the relevant assessment order and the grounds of confirmation of the said order by the CIT(A).  It was further observed that the said assessment order and the appellate order were part of the record of the A.O. at the time of passing the order dropping the penalty proceedings initiated u/s 271(1)(c).  It was, therefore, evident that the proceedings were dropped by the A.O. without proper application of mind and without considering all the facts of the case.  Non-application of mind by the A.O. was also manifest from the perusal of the order sheet of the case record of the assessee firm.   The CIT considered the above order of the A.O. erroneous and prejudicial to the interests of revenue.  He issued a show cause to the assessee affording an opportunity to explain as to why the order passed by the A.O. should not be cancelled and suitable directions issued to the A.O. u/s 263 for passing a fresh order u/s 271(1)(c).

In response to the above show cause notice, the following arguments were put forth on behalf of the assessee-firm :

(i) Provisions of section 263 cover only those orders of assessment which are errorneous and prejudicial to the interests of revenue and that penalty cannot be equated with revenue,

(ii) Without prejudice to (i) above, an order to be brought under the purview of section 263 for interference must be erroneous and prejudicial to the interest of revenue and that in the instant case i.e. dropping of penalty proceedings, no loss of revenue was incurred by the State.

(iii) Section 271(1) and 273 come after section 263 as per arrangement of sections of the Act and it is the intention of the Legislature that actions u/s 271(1) and 273 cannot be revised u/s 263 unless specifically stated in the provisions of the Act.

After considering the submissions made by the assessee, the CIT passed an order u/s 263 cancelling the A.O.’s order and directed that a fresh order u/s 271(1)(c) be passed.  With regard to the argument of the assessee at (i) above, the CIT in his order u/s 263 referred to the provisions of section 263 which empowers the CIT to “call for and examine the record in any proceeding under this Act” and is not confined to assessment proceedings only and would take within its sweep even the orders wherein either proceedings are dropped or proceedings are filed.  The CIT relied upon the following judicial pronouncements to substantiate his case :

(a) CIT Vs. Madras Palayakat Company (P) Ltd. 74 ITR 642, 645 (Mad.)

(b) CIT Vs. Christian Mica Industries Ltd. 120 ITR 627, 629 (Cal.)

(c) Exporters India Vs. CIT 246 ITR 1( Delhi).

(d) New Jagat Textile Mills (P) Ltd. Vs CIT 282 ITR 399 (Guj.)

The CIT in his order u/s 263 clarified that the decisions of various High Courts relied upon by the assessee were that action u/s 263 is not maintainable for non-initiation of penal action during the assessment proceedings and that the Commissioner cannot direct the A.O. to initiate penalty proceedings.  The CIT further clarified that in the instant case, the penalty proceedings were initiated u/s 271(1)(c) during the course of assessment proceedings themselves.  The decisions relied upon by the assessee were therefore of no help to it because the facts were not similar.

With regard to the argument made on behalf of the assessee at (ii) above, the CIT in his order clarified that on going through the case records it was evident that while dropping the penalty proceedings, the A.O. had not considered the findings in the assessment order as also the grounds of decision of the CIT(A) confirming the quantum of additions, the provisions of Explanation-I to section 271(1) as also the case laws on the issue.  Regarding the argument that dropping of penalty proceedings had not resulted in any loss of revenue, the CIT rebutted the same stating that the tax sought to be evaded in the present case worked out to 1 crore and, therefore, the minimum penalty imposable was 1 crore and the maximum penalty imposable was 3 crores in terms of section 271(1)(iii).

The argument of the assessee at (iii) above was also rejected by the CIT as being without merit and absurd, as also for not being backed up by any documentary evidence expressing such intention of Legislature or supported by any judicial decision.

The assessee firm filed a writ petition under Article 226 of the Constitution of India before High Court praying for quashing of the order of the CIT u/s 263.  The High Court in its order after considering the relevant case-laws, dismissed the writ filed by the assessee and held that the order of the A.O. dropping the penalty proceedings initiated u/s 271(1)(c) was definitely erroneous and prejudicial to the interests of revenue.  The Court further held that the CIT had passed a detailed order holding that loss of revenue had been caused and it was the Court’s considered view that the cumulative tests of various judicial pronouncements were satisfied and the order passed by the CIT could not be found fault with.

Shabbir Shakir
B.Com, Certified Accounting Technician (ICAI)

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January 2021