S. 263 Non initiation of penalty proceedings during assessment renders it erroneous

Full Text of the ITAT Order is as follows:-

This is an appeal by the assessee against the order of Commissioner of Income Tax-17-Kolkata passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 21.03.2017 for assessment year 2006-07.

Shri T.K. Chakraborty, Ld. Advocate appeared on behalf of assessee and Shri G.Mallikarjuna, Ld. Departmental Representative appeared on behalf of Revenue.

2. Ground No. 1 to 4 are inter-related and therefore being taken up Solitary inter-connected issue raised by assessee in this appeal is that Ld. Pr.CIT erred in holding the assessment order as erroneous in so far as prejudicial to the interest of Revenue.

3. Briefly stated facts as culled out from the order of Authorities Below are that assessee in the present case is an individual and engaged in the business of consultancy, supervision, planning and designing, estimating and evaluation. The assessment for the year under consideration was framed u/s. 143(3)/263 of the Act vide order dated 31.03.2015 wherein the addition of ₹1 ,62,75,000/- was made on account of unexplained investment.

4. However the Ld. Pr.CIT u/s 263 of the Act from the above order observed that the penalty proceedings u/s 271 (1 )(c) of the Act has not been initiated by the AO. Therefore, he was of the view that the order passed by AO is erroneous in so far as prejudicial to the interest of Revenue on account of non-initiation of penalty proceedings u/s 271(1 )(c) of the Act.

5. Ld. Pr. CIT u/s. 263 of the Act also observed that the order for the same assessment year was made earlier on two occasions u/s 144 and 263/1 44 of the Act wherein the penalty proceedings u/s. 271(1 )(c) of the Act was initiated on account of impugned unexplained investment. The relevant details of the earlier assessment orders are extracted below:-

However, the assessee against the penalty order passed u/s. 271(1)(c) of the Act dated 27.03.2014 preferred an appeal before Ld. CIT(A) who deleted the penalty vide its order dated 29.09.2016 on the following grounds:-

i) The assessment order passed u/s. 263/144 dated 25.08.2011 was set aside by Ld. Pr. CIT u/s 263 of the Act, therefore, penalty cannot be levied;

ii) The penalty order was passed beyond the limitation period;

From the above facts Ld. Pr. CIT u/s 263 of the Act observed that penalty proceedings was initiated by the AO in two assessment orders passed on 12.2008 and 25.08.2011 respectively but the AO omitted to initiate the same in his assessment order framed on 31 .03.2015. Therefore, the Ld. Pr. CIT was of the view that the order dated 31.03.2015 passed by the AO is erroneous is in so far as prejudicial to the interest of Revenue on account of not initiation of penalty proceedings u/s. 271 (1 )(c) of the Act. Accordingly, Ld. Pr. CIT u/s 263 of the Act called upon the assessee to explain why the penalty proceedings u/s. 271(1)(c) of the Act should not be initiated. In compliance thereto, assessee submitted that for the same assessment year penalty levied u/s 271 (1 )(c)of the Act by the AO has already been deleted by the Ld. CIT(A) in his order dated 29.09.201 6, therefore, there is question for further initiation of penalty proceedings u/s 271(1 )(c) of the Act. The assessee also submitted that the assessment order does not become erroneous in so far as prejudicial to the interest of Revenue if penalty proceedings have not been initiated in the assessment order. The assessee in this regard relied on the judgment of Hon’ble Madras High Court in the case of CIT vs. C.R. Swamy reported in 254 ITR 158 (Mad). The assessee also relied on the judgment of Hon’ble Delhi High Court in the case of CIT vs. Sudarshan Talkies reported in 200 ITR 153 (Del). However, Ld. CIT disregarded the contention of assessee by observing as under:-

“3.1 The above written submission has been discussed with the Ld. A.R. in the hearing held on 21.02.2017. In the above written submission, the Ld. A.R. has first pointed out that the penalty imposed by the AO u/s.271(1)(c) for the same assessment year i.e., 2006-07 has been deleted by the Ld. CIT(A)-15 as bad in law by his order dated 29.09.2016 and hence, the question of further initiation of penalty u/s.271(1)(c) does not arise. This contention of the Ld. A.R. has not been found to be correct because the earlier penalty order was passed on the basis of the assessment order passed u/s. 144/263 dated 25.08.2011 which itself has been set aside and when the assessment order itself initiating the penalty proceeding u/s.271(1)(c) did not survive, the question of levying of penalty u/s.271(1)(c) does not arise. The second ground of deleting the penalty was that the penalty order was passed beyond the limitation period and hence, such penalty order being time barred cannot survive but it does not mean that the penalty order was not sustainable on merit. Therefore. first contention of the Ld. A.R. has been rejected.

