Penalty under section 271(1)(c ) after CIT (Appeal) order

Time limit for levy penalty under section 271(1)(c) after Commissioner Appeal order

Recently, my  friend made me a panic call as he received a notice for levying penalty under section 271(1)(c) of the Income Tax Act after the commissioner (A) has dismissed quantum appeal and the assessee has further filed the appeal before the Honorable Appellant Tribunal  against the order of commissioner (A). This is not my friend case but it generally happens when the order is passed by the commissioner (A) in quantum cases; the department initiates penalty proceedings in spite of the facts that the assessee is in appeal before the honorable Tribunal.

Now the question is  whether penalty under section 271(1)(c ) can be imposed when the matter  is pending before the honorable tribunal; for this, it is necessary to analysis  the relevant provision of the act is  extracted below:

Section 275 of the Income Tax Act, 1961

275.(1) No order imposing a penalty under this Chapter shall be passed–

(a) in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals) under section 246 or section 246A or an appeal to the Appellate Tribunal under section 253, 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 the order of the Commissioner (Appeals) or, as the case may be, the Appellant Tribunal is received by the Chief Commissioner or Commissioner, whichever period expires later:

Provided that in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals) under section 246 or section 246A, and the Commissioner (Appeals) passes the order on or after the 1st day of June, 2003 disposing of such appeal, an order imposing penalty shall be passed before the expiry of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed, or within one year from the end of the financial year in which the order of the Commissioner (Appeals) is received by the Chief Commissioner or Commissioner, which is later;”

Analysis

Where the main part of this section  provides that where the assessment order is subject matter of an appeal before the commissioner of income tax under section 246 or 246(A) or further appeal to the Appellant Tribunal, the period of limitation for passing penalty order will be  six month  from the date of receipt of the order of commissioner or Appellant tribunal by the chief commissioner or commissioner.

The proviso to section 275 was inserted by the The Finance Act, 2003 to provide for  following changes with effect from 1-6-2003.

The Income Tax Circular No. 7/2003 on Finance Act 2013 provided as follows

80. Amendment of section 275 relating to time limit for imposing of penalty

80.1 Under the existing provisions contained in clause (a) of sub-section (1) of section 275, no order imposing a penalty shall be passed, in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals), or to the Appellate Tribunal 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 within six months from the end of the month in which the order of the Commissioner (Appeals), or, as the case may be, the Appellate Tribunal is received by the Chief Commissioner or Commissioner, whichever period expires later.

80.2 The Finance Act, 2003 has inserted a proviso in the said clause so as to provide that in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals) under section 246 or section 246A of the Income-tax Act, and the Commissioner (Appeals) passes the order on or after the 1st June, 2003 in such appeal, an order imposing penalty shall be passed before the expiry of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed or within one year from the end of the financial year in which the order of the Commissioner (Appeals) is received by the Chief Commissioner or Commissioner, whichever is later.

80.5 These amendments will take effect from the 1st day of June, 2003.

[Section 96]

Issue

The issue arose after this amendment was that whether after this proviso,  penalty has to be imposed within  one year from the end of the financial year (prior to amendment the period was 6 months) in which the order is received by Chief Commissioner of Income-tax or Commissioner of Income-tax ignoring the  fact that  the appeal has been preferred before the honorable Tribunal.

Here, it is relevant to understand the scope of proviso; The Supreme Court in considering the function of a proviso in Commissioner of Income Tax v. Ajax Products Ltd., 55 ITR 741(SC), approved the dictum in Commissioner of Income Tax v. Indo-Mercantile Bank Ltd., (1959) 361 ITR I, and summarized it thus:

“”The proper function of a proviso is that it qualified the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso, would fall within the main enactment. Ordinarily, it is foreign to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to the main enactment. „It is a fundamental rule of construction that a proviso must be considered with relation to the principal matter to which it stands as a proviso.‟ Therefore, it is to be construed harmoniously with the main enactment.”

There may be cases in which the language of the statute may be so clear that a proviso may be construed as a substantive clause. But whether a proviso is construed as restricting the main provision or as a substantive clause, it cannot be divorced from the provision to which it stands as a proviso. It must be construed harmoniously with the main enactment. So construed, we have already stated earlier the result that flows from such a construction.”

