Recording of satisfaction in assessment order about initiation of penalty is must

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

This appeal by assessee under section 253 of Income Tax Act is directed against the order of learned Commissioner (Appeals)-9, (Commissioner (Appeals)) Mumbai dated 06-11-2015 for assessment year 2005-06. The assessee has raised the following grounds of appeal :–

1. The learned assessing officer was failed to recoded any direction to initiate the penalty in terms of legal fiction under section 271(1B) of the Income Tax Act in its assessment order under section 143(3) dated 27-12-2007 and hence entire penalty proceeding is required to be quashed in absence of satisfaction to initiate the penalty under section 271(1)(c) of the Income Tax Act.

2. The learned Commissioner (Appeals) erred in conforming action of the learned assessing officer levied penalty of Rs. 15,00,483 under section 271(1)(c).

3. The learned Commissioner (Appeals) passed quantum order on 10-11-2008 against which appeal was already preferred by the assessee before the Hon’ble ITAT. During the pendency of quantum appeal before the ITAT, the learned assessing officer levied the penalty vide order dated 29-3-2010 under section 271(1)(c) of the Income Tax Act. The learned Commissioner (Appeals) erred in appreciating provisions of section 275(1)(a) of the Income Tax Act and erred in applying first proviso after said section after holding that cut-off date to pass penalty order is 31-3-2010, i.e. 1 year after the completion of year in which Commissioner passes order, instead of 31-5-2009, i.e. 6 months from the date of receipts of Commissioner (Appeals)’s order in cases where appeal is preferred before the ITAT.

4. The learned Commissioner (Appeals) erred in conforming action of the learned assessing officer levied penalty of Rs. 15,00,483 under section 271(l)(c) not appreciating the view that issue was debatable in nature and no penalty can be levied on such issues.

2. Brief facts of the case are that assessee is engaged in the business of equity shares, broker in National Stock Exchange and Bombay Stock Exchange, Mutual Funds distribution and having Merchant Broking Services license from SEBI, filed its return of income for relevant assessment year on 30-10-2005. Subsequently, the assessee filed revised return of income on 31-3-2007 declaring total income of Rs. 2,39,83,993. The assessment was completed on 27-12-2007. The assessing officer while passing the assessment order besides the other additions and dis allowance made the addition of Rs. 41,00,522 on account of capitalization of expenditure. On appeal before the learned Commissioner (Appeals), in quantum assessment the addition on account of capitalization of expenditure was confirmed. The assessing officer levied penalty on the addition/dis allowance on account of capitalization of expenditure. The assessing officer levied penalty under section 271(1)(c) of Rs. 15,00,483 vide order dated 29-3-2010. On appeal before the learned Commissioner (Appeals), the penalty order was upheld. On further appeal before the Tribunal, the matter was restored back to the file of assessing officer vide order dated 6-6-2012 in ITA No. 4144/Mum/2011. The case was restored to examine if the penalty order was passed within stipulated period prescribed under section 275 and to decide the question of penalty afresh. The assessing officer in the restoration proceeding again confirmed the penalty order vide order dated 26-2-2014. On further appeal before Commissioner (Appeals) the order of penalty was further confirmed vide order dated 6-11-2015, impugned before us.

3. We have heard the learned Authorized Representative (AR) of the assessee and learned Departmental Representative (Departmental Representative) for the Revenue and perused the material available on record. The learned Authorized Representative of the assessee argued that the assessing officer failed to attend the direction of the Tribunal while passing fresh order dated 26-2-2014 in confirming the penalty order passed originally on 29-3-2010. It was argued that the assessing officer while passing the assessment order has not recorded satisfaction for initiating penalty whether the assessee has ‘ concealed the income’ or furnished ‘inaccurate particular of income’. The satisfaction of the assessing officer is must and it should be clear from the assessment order itself. Since, the assessing officer failed to record such satisfaction in the Assessment Order, the penalty order is liable to be quashed. In support of his submission the learned Authorized Representative of the assessee relied upon the decisions of Hon’ble Andhra Pradesh High Court in CIT v. Lotus Construction reported vide (2015) 370 ITR 475(A P), V.V. Projects and Investment (P) Ltd. v. DCIT (2008) 300 ITR 40(AP), Chennakeshwar Pharmacautical v. CIT (2012) 349 ITR 196 (A P), Hon’ble Delhi High Court in CIT v. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 (Delhi), CIT v. M.K. Sharma (2008) 307 ITR 147(Delhi) and decision of Hon’ble Apex Court in D.M. Manasvi v. CIT (1972) 86 ITR 557 (SC). In alternative submissions, it was argued that the order of penalty is based merely on difference of opinion between the assessee and the Revenue on account of nature of expenses. According to Revenue the expenses incurred by the assessee gives enduring benefit to the assessee and the same was required to be treated as capital in nature. However, as per the assessee, the expenses are Revenue in nature and claimed the benefit of such expenditure in the year only. The expenditure was disallowed, mere dis allowance would not lead to levy of penalty. In support of his submission the learned Authorized Representative of the assessee relied upon the decision of Hon’ble Supreme Court in CIT v. Reliance Petroproducts (P) Ltd. 322 ITR 158(SC). In third alternative submission, the learned Authorized Representative argued that assessee has taken the premises on lease and carry out repair work for smooth utilization premises for the purpose of business. However, the assessing officer was a view that certain repair works has given and during benefit to the premises and therefore, it was capital in nature accordingly and addition/dis allowance of Rs. 41,00,522 was made. Since, merely it was difference of opinion regarding nature of expenditure, the assessee has not concealed anything about the income nor furnished inaccurate particular while filing the return of income. The assessee furnished and disclosed all particulars while furnishing the return of income. The assessing officer while making dis allowance nowhere recorded that the assessee has either concealed the income or furnished inaccurate particular thereof. In other alternative submission the learned Authorized Representative of the assessee relied that the order of penalty was time-barred and the same was not passed within the prescribed period of limitation as prescribed under section 275 of the Act. Finally the learned Authorized Representative argued that assessing officer was bound to follow the order of Tribunal and assessing officer has not followed the direction of Tribunal. The lower authorities has no option except either to take the matter on further appeal before High Appellate Forum or ought to follow the direction. In support of his submission the learned Authorized Representative relied upon the decision of Tribunal in ITO v. Punj Hospitality (P) Ltd. and Union of India v. Kamalakshi Finance Corporation Ltd. AIR (1972) (SC) 711.