3.2 The second contention raised by the ld. A.R. is that the Hon’ble Madras High Court in the case of CIT – vs.- CR. K. Swamy reported in 254 ITR (158) held that, non-initiation of penalty proceeding u/s.271(1)(c) of the I.T. Act in the assessment order did not render the assessment erroneous or pre- judicial to the interest of revenue and the CIT cannot invoke jurisdiction of 263 of the I. T. Act for such non-initiation of penalty proceeding u/s 271(1)(c) of the Act. The Ld. A.R. in this regard also, referred to another decision by the Honble Delhi High Court in the case of CIT -vs- Sudershan Talkies reported in 200 ITR 1 53 (Delhi).

I have considered the above case laws relied upon by the ld. A.R. After going through these case laws, it has been found that decision of Hon’ble Madras High Court is based on the decision of Hon’ble Delhi High Court in the case of CIT -vs- Sudershan Talkies (supra) and in the decision of CIT -vs- Sudershan Talkies (supra), the Delhi High Court has relied upon its own decision in the case of Addl. CIT -vs- J.K.D’costa (1982) 133 ITR-l. In this regard, I respectfully submit that after going through the order of Hori’ble Delhi High Court in the case of CIT -vs- J.K. D’costa (supra) relied upon in the decisions cited by the assessee. the Honble Allahabad High Court in the subsequent decision of CIT vs- Surendra Prasad Agarwal reported in 2005, 142 Taxmann 653 (Allahabad) has not agreed with the view Honorable Delhi High Court They have rather followed the decision of Hon’ble Madhya Pradesh High Court in the case of Addl. CIT -vs- Indian Pharmaceuticals (1980) 123 ITR 874 and it has been held by the Allahabad High Court in the above cited decision as under.

“It is also aforesaid the Assessing Officer has to initiate proceedings for imposition of penalty during the course of the assessment itself. If he fails to initiate or record his satisfaction for the initiation of the penalty proceedings during the course of the assessment proceedings it would be a case where the assessment order con be said to be erroneous as he has not decided a point nor recorded a finding on an issue which ought to have been done or decides it wrongly as held by this Court in the case of Sariyo Distillery (supra). Thus the omission of the Income Tax officer to initiate penalty proceedings during the course of the assessment renders the assessment order erroneous and prejudicial to the interest of the Revenue. “

On the issue before me about the issuing the direction to the AO u/s.263 for initiation of penalty proceeding u/s.271(1)(c), no other decision other than the decision of Hon’ble Delhi High Court and a subsequent decision of Hon’ble Madras High Court in which the decision of Hon’ble Delhi High Court was followed, has been brought to my notice by the assessee, rather there are other decisions of Hon’ble Allahabad High Court also in the case of CIT -vs- Associated Contractors Corporation (2005) 145 Taxmann 356, CIT-vs- Smt. Kiran Jaiswal (2006) 153 Taxmann 399, CIT-vs- Ashok Construction Co. (2005) 147 Taxmann 37 (Allahabad) in which it has been held that non-initiation of penalty proceeding by the assessing authority renders the order to be erroneous and pre-judicial to the interest of revenue and therefore, the said matter can be revised u/s.263.

As far as the merit of the case is concerned, when on the same addition in original order, penalty u/s. 271(I)(c) is initiated, there is no question of not initiating penalty u/s.271(1)(c) on that addition again made in subsequent revised order, specially when that addition is confirmed in appellate proceeding. Therefore, non-initiation of penalty proceeding u/s. 271(1)(c) on same addition in the revised order is nothing but an error committed by the AD and because of such error, the assessment order passed by the AO has become erroneous in so far as pre- judicial to the interest of revenue, In view of the above facts of the case and following the decisions of Hon’ble Allahabad High Court and also the Hon’ble Madhya Pradesh High Court, I hold that non-initiation of penalty proceeding u/s.271(l)(c) by the AD in this case, despite making same addition in the revised order dated 31.03.2015 as it was made in the original order on account of unexplained investment u/s.69A amounting to Rs. 1,62,75,000/-, has rendered the said as assessment order passed by the AO as erroneous in so far as pre- judicial to the interest of revenue Therefore, the AO is directed to re-examine the initiation of penalty proceeding u/s.271(1)(c) on the basis of same addition that was made in the original order dated 31.12.2008 and then again in the revised order dated 31.03.2015 on account of unexplained investment in RBI Taxable Bond not disclosed by the assessee and to this extent, the assessment order is set aside and the matter is restored back to the file of the A O.

