Case Law Details
PCIT Vs Harish Jain (Rajasthan High Court)
Rajasthan High Court has dismissed appeals filed by the Principal Commissioner of Income Tax (PCIT) against an order of the Income Tax Appellate Tribunal (ITAT), Jaipur. The High Court affirmed the Tribunal’s decision to quash a revisional order that had directed the Assessing Officer (AO) to initiate penalty proceedings under of the Income Tax Act, 1961, against the assessee, Harish Jain. The core of the judgment revolves around the necessity for the AO to record specific satisfaction for the relevant penalty provision during assessment proceedings.
The case originated from a search conducted on September 7, 2017, at the premises of Resonance Group, Kota, which led to a notice under Section 153A of the Act being issued to Harish Jain for Assessment Year (AY) 2012-13. The assessee filed a return declaring an income of ₹15,67,000, which was subsequently assessed at ₹70,67,000 by an order dated December 22, 2019. In this assessment order, the AO recorded satisfaction for initiating penalty proceedings under Section 271AAB of the Act.
The Revisional Authority, exercising powers under Section 263 of the Act, subsequently issued an order on March 25, 2022, directing the AO to initiate and levy penalty under Section 271(1)(c) of the Act, after independently arriving at due satisfaction. The assessee appealed this revisional order to the ITAT, which set it aside. The PCIT then appealed to the High Court, raising substantial questions of law concerning the quashing of the Section 263 order by the ITAT.
The primary issue before the High Court was “whether initiation of penalty proceedings under two sections by A.O. by recording satisfaction for one section makes the order erroneous and prejudicial to interest of revenue and revisional authority can direct A.O. to initiate penalty proceedings under other section after recording satisfaction?”
The High Court examined Section 271(1) of the Act, which provides for penalties in cases of failure to furnish returns, non-compliance with notices, concealment of income, or furnishing inaccurate particulars. The court noted that Section 271(1)(c) specifically deals with penalties for concealed particulars of income or furnishing inaccurate particulars.
The AO, in the assessment order, had explicitly recorded satisfaction for initiating penalty proceedings under Section 271AAB of the Act. The relevant portion of the AO’s order stated: “Since the assessee has offered Rs.55 Lacs for taxation in his statement u/s 132(4) during search proceeding but has not included the same amount in his return filed u/s 153A on 18.07.2018 and not paid the taxes, I am satisfied that the provision of section 271AAB(1A) is applicable in this case. Therefore penalty proceeding u/s 271AAB(1A) is initiated accordingly.” However, in the concluding part of the order, the AO also initiated penalty proceedings under Section 271(1)(c) along with Section 271AAB, by issuing a notice under Section 274.
The Rajasthan High Court relied on a series of judicial precedents to establish the legal position regarding penalty proceedings.
Judicial Precedents:
1. Commissioner of Income Tax, Madras and Anr. Vs. S.V.Angidi Chettfar [(1962) 44 ITR 739 (SC)]: A five-judge bench of the Supreme Court, while dealing with Section 28 of the Indian Income Tax Act, 1922 (a pari materia provision to Section 271 of the current Act), held that the power to impose a penalty depends on the satisfaction of the Income Tax Officer “in the course of the proceedings under the Act,” and this satisfaction “cannot be arrived at after the conclusion of proceedings.” The Supreme Court clarified that satisfaction must exist before the proceedings are concluded, although the formal steps for levying penalty can commence later.
2. M. Manasvi Vs. Commissioner of Income Tax, Gujarat, II Ahmedabad [(1972) 86 ITR 557 (SC)]: This Supreme Court decision reiterated and relied upon the principles laid down in S.V.Angidi Chettfar (supra), further solidifying the requirement of contemporaneous satisfaction.
3. Additional Commissioner of Income Tax. Vs. J.K.D.’ Costa [(1982) 133 ITR 7 (Delhi)]: The Delhi High Court held that assessment and penalty proceedings are distinct and independent. A failure by the AO to record satisfaction for levying penalty in the assessment order does not render the assessment order “erroneous and prejudicial to the interest of revenue” under Section 263. The Supreme Court dismissed the SLP against this order, indicating agreement with the Delhi High Court’s stance.
4. Commissioner of Income Tax vs. Rakesh Nain Trivedi [(2016) 282 CTR (P&H) 205]: The Punjab and Haryana High Court, aligning with previous decisions of the Delhi High Court (e.g., Additional CIT v. J.K.D.’Costa, Commissioner of Income Tax v. Sudershan Talkies, Commissioner of Income Tax v. Nihal Chand Rekyan) and the Rajasthan High Court itself (Commissioner of Income Tax v. Keshrimal Parasmal), held that a revisional authority cannot initiate revisional proceedings under Section 263 merely because the AO failed to initiate penalty proceedings during the assessment. This implicitly underscores that absence of penalty initiation does not, by itself, make an assessment order erroneous and prejudicial.