4. On the other hand the learned Departmental Representative for the revenue supported the order of the authorities below. It was argued that in the restoration proceedings the assessee failed to substantiate his contention that the order of the penalty was passed beyond the prescribed period of limitation as provided under section 275 of the Act. On merit it was argued that the dis allowance made in the quantum assessment has been confirmed by the appellate authorities.

5. We have considered the rival submissions of the learned Representatives of the parties and have gone through the orders of the authorities below. The perusal of the assessment order reveals that while making the dis allowance or passing final the assessment order on 27-12-2007 the assessing officer has not recorded his satisfaction, if the assessee concealed the income or furnished inaccurate particular of income. The assessing officer at the end of assessment order noted; “Notice under section 271(1)(c) of the Act, 1961 is issued separately”. We have noted that while framing assessment order the assessing officer made four addition by way of dis allowances, consisting of (i) dis allowance of Computer Software Charges, (ii) dis allowance on account of penalty levied by SEBI, (iii) dis allowance on account of Capitalization of expenditure on leased premises and (iv) dis allowance on account of non-deduction of TDS on payment to related party. While making dis allowances the assessing officer has not recorded his satisfaction about the initiation of penalty on such disallwances. At the end of assessment order the assessing officers just mentioned ‘notice under section 271(1)(c) of the Act issued separately. Admittedly there is no satisfaction of the assessing officer regarding the initiation of penalty in assessment order. Coming back to the order of penalty, initially the penalty order was passed on 29-3-2010. The penalty levied vide order dated 29-3-2010 has already been set aside by the Tribunal in its order 6-6-2012 in ITA No. 4144/Mum/2011.

6. The assessing order while passing fresh penalty order held that despite giving opportunity the assessee failed to explain as to how the order dated 29-3-2010 was beyond the stipulated time and held that the order was passed within time. The assessing officer again confirmed the penalty order without specifying, under which limb of section 271(1)(c) the penalty is levied. The learned Commissioner (Appeals) confirmed the order of penalty without specifying the specific limb of section 271(1)(c). The learned Commissioner (Appeals) concluded as under :–

“ I have further gone through the present as well as previous assessment order and penalty order of the assessing officer as well as Commissioner (Appeals)’s order on quantum as well as penalty. Keeping in view the entire facts and circumstances of the case, it has been clearly established by the assessing officer that the claim of the assessee being capital in nature could not be established and the contention of the appellant was not supported by the relevant facts. Therefore, the penalty imposed by the assessing officer is upheld.”

In our view the assessing officer as well as by learned Commissioner (Appeals) failed in recording the satisfaction regarding initiating, imposing and confirming the penalty order, if it was for concealment of income or for furnishing inaccurate particulars. The order of penalty was passed and confirmed in mechanical way. We have seen that in this case, there is no finding that any details supplied by the assessee in its Return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1)(c) of the Act. In our view mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the Return cannot amount to the inaccurate particulars. In our view the assessee had furnished all the details of its expenditure as well as income in its Return, which details, for which there is no finding that the details were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the assessing officer to accept its claim in the Return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under section 271(1)(c).

The Hon’ble Supreme Court in Dilip N. Shorff v. CIT (291 ITR 519 SC) held that when the assessee has furnished all the particulars of income the imposition of penalty is not automatic. Further, Hon’ble Apex Court in Reliance Petroproducts Ltd. v. CIT (322 ITR 158 SC) held that mere making a claim which is not sustainable in law does not attract the penalty under section 271(1)(c). The Hon’ble Andhra Pradesh High Court in CIT v. Lotus Construction, V.V. Projects and Investment (P) Ltd. v. DCIT, and in Chennakeshwar Pharmaceutical v. CIT (supra) and Hon’ble Delhi High Court in CIT v. Ram Commercial Enterprises Ltd. (supra) held that recording of the satisfaction in the assessment order about the initiation of penalty is must. In absence of proper satisfaction about the initiation of penalty order the penalty is liable to be deleted. Thus, the submissions of the learned Authorized Representative for the assessee are convincible that the penalty was levied by assessing officer without proper satisfaction. In our view the ratio of decision in Reliance Petroproducts Ltd. (supra) is directly applicable on the facts of the present case. Thus, the learned Authorized Representative of assessee is succeeded in convincing us on his first two preposition that neither the assessing officer recorded his satisfaction about initiating and in imposing the penalty on particular limb of section 271(1)(c) and there was difference of opinion on the dis allowance of expenditure. Hence, the grounds of appeal raised by the assessee are allowed. As we have allowed the appeal of the assessee on first two prepositions of submissions of learned Authorized Representative for the assessee hence, the discussion on other submission has become academic.

7. In the result, appeal filed by assessee is allowed.