4. Accordingly, the assessment order passed u/s.263/143(3) dated 31.03.2015 is set aside to the extent of initiation of penalty proceeding u/s.271(1)(c) after examining the nature of addition made u/s.69A on account of unexplained investment in RBI Taxable Bonds. Rest of assessment order dated 31.03.2015 shall remain intact as it was passed.”

Being aggrieved by this order of Ld. Pr. CIT assessee has come up in appeal before us.

6. Ld. AR for the assessee before us filed paper book which contains annexure- A to G and submitted that the provision of Section 263 of the Act refers to the assessment proceedings. Thus, Ld. Pr. CIT u/s 263 of the Act cannot expand his power to deal with penalty proceedings which are not before him. He further submitted that Ld. CIT(A) has already deleted the penalty levied by the AO on the ground that the order was time barred. He prayed before the Bench that the issue may be decided on merit. On the other hand, Ld DR vehemently relied on the order of Authorities Below.

7. We have heard the rival contentions and perused the material available on record. The limited issue for our adjudication is that Ld. CIT u/s 263 of the Act held the assessment order passed by the AO as erroneous in so far as prejudicial to the interest of Revenue on the ground that penalty proceeding was not initiated in the assessment order. In this regard, we find that Hon’ble Allahabad High Court in the case of CIT vs. Surendra Prasad Agrawal (2005) reported in 275 ITR 113 (All) after considering the judgment of Hon’ble Delhi High Court in the case of CIT vs. Surendra Talkies reported 200 ITR 153 (Del) as well as CIT vs. C.R. K. Swami reported in 254 ITR 158 (Del) has held that non initiation of penalty proceedings in the assessment order amounts to error causing prejudice to the interest of Revenue. The relevant extract of the order reproduced below:-

“It is well established that the Assessing Officer has to initiate proceedings for imposition of penalty during the course of assessment itself. If he fails to initiate or record his satisfaction for the initiation of the penalty proceedings during the course of the assessment proceedings it would be a case where the assessment order can be said to be erroneous as he has not decided a point nor recorded a finding on an issue which ought to have been done or decides it wrongly. Thus, the omission of the ITO to initiate penalty proceedings during the course of the assessment renders the assessment order erroneous and prejudicial to the interest of the revenue. [Para 18]

Therefore, the Tribunal was not justified in holding that the failure to initiate penalty proceedings in the course of the assessment did not render the assessment order erroneous and prejudicial to the interest of the revenue. The Commissioner had the jurisdiction to revise such an order.

From the above proposition, we observe that non initiation of penalty proceedings during assessment proceedings renders the assessment order erroneous and prejudicial to the interest of Revenue. Thus, in view of the above, we find no infirmity in the order passed by Ld. Pr. CIT u/s 263 of the Act.

However, we further note that there is a time limit prescribed u/s 275 of the Act to pass a penalty order which reads as under:-

⁹[Bar of limitation for imposing penalties.

¹[(1)]No order imposing a penalty under this Chapter shall be passed—

²[(a) in a case where the relevant assessment or other order is the subject-matter of an appeal to the ³[***] Commissioner (Appeals) under section  246 ⁴[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 ⁵[***] Commissioner (Appeals) or, as the case may be, the Appellate Tribunal is received by the Chief Commissioner or Commissioner, whichever period expires later :

⁶[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, whichever is later;]

(b) in a case where the relevant assessment or other order is the subject-matter of revision under section 263 ⁷[or section 264], after the expiry of six months from the end of the month in which such order of revision is passed;

(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 ]

In this connection, no argument was advance by Ld. AR for the assessee. Therefore, we refrain ourselves from adjudicating the same and thus, we are inclined to keep the issue open. In view of the above, we hold that the impugned order passed by Ld. Pr. CIT u/s. 263 of the Act is correct and as per the provision of law. Consequently, grounds raised by assessee are dismissed.

8. In the result, appeal filed by assessee stands dismissed.

Order pronounced in the open court 10/11/2017