Adithya Homes Private Limited Vs ACIT (ITAT Hyderabad)
ITAT Hyderabad held that law doesn’t permit delegation of authority by PCIT to Assessing Officer (AO) for the purpose of imposition of penalty. Accordingly, direction issued by PCIT to AO to initiate penalty proceedings u/s 271(1)(c) of the Income Tax Act is unlawful.
Facts- A search and seizure operation was conducted in the Red Rose Group. As part of the search operations, a warrant was issued in the case of assessee and search was conducted. Thereafter, notice u/s.153A was issued to the assessee. After verification of the information furnished by the assessee and the material available on record, AO had completed the assessment interalia making an addition of Rs.50,21,000/- being the difference that had not been accounted for by the assessee as turnover in its books of accounts.
Thereafter, PCIT had issued the show cause notice u/s 263 of the Act revising the assessment order as AO has not initiated the penalty u/s 271(1) of the Income Tax Act.
Not being convinced by the submission of the assessee, PCIT ordered initiation of penalty proceeding u/s 271(1)(c). Being aggrieved, the present appeal is filed.
Conclusion- Held that we do not agree with the direction issued by the ld. PCIT to the Assessing Officer to initiate the penalty proceedings under section 271(1)(c) of the Act. The law does not permit the delegation of authority by the ld. PCIT to Assessing Officer for the purpose of imposition of penalty. Firstly, it is for the ld. PCIT to record satisfaction and then initiate penalty proceedings. Since no satisfaction has been recorded by the ld. PCIT, therefore, it would not be appropriate for him to direct the Assessing Officer to record his satisfaction and initiate the penalty proceedings against the assessee. In our view, if the ld.PCIT records his satisfaction then penalty proceedings should also be completed by him alone and he cannot direct the Assessing Officer after recording his satisfaction to complete the proceedings.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
These appeals of the assessee for A.Ys. 2016-17 and 2017-18 arise from the separate orders of Principal Commissioner of Income Tax (Central), Hyderabad dt.22.02.2023 invoking proceedings under section 263 of the Income Tax Act, 1961 (in short, “the Act”).
2. The grounds raised by the assessee in ITA No.230/Hyd/2023 read as under :
“1. The id. Pr. CIT (Central), Hyderabad, has erred in law as well as on-facts of the case by passing an order u/s 263 of the Income Tax Act, 1961, setting aside the assessment order passed u/s 153A r.w.s 143(3) to the file of the AO and the Addi. CIT for the limited purpose of initiating penalty proceedings u/s 271(1) (c) of the Income Tax Act, and therefore the impugned order is liable to be quashed.
2. The ld. Pr. CIT has erred in holding the assessment order as erroneous and prejudicial to the interests of Revenue merely because the AO has not initiated penalty proceedings and because penalty proceedings though connected are distinct, independent, and separate proceedings.
3. The ld. Pr. CIT could not assume jurisdiction u/s 263 of the Income Tax Act for the sole reason that the AO did not initiate penalty proceedings u/s 271(1) (c) as the prejudice to the interest of the Revenue, if any, has to be proved by reference to the assessment order only.
4. Recording of satisfaction of the Specified Authority u/s 271(1)(c), during the pendency of the assessment proceedings, is a condition precedent for initiation of penalty proceedings and any satisfaction (which is borrowed or supplied, by way of direction or otherwise) coming on record after the assessment would not be valid in law.
5. The id Pr. CIT has failed to appreciate the law that if two reasonable constructions of a taxing provision are possible, that construction which favors the assessee must be adopted and preference needs to be given to the reasoning of the majority of the Hon’ble High Courts.”
2.1. Subsequently, assessee had filed the following additional grounds which read as under :
“1. On the facts and in the circumstances of the case, the order passed by the Id. Pr. Commissioner of Income Tax directing the Assessing Officer to initiate penalty proceedings under section 271 (1)(c) of the Income Tax Act, 1961 is illegal and unsustainable in law as the time limit for initiating penalty prescribed under section 271 (1)(c) of the Act expired much before the id. Pr. Commissioner of Income Tax assumed jurisdiction on 10. 01.2023 under section 263 of the Act.
2. The id. Pr. Commissioner of Income Tax failed to appreciate that what was not done by the Assessing Officer with in the time limits provided under section 275(l) of the Income Tax Act, 1961 cannot be directed to be done by exercising the revision power under section 263 of the Act as held by various courts. The id. Pr. Commissioner of Income Tax ought to have appreciated that he cannot bring back to live the penalty proceedings under section 271 (1)(c) of the Act which got barred by limitation under section 275(1) of the Act.”
3. Similar grounds were raised by the assessee in other appeal also i.e., ITA 231/Hyd/2023 for A.Y. 2017-18 except the amounts involved.
4. Before us, both the parties submitted that the issues raised in both the appeals are identical. In view of the aforesaid submission, we, for the sake of convenience proceed to dispose of both the appeals by a consolidated order but however refer to the facts in ITA No.230/Hyd/2023.