5. Commissioner of Income Tax Vs. Super Metal Re-Rollers (P.) Ltd. [(2004) 265 ITR 82 (Delhi)] and Commissioner of Income Tax Vs. Ram Commercial Enterprises Ltd. [(2000) 246 ITR 568 (Delhi)]: These Delhi High Court judgments, relying on D.M. Manasvi (supra), emphasized that the mere initiation of penalty proceedings is not equivalent to the requisite recording of satisfaction by the AO in the assessment order. Satisfaction must be explicitly “spelt out” in the AO’s order.
6. Commissioner of Income Tax vs. Jai Laxmi Rice Mills [(2015) 379 ITR 521 (SC)]: The Supreme Court explicitly held that satisfaction recorded for penalty proceedings under Section 271(1)(c) cannot be the basis for initiating penalty proceedings under a different section (e.g., Section 271E), leading to the quashing of such penalty proceedings. This highlights the principle that satisfaction must be for the specific provision under which the penalty is sought to be imposed.
Based on these precedents, the Rajasthan High Court summarized the established legal position:
- The AO’s satisfaction regarding the grounds for penalty (as per clauses (a) to (d) of Section 271) must be recorded during the course of the assessment proceedings.
- Assessment and penalty proceedings are distinct.
- Recording of satisfaction must occur during the proceedings, though the penalty notice can be issued later.
- Once satisfaction is recorded, penalty can be imposed within the limitation period under Section 275.
- Merely initiating penalty proceedings is not a substitute for recording explicit satisfaction in the order.
- An assessment order cannot be deemed erroneous and prejudicial to revenue solely due to the AO’s non-recording of satisfaction for initiating penalty.
- Satisfaction must be specific to the provision under which penalty is initiated; penalty cannot be imposed under a different provision for which no satisfaction was recorded.
Applying these principles to the present case, the High Court noted that the AO had recorded satisfaction specifically for Section 271AAB of the Act. Even though the AO initiated proceedings under both Section 271AAB and Section 271(1)(c), there was no recorded satisfaction for Section 271(1)(c) during the assessment proceedings. The court clarified that this was not a mere “wrong mentioning of section” but a “case of non recording of satisfaction u/s 271(1)(c) of the Act.”
Given the absence of a properly recorded satisfaction for Section 271(1)(c) by the AO during the assessment, the High Court concluded that the penalty proceedings under that section were “vitiated.” Therefore, the revisional order directing the AO to initiate penalty proceedings under Section 271(1)(c) by recording independent satisfaction was deemed unjustified, as such reasons cannot be recorded after the culmination of assessment proceedings.
The Rajasthan High Court consequently upheld the ITAT’s order, dismissed the appeals filed by the PCIT, and answered the substantial questions of law against the revenue.
For Respondent(s) : Mr. Mahendra Gargieya with Mr. Devang Gargieya & Mr. Hemang Gargieya
FULL TEXT OF THE JUDGMENT/ORDER OF RAJASTHAN HIGH COURT
1. These appeals are filed under Section 260-A of the Income Tax Act, 1961 (for short ‘the Act’) against the order of the Income Tax Appellate Tribunal, Jaipur (for short ‘the tribunal’) dated 25.11.2022.
2. Appeals are being decided by this order as the facts and issues involved are similar. For convenience, the facts are being taken from D.B. Income Tax Appeal No.81/2023.
3. The brief facts are that consequent to search conducted on 07.09.2017 at the residential and business premises of Resonance Group, Kota, notice under Section 153A of the Act dated 05.07.2018 was issued to the assessee-respondent (hereinafter referred to as ‘assessee’). The assessee furnished return on 18.07.2018 declaring income of Rs. 15,67,000/-. The assessment was finalized vide order dated 22.12.2019 and the income was assessed at Rs. 70,67,000/-. The assessing officer (hereinafter referred to as ‘A.O’.) recorded satisfaction for initiating penalty proceeding under Section 271AAB of the Act.
3.1 The Revisional Authority vide order dated 25.03.2022 directed the A.O. to initiate and levy penalty u/s 271(1)(c) of the Act, after arriving at due satisfaction independently. In appeal of the assessee, the revisional order was set aside by the tribunal and hence, the present appeal.