Also in S.C. Cambatta and Co. Ltd. v. Commissioner of Income Tax, (1952) 21 ITR 121 (Bombay), the proper construction and interpretation of a proviso was summarized thus:

“But it must not be forgotten that a proviso is subsidiary to the main section and it must be construed in the light of the section itself. The object of the proviso, as it has so often been stated, is to carve out from the main section a class or category to which the main section does not apply. But in carving out from the main section one must always bear in mind what is the class referred to in the main section and must also remember that the carving out intended by the proviso is from the particular class dealt with by the main section and from no other class.”

From the perusal of  above, it appears that the proviso to section 275(a) has been inserted to extend the time limit of six month to one year after  the receipt of  order of commissioner(A) in the office of Chief Commissioner or commissioner of income tax and it does not obliterate the time limit provided in the main section where the assessee choose to further file appeal in  honorable tribunal against the order of CIT(A).

Legal Precedents

This  issue   came before Madras High court in the case of Rayala Corporation P. Ltd. v. Union of India, (2007) 288 ITR 452 (Mad) where it held that

“A reading of the above said provision makes it clear that the interpretation placed by learned counsel for the petitioner on the said provision is acceptable. There is no dispute in this case that the petitioner has filed an appeal before the Tribunal and the same is pending. In such a case, the limitation period for the levy of penalty will be as provided for under section 275(1)(a), i.e., six months from the end of the month in which the order of the Appellate Tribunal is received by the Chief Commissioner. There cannot be any doubt on this aspect. Accordingly, this court is of the view that the proviso to section 275(1)(a) of the Act, does not nullify the availability to the third respondent of the period of limitation of six months from the end of the month when the order of the Income-tax Appellate Tribunal, Chennai, is received by the third respondent herein.”

The above judgement of Madras High Court was also considered by honorable DHC in the case of MOHAIR INVESTMENT AND TRADING CO. P. LTD. reported in 18 Taxmann.com 239 where in the honorable court after analyzing the mail section and its proviso and effect of proviso held as under :

“From a plain reading of the relevant Sections it is clear that the period of six months provided for imposition of penalty under Section 275(1)(a) starts running after the successive appeals from an assessment order has been finally decided by the CIT(A) or the ITAT as the case may be whichever period expires later. The proviso to section 275(1)(a) has only had the effect of extending the period of imposing penalty from six months to one year within the receipt of the order of the Commissioner after 1st June, 2003. The proviso thus carves out an exception from the main Section inasmuch as in cases where no appeal is filed before the ITAT the Assessing Officer must impose penalty within a period of one year to be reckoned from the date of receipt of the order by the Commissioner. To read this provision as suggested by the Counsel for the Assessee would obliterate the main provision itself. In this behalf it is necessary to remember that a proviso is merely a subsidiary to main Section and must be construed in the light of the Section itself. It has to be construed harmoniously with the main provision. This conclusion is fortified by the decision of the learned Judge in Rayala Corporation (supra), where it was held that in case where an appeal is pending before the Tribunal the limitation period for levy of penalty can only be as provided for under Section 275(1)(a), i.e., six months from the end of the month in which the order of the Tribunal is received by the Commissioner.”

This  issue  also came before Madras High court in the case of Rayala Corporation P. Ltd. v. Union of India, (2007) 288 ITR 452 (Mad) where it held that

“A reading of the above said provision makes it clear that the interpretation placed by learned counsel for the petitioner on the said provision is acceptable. There is no dispute in this case that the petitioner has filed an appeal before the Tribunal and the same is pending. In such a case, the limitation period for the levy of penalty will be as provided for under section 275(1)(a), i.e., six months from the end of the month in which the order of the Appellate Tribunal is received by the Chief Commissioner. There cannot be any doubt on this aspect. Accordingly, this court is of the view that the proviso to section 275(1)(a) of the Act, does not nullify the availability to the third respondent of the period of limitation of six months from the end of the month when the order of the Income-tax Appellate Tribunal, Chennai, is received by the third respondent herein.”

Conclusion

From the perusal of the legislative law and its legal precedents, it can be infered that the time limit for levying penalty under section 271(1)© will be counted from the six month from the end of month in which the order of honorable Tribunal is received by the Chief Commissioner or Commissioner of Income Tax if the assessee has gone in appeal before the Appellant Tribunal.