5. The brief facts of the case are that assessee is a company and filed its original return of income for A.Y. 2016-17 on 07.10.2016 admitting income of Rs.3,86,91,380/- under the normal provisions and income of Rs.3,84,47,420/- as per the provisions of Section 115JB of the Act. The case was processed under section 143(1) of the Act on 15.11.2016. Subsequently, the case was selected for scrutiny and assessment was completed u/s 143(3) of the Act on 21.04.2017 wherein the income returned was accepted. A search and seizure operation was conducted in the Red Rose Group of cases on 12/07/2018. As part of the search operations, a warrant was issued in the case of assessee and search was conducted. Thereafter, notice u/s.153A dated 23.01.2019 was issued to the assessee. In response to the notice, the assessee filed the return of income on 31.03.2019, admitting total income of Rs.3,86,91,380/-. Accordingly, notice u/s.143(2) dated 23.07.2019 was issued to the assessee. Subsequently, notices were issued u/s 142(1) calling for information. In response to the notice and subsequent statutory notices, the assessee furnished information. After verification of the information furnished by the assessee and the material available on record, Assessing Officer had completed the assessment interalia making an addition of Rs.50,21,000/- being the difference that had not been accounted for by the assessee as turnover in its books of accounts. Finally, the Assessing Officer had completed the assessment u/s 153A of the Act on 12.07.2021 assessing the total income at Rs.4,37,12,380/-.
6. The ld.AR submitted that the ld. PCIT had issued the show cause notice dt.10.01.2023 u/s 263 of the Act revising the assessment order as the Assessing Officer has not initiated the penalty u/s 271(1) of the Income Tax Act.
7. In the show cause notice dt.10.01.2023, it was mentioned as under :
“2. On examination of records, it is observed that the order passed by the Assessing Officer on 12.07.2021 for A.Y. 2017-18 is erroneous in so far as it is prejudicial to the interest of revenue as penalty proceedings under relevant provisions of the Act have not been initiated by the Assessing Officer though unaccounted income of Rs.64,61,600/- was added in the assessment order. The invoking of penalty proceedings is a statutory requirement in such cases of assessment when undisclosed income is brought to tax. For the same reasons, the order u/s 153D of the Act dated 09.07.2021 passed by the Addl. CIT, Central Range – 2, Hyderabad according approval to the above mentioned assessment order is also erroneous in so far as it is prejudicial to the interest of revenue.
3. Hence, it is proposed to revise the assessment order dated 12.07.2021 for the A.Y. 2016-17 by virtue of the powers vested u/s 263 of the Act. Similarly, it is also proposed to revise the order u/s 153D of the Addl. CIT, Central Range – 2, Hyderabad, dated 09.07.2021 by virtue of the powers vested u/s 263 of the Act and accordingly, you are requested to submit your objections, if any, against the proposed revision under section 263 of the I.T. Act, 1961. Your submissions should reach this office on or before 18.01.2023. You may submit your objections / replies to the email [email protected].”
8. The assessee had filed reply to the show cause notice to the ld. PCIT. Thereafter, the ld. PCIT had revised the show cause notice to set aside the approval granted by the ACIT, Range – 2, Hyderabad u/s 153D of the Act.
9. The assessee had filed a reply before the ld. PCIT and it was the submission of the assessee that the ld. PCIT has no jurisdiction to issue the show cause notice for non-issuance of penalty notice to the assessee. Further, the assessee relied upon the judgments to substantiate his case. However, the ld. PCIT was not convinced with the submissions of the assessee and therefore, the ld. PCIT set aside the orders of Assessing Officer for the limited purpose of initiating the penalty proceedings by the Assessing Officer.
10. The assessee had submitted reply to the ld. PCIT, however, the ld. PCIT was not convinced by the submissions made by the assessee and has passed the following directions :
“18. In view of all the above, it is held that the objections raised by the assessee vide it’s letter dated 17.01.2023 in response to notice u/s. 263 dated 10.01 .2023, are not tenable in law as well as in facts. Considering the facts of the case as discussed in preceding paragraphs, it is hereby held that the Assessment Order passed by the A.O. u/s. 143(3), r.w.s. 153A on 12.07.2021 for A.Y. 2016-17 and the Order of approval u/s. 153D of the Act dated 09.07.2021 issued by the Addl. CIT, Central Range-2, Hyderabad are erroneous and prejudicial to the interest of revenue. Accordingly the same are set-aside to the file of the A.O. and the Addl. CIT respectively for the limited purpose of initiating penalty proceedings u/s. 271(1)(c) of the I.T. Act after following due procedure laid down and to take consequential action. Needless to say that the assessee should be afforded proper opportunity of being heard during the assessment proceedings taken up in consequence of this order. The assessee is at liberty to furnish necessary evidence, if any to the Assessing Officer during the proceedings being taken up in consequence to this order.”