3.2 The appeal was admitted on 07.11.2023 on following substantial questions of law:-
“(i) Whether the learned ITAT has erred in law in quashing the order dated 25.03.2022 passed under Section 263 of the Income Tax Act, 1961?
ii. Whether the learned ITAT has erred in law by quashing the order under Section 263 of the Income Tax Act, 1961 passed by the Pr. CIT by treating a case of initiation of penalty under incorrect section of Income Tax Act, 1961 to be a case of non-initiation of penalty?
iii. Whether the learned ITAT has erred in law in not appreciating that penalty proceedings had to be initiated in the assessment order itself and further the incorrect initiation of penalty by the A.O. made the assessment order erroneous and prejudicial to the interests of revenue?”
4. Learned counsel for the appellant submits that in the last paragraph of the assessment order, the A.O. initiated penalty proceedings u/s 271(1)(c) of the Act by issuance of notice. The tribunal erred in setting aside the revisional order. Submission is that Section 271AAB of the Act was not on the statute book during the relevant assessment year and the satisfaction recorded for initiating penalty u/s 271AAB of the Act was erroneous.
5. Learned counsel for the assessee submits that no satisfaction was recorded by the A.O. for initiating penalty proceedings u/s 271(1)(c) of the Act.
6. The issue involved is:- whether initiation of penalty proceedings under two sections by A.O. by recording satisfaction for one section makes the order erroneous and prejudicial to interest of revenue and revisional authority can direct A.O. to initiate penalty proceedings under other section after recording satisfaction?
Section 271(1) of the Act is quoted below:-
Failure to furnish returns, comply with notices, concealment of income, etc.
271.(1) If the [Assessing] Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person:-
a. Omitted
b. has failed to comply with a notice under sub-section (2) of section 115WD or under sub-section (2) of section 115WE or under sub-section (1) of section 142 or sub-section (2) of section 143 [or fails to comply with a direction issued under sub-section (2A) of section 142], or
c. has concealed the particulars of his income or furnished inaccurate particulars of such income, or
d. has concealed the particulars of the fringe benefits or furnished inaccurate particulars of such fringe benefits,
he may direct that such person shall pay by way of penalty:-
i. Omitted
ii. in the cases referred to in clause (b), in addition to tax, if any, payable by him, a sum of ten thousand rupees for each such failure;
iii. in the cases referred to in clause (c) or clause (d), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits.
xxx xxx xxx
7. The assessment for A.Y. 2012-13 was finalized by making an addition of Rs.55 lacs. The issue of initiation of penalty proceeding was with regard to this addition as no other issue was involved. The A.O. recorded satisfaction for initiating penalty proceedings u/s 271AAB of the Act as the assessee had offered Rs.55 lacs for taxation in the statement recorded during the search proceedings. Relevant portion of the order is reproduced:
“Since the assessee has offered Rs.55 Lacs for taxation in his statement u/s 132(4) during search proceeding but has not included the same amount in his return filed u/s 153A on 18.07.2018 and not paid the taxes, I am satisfied that the provision of section 271AAB(1A) is applicable in this case. Therefore penalty proceeding u/s 271AAB(1A) is initiated accordingly.”
8. In the concluding part of the order, the A.O. initiated penalty proceedings u/s 271(1)(c) of the Act. In the same para the penalty proceedings u/s 271AAB of the Act were also initiated by issuance of notice u/s 274 of the Act.
9. Section 271 of the Act stipulates that the penalty may be imposed by the officers mentioned in section being satisfied during the course of proceedings that the ingredients of one of the clause (a) to (d) exist in the case.
10. The five judges Bench of the Supreme Court in the case of Commissioner of Income Tax, Madras and Anr. Vs. S.V.Angidi Chettfar reported in (1962) 44 ITR 739(SC) dealing with Section 28 of the Indian Income Tax Act, 1922 (which is para-materia to Section 271 of the Act) held that satisfaction of the officer has to be during course of the proceedings and it cannot be arrived at after the conclusion of proceedings:-
The relevant para is quoted below:-
“The power to impose penalty under Section 28 depends upon satisfaction of the Income Tax Officer in the course of the proceedings under the Act; it cannot be exercised if he is not satisfied about the existence of conditions specified in clauses (a), (b) or (c) before the proceedings are concluded. The proceedings to levy penalty has, however, not to be commenced by the Income Tax Officer before the completion of assessment proceedings by the Income Tax Officer. Satisfaction before conclusion of the proceedings under the Act, and not the issue of the notice or initiation of any step for imposing penalty is a condition for the exercise of the jurisdiction.”
11. The decision of Commissioner of Income Tax, Madras and Anr. Vs. S.V.Angidi Chettfar (supra) was relied upon by the Supreme Court in M. Manasvi Vs. Commissioner of Income Tax, Gujarat, II Ahmedabad reported in (1972) 86 ITR 557(SC).
12. In Additional Commissioner of Income Tax. Vs. J.K.D.’ Costa reported in (1982) 133 ITR 7, the Delhi High Court held that the assessment and penalty are two independent proceedings. In revision the assessment proceedings cannot be expanded to bring penalty proceedings within ambit of assessment. The failure of the A.O. to record satisfaction for levying of penalty in the assessment order shall not make it erroneous to be prejudicial to the interest of revenue. The SLP against order of the Delhi High Court was dismissed.
13. The Division Bench of the Punjab and Haryana High Court in Commissioner of Income Tax vs. Rakesh Nain Trivedi reported in (2016) 282 CTR (P&H) 205, while considering the issue as to whether the revisional authority on failure of the A.O. to initiate penalty proceedings during the assessment proceedings can held it to be erroneous to be prejudicial to the interest of revenue. Agreeing with the various decisions of High Courts i.e. :Commissioner of Income Tax v. Subhash Kumar Jain (2011) 335 ITR 364 the Punjab and Haryana High Court, Delhi High Court in Additional CIT v. J.K.D.’Costa (1982) 133 ITR 7 (Del), Commissioner of Income Tax v. Sudershan Talkies (1993) 201 ITR 289 (Del) and Commissioner of Income Tax v. Nihal Chand Rekyan (2000) 242 ITR 45 (Del), Commissioner of Income Tax v. Keshrimal Parasmal (1986) 157 ITR 484 (Raj), Commissioner of Income Tax v. Linotype & Machinery Ltd. (1991) 192 ITR 337 (Cal) and Surendra Prasad Singh and others v. Commissioner of Income Tax (1988) 173 ITR 510 (Gau.) and dissenting with the diametrically opposite approach of Madhya Pradesh High Court in Additional Commissioner of Income Tax v. Indian Pharmaceuticals (1980) 123 ITR 874 (MP), Additional Commissioner of Income Tax v. Kantilal Jain (1980) 125 ITR 373 (MP) and Addl. CWT v. Nathoolal Balaram (1980) 125 ITR 596 (MP) held that initiation of revisional proceedings was not justified.
14. The Delhi High Court in Commissioner of Income Tax Vs. Super Metal Re-Rollers (P.) Ltd. reported in (2004) 265 ITR 82 (Delhi); Commissioner of Income Tax Vs. Ram Commercial Enterprises Ltd. reported in (2000) 246 ITR 568 (Delhi) relying upon the Supreme Court decision in D.M. Manasvi (supra) held that initiation of penalty proceedings cannot be equated for the requisite of recording satisfaction by the A.O. in assessment order for initiation of penalty proceedings. Satisfaction has to be spelt out in the order of the A.O.
15. The Supreme Court in Commissioner of Income Tax vs. Jai Laxmi Rice Mills reported in (2015) 379 ITR 521 (SC) held that satisfaction recorded for penalty proceedings u/s 271 (1) (c) of the Act cannot be the basis to start penalty proceedings under Section 271(E) of the Act and the penalty proceedings were quashed.
16. From Section 271(1)(c) of the Act and the ruling cited above, the legal position emerges:-
i. the satisfaction of the A.O. that the matters mentioned in Clause (a) to (d) of Section 271 of the Act subsist, is to be recorded during course of the proceedings;
ii. the assessment and penalty are separate proceedings;
iii. the recording of the satisfaction has to be during course of the proceedings though the notice can be issued during or after the proceedings;
iv. once the satisfaction is recorded, the penalty can be imposed after conclusion of the proceedings but within the limitation provided under Section 275 of the Act;
v. the initiation of penalty proceedings by the A.O. during the proceedings is not a substitute for recording of the satisfaction in the order;
vi. the assessment order cannot be held to be erroneous and prejudicial to the interest of the revenue for non recording of the satisfaction by the A.O. to initiate the penalty proceedings; and
vii. the satisfaction has to be of specific provisions and penalty proceedings cannot be initiated under a different provision for which no satisfaction was recorded.
17. In the present case, the A.O. recorded satisfaction for initiating penalty proceedings under Section 271AAB of the Act and initiated proceedings both under 271AAB and 271(1)(c) of the Act. The penalty proceedings under Section 271(1)(c) of the Act were vitiated for non recording of the satisfaction by the A.O. during the course of the assessment proceedings. It is a case of non recording of satisfaction u/s 271(1)(c) of the Act and not case of wrong mentioning of section as A.O. initiated proceedings under both the sections but recorded satisfaction for one section.
18. Accordingly, the revisional order directing A.O. to initiate penalty proceedings u/s 271(1)(c) of the Act by recording independent satisfaction is not justified as reasons cannot be recorded after culmination of proceedings.
19. The order of the tribunal quashing the order of the revisional authority is upheld. The substantial question of law answered against the revenue. The appeals are dismissed.
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