11. Feeling aggrieved with the order of ld. PCIT, the assessee is now in appeal before us.
12. Before us, ld. AR submitted that the Ld. PCIT cannot direct the initiation of proceedings after the lapse of the statutory period of 6 months from the end of the assessment year, as the penalty proceedings are required to be concluded within the period of 6 months. It was secondly submitted that the Ld. PCIT cannot substitute or record his satisfaction for the initiation of the penalty. Ld. AR contended that the satisfaction must be recorded by the AO and not by the Ld. PCIT. If the Ld. PCIT intended to initiate the penalty, he should have done so independently by recording own satisfaction and initiate the penalty accordingly. The ld.AR had also filed the written submissions in support of the case of the assessee which are to the following effect :
“The common issues involved in the above appeals is with respect to the Revision power exercised by the id. PCIT (Central), Hyderabad, only for the limited purpose of directing the AO to initiate penalty proceedings under section 271(1)(c) and 270A of the Income Tax Act, 1961 (henceforth “the Act”) for the assessment years 2016-17 and 2017-18, respectively. For both the above asst. years, the AO has not initiated penalty proceedings while concluding the assessment orders under section 153A of the Act, thereby implying that ‘he had chosen not to invoke penalty proceedings.
2. The id. PCIT (Central) issued show cause notice finding the assessment orders for the above asst. years to be erroneous & prejudicial to the interest of the Revenue within the meaning of section 263 of the Act. The Id. PCIT also issued supplementary show cause notice finding fault with the approval accorded by the id. Addl. CIT to the assessment orders passed under section 153A of the Act.
3. The Appellant contended before the id. PCIT that jurisdiction under section 263 of the Act cannot be exercised only for the purpose of directing the AO to initiate penalty proceedings as the same are within the domain of the AO. The Appellant also cited various precedents in support of its contention. However, the ld. PCIT did not agree with the submissions of the Appellant nor the precedents cited before him. The ld. PCIT has set aside the assessment orders only for the limited purpose of initiating penalty proceedings by the Assessing Officer.
4. The Appellant has filed the present appeals aggrieved by the order of id. PCIT setting aside the assessment orders only for the limited purpose of initiating penalty by the AO.
5. The Appellant also filed two additional grounds on 10.07.2023 in the above appeals with respect to directions given by the ld. PCIT for initiating penalty proceedings which are barred by limitation. The following are the additional grounds:
ADDITIONAL GROUNDS
1. On the facts and in the circumstances of the case, the order passed by the ld. Pr. Commissioner of Income Tax directing the Assessing Officer to initiate penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961 is illegal and unsustainable in law as the time limit for initiating penalty prescribed under section 271(1)(c) of the Act expired much before the ld. Pr. Commissioner of Income Tax assumed jurisdiction on 10.01.2023 under section 263 of the Act.
2. The ld. Pr. Commissioner of Income Tax failed to appreciate that what was not done by the Assessing Officer with in the time limits provided under section 275(l) of the Income Tax Act, 1961 cannot be directed to be done by exercising the revision power under section 263 of the Act as held by various courts. The id. Pr. Commissioner of Income Tax ought to have appreciated that he cannot bring back to live the penalty proceedings under section 271(1)(c) of the Act which got barred by limitation under section 275(l) of the Act.
SUBMISSION ON ADDITIONAL GROUNDS
6. The assessment order is passed on 12.07.202 1. As per section 275(1)(c) of the Act the limitation for levy of penalty under section 271(1) (c) or section 270A of the Act ends on 30.09.2022. In the present case, the id. PCIT assumed jurisdiction under section 263 of the Act on 10.0 1.2023, which is after the date of time limits available for the AO to levy penalty. Therefore, the direction given by the ld. PCIT in the impugned orders under challenge, only for the limited purpose of initiating penalty proceedings cannot be sustained in law because the penalty proceedings have become barred by limitation.
7. It is submitted that the ld. PCIT is a creature of statute and can only implement the provisions of law. The ld. PCIT does not have power to confer jurisdiction on the ld.AO to initiate penalty proceedings which have become barred by limitation as per the provisions of section 275(1) of the Act. While the limitation could have been saved by setting aside the assessment orders in entirety, but since the impugned orders of the ld. PCIT have set aside the assessment orders only for the limited purpose of initiating the penalty proceedings, the limitation to levy penalties under section 271(1)(c) and section 270A or section 271AAA of the Act are not saved. The have become barred by time under section 275(1)(c) of the Act.
8. It is submitted that the ld. PCIT cannot give a direction which is barred by limitation given the facts of the present case. It is a settled position of law that what cannot be done by the AO directly cannot be done by the ld. PCIT under section 263 of the Act.
It is therefore prayed that the Hon’ble Tribunal may quash the impugned orders passed under section 263 of the Act on these grounds.
SUBMISSION ON GROUNDS RAISED IN APPEAL MEMORANDUM
9. Without prejudice to the additional grounds, It is submitted that the ld. PCIT could not have invoked revisional jurisdiction only on the ground that the id. AO has not initiated penalty proceedings. It is submitted that the judicial opinion on the above issue is divided. The following is the legal position:
