Section 271D Penalty Cannot Survive Without Recorded Satisfaction: Gujarat HC

PCIT Vs Parivar Television Pvt. Ltd. (Gujarat High Court)

The Gujarat High Court dismissed the Revenue’s appeal filed under Section 260A of the Income-tax Act, 1961, against the order of the Income Tax Appellate Tribunal (ITAT), Surat, relating to the block period from 1 April 1995 to 19 December 2001. The Revenue challenged the Tribunal’s decision deleting the penalty imposed under Section 271D, contending that the Tribunal had incorrectly relied on the Supreme Court’s decision in CIT v. Jai Laxmi Rice Mills, failed to uphold the findings of the Commissioner of Income Tax (Appeals), and decided the matter solely on the ground that no satisfaction for initiating penalty proceedings had been recorded in the assessment order without examining the merits.

Read ITAT Judgment in this case: No Satisfaction in Assessment Order: ITAT Surat Quashes Section 271D Penalty

The case arose from a search conducted under Section 132 in December 2001 and January 2002 in the Jayraj Group cases, during which the business premises of the assessee were also searched on 19 December 2001. A notice under Section 158BC was issued on 2 January 2003, requiring the assessee to file its block return of income. The Assessing Officer completed the block assessment on 31 December 2003, determining undisclosed income of Rs. 1,09,87,052.

The High Court observed that a reading of the assessment order showed that it contained no reference to initiation of penalty proceedings under Section 271D. The order merely computed the undisclosed income, completed the assessment under Section 158BC read with Section 158BG, directed issuance of the demand notice and challan, levied interest under Section 158BFA(1) wherever applicable, and recorded that the order had been passed after obtaining approval of the Additional Commissioner of Income Tax.

The Revenue argued that although the assessment order did not mention initiation of penalty proceedings, the Assessing Officer had subsequently made a reference dated 14 May 2004 for initiation of penalty proceedings under Section 271D. Based on that reference, the Additional Commissioner imposed penalty by order dated 20 June 2005. The Revenue further submitted that the Tribunal had earlier restored the matter to the Commissioner (Appeals) for fresh adjudication, and therefore the Tribunal’s later observations regarding absence of reference to penalty proceedings in the assessment order were unsustainable.

The High Court reproduced the relevant findings of the Tribunal, which had recorded that the assessment order contained no reference to initiation of penalty under Section 271D or any recommendation to the Joint Commissioner or Additional Commissioner for levy of such penalty. The Tribunal had relied on the Supreme Court’s decision in CIT v. Jai Laxmi Rice Mills and its own coordinate bench decision in Nizar Taluka Sahkari Kharid Vechan Sangh Ltd., holding that where no satisfaction is recorded in the assessment order before initiating penalty proceedings, no penalty under Section 271D can be sustained.

The High Court then examined the Supreme Court’s judgment in Commissioner of Income-tax, Panchkula v. Jai Laxmi Rice Mills Ambala City. It noted that in that case the Supreme Court held that when the original assessment order, containing satisfaction for initiation of penalty proceedings, was set aside and the fresh assessment order did not record any satisfaction regarding penalty proceedings under Section 271E, the penalty could not survive. The Supreme Court had held that, in the absence of satisfaction recorded in the fresh assessment order, no penalty under Section 271E could be levied.

Applying the same principle, the Gujarat High Court found that the assessment order in the present case contained no satisfaction regarding initiation of penalty proceedings under Section 271D. It held that the Tribunal had correctly relied upon the Supreme Court’s decision while deleting the penalty.

The High Court concluded that no substantial question of law arose from the Tribunal’s order. Accordingly, the Revenue’s appeal was dismissed.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. This Tax Appeal is filed under Section 260-A of the Income Tax Act, 1961, challenging the order passed by the Income Tax Appellate Tribunal, Surat, in ITA No. 1738/AHD/2016 for Block Period 01.04.1995 to 19.12.2001.

2. The following substantial questions of law are raised for consideration of this Court:

“(i) Whether on the facts and in the circumstances of the case and in law, the Ld. Tribunal was justified in deleting the penalty levied u/s. 271 D of the Act totaling to Rs.2,79,47,692/- relying upon the decision in the case of CIT vs. Jai Laxmi Rice Mills (2015) taxmann.com 75(SC) and without appreciating that the facts of the instant case are not identical?

(ii) Whether on the facts and in the circumstances of the case and in law, the Ld.Tribunal was justified in not upholding the findings of the CIT(A) where a clear finding was given with respect to levy of penalty u/s. 271 D of the Act?

(iii) Whether on the facts and in the circumstances of the case and in law, the Ld.Tribunal was justified in deciding the issue simply basing on that no satisfaction was recorded in the assessment order and not deciding the issue on merits.”

3 Facts in brief are as under:

3.1 There was a search operation u/s. 132 of the Income Tax Act, 1961 in the Jayraj Group of cases covering the residential as well as business premises of the assessee group in December 2001 and January 2002.

3.2 The business premises of M/s. Parivar Television Pvt Ltd was also searched u/s. 132(1) of the Act on 19.12.2001 in connection with Jayraj Group.

3.3 A notice u/s. 158 BC was issued on 02.01.2003 to the assessee requesting it to file Block return of income for the taxable income including the undisclosed income for the block period.

3.4 A Block Assessment Order was passed on 31.12.2003, which reads as under:-

“6. In view of the above discussion, the total undisclosed income of the assessee is computed as under:

7. Assesseed U/s. 158BC r.w.s. 158BG of the I.T.Act, 1961. Demand notice and challan are issued accordingly. Charge interest u/s. 158BFA(1) of the I.T. Act, if any.

8. This order is passed after getting the approval of the Addl. CIT, CR, Baroda.”

4. Reading of the Assessment Order, therefore, would indicate that there was no mention in the said order regarding initiation of penalty proceedings under Section 271D of the Act.

5. Mr.Nikunt Raval, learned Senior Standing Counsel appearing for the revenue, would submit that once the Tribunal vide order dated 29.02.2012, in context of a reference made by the Assessing Officer on 14.05.2004 for initiation of penalty proceedings, had restored the file to the CIT(A), the observations of the Tribunal about absence of reference to penalty proceedings would be unsustainable. Perusal of the findings of the Tribunal read as under:

“7. Brief facts of the case are that the assessment in the present case was completed on 31/12/2003 under Section 158BC r.w.s. 158BG/144 of the Act in making total addition of Rs. 1.09 crore. The Assessing Officer at the time of passing the assessment order has not initiated any kind of penalty. Subsequent of passing the assessment order, a reference was made by the Assessing Officer for initiation of penalty proceedings vide reference dated 14/05/2004 for initiation of penalty under Section 271D for violation of Section 269SS in respect of various deposits/ loan received by the assessee in cash in excess of Rs. 20,000/-, during the relevant financial year. The Additional Commissioner of Income Tax levied penalty under Section 271D vide his order dated 20/06/2005. On further appeal before the ld. CIT(A), the order of penalty under section 271D was upheld vide order dated 24.03.2006. however, on further appeal before Tribunal in ITA No. 124/Ahd/2006, vide order dated 29.02.2012, the matter was restored back to the file of ld CIT(A) to examine certain evidence in the form of bank statement and to decide the issues afresh. The ld CIT(A) in his fresh order dated 30.03.2016 granted partial relief to the assessee. Further aggrieved, the assessee has filed present appeal before the Tribunal.

8. We have heard the submissions of the ld. AR for the assessee and the ld CIT-DR for the revenue and have gone through the orders of the lower authorities carefully. The ld. AR of the assessee on his second additional ground of appeal submits that the Assessing Officer while passing the assessment order on 31/12/2003 has not recorded any satisfaction about initiation of penalty under Section 271D of the Act. The ld. AR of the assessee carried us through the contents of assessment order and would submit that there is no whisper about the initiation of penalty under Section 271D or any whisper for making any reference for initiation of penalty under Section 271D of the Act. The ld. AR for the assessee submits that the Hon’ble Apex Court in the case of CIT Vs Jai Laxmi Rice Mills (2015) 64 com75 (SC) held that wherein no satisfaction was recorded for initiating penalty proceedings under Section 271E, the impugned penalty order passed under said Section deserve to be set aside. The ld. AR submits that Section 271E and 271D are having similar criteria, one penalty relates to making payment and the other relates to taking or accepting loan in cash in excess of Rs. 20,000/- in cash in contravention of Section 269SS. The ld. AR further submits that the Coordinate Bench of Surat Tribunal while following the order of Hon’ble Apex Court in Jai Laxmi Rice Mills (supra), deleted the similar penalty under Section 271D.

9. The ld. AR further submits that he has already filed his submission on first additional ground of appeal which relates to time limit for passing the penalty order as prescribed under Section 275, as well as he has also filed his written submission on merit on the case. The ld. AR for the assessee submits that in case, the second additional ground of appeal is allowed, the other contention raised by assessee would become academic.

10. On the other hand, the ld. CIT-DR for the revenue submits that language of Section 271D or 274 nowhere prescribed for recording satisfaction for initiation of proceedings. Rather Section 274 speaks about providing reasonable opportunity before levying penalty. The assessee was given full opportunity before levying such penalty under section 271D. The ld AR for assessee failed to demonstrate the prejudice caused to the assessee in not recording about initiation of penalty at the time of passing the assessment. Not making or recording satisfaction about the initiation of penalty under section 271D is merely a curable defect. The assessee has nowhere raised such objection either at the time of penalty proceedings of at first appellate stage.

11. We have considered the submissions of both the parties and have gone through the assessment order dated 31/12/2003. On careful perusal of the assessment order, we find that there is no whisper or reference in the assessment order about initiation of penalty under Section 271D. We further find that there is no whisper about making a reference to the Joint Commissioner or Additional commissioner for levying such penalty. We find that the Hon’ble Apex Court in CIT Vs Jai Laxmi Rice Mills (supra), while considering the similar questions of law held that when no satisfaction recording regarding penalty proceedings under Section 271E, in the assessment order was recorded while passing the assessment order, no penalty could be levied. We further find that by following the order of Hon’ble Apex Court in CIT Vs Jai Laxmi Rice Mills (supra), the Coordinate Bench of Tribunal in The Nizar Taluka Sahkari Kharid Vechan Sangh Ltd. Vs JCIT in ITA No. 3157/Ahd/2015 dated 13/12/2019 also held that when no satisfaction has been recorded by the Assessing Officer before initiating penalty, no penalty under Section 271D could be levied. The order of Hon’ble Supreme Court, which is binding precedent by virtue of Article 141 of the Constitution of India and respectfully following the same the penalty order under section 27D dated 20/06/2005 is set aside/quashed.”

6. In the case of Commissioner of Income-Tax, Panchkula vs. Jai Laxmi Rice Mills Ambala City., reported in [2015] 64 taxmann.com 75 (SC), Hon’ble Supreme Court has held as under:

“1. In these appeals, we are concerned with the question as to whether penalty proceeding under Section 271D of the Income Tac Act (hereinafter referred to as “the Act”) is independent of the assessment proceeding and this questin arises for consideration in respect of Assessment Years 1991-9992 and 1992-1993 under the following circumstances:

In respect of Assessment Year 1992-1993, assessment order was passed on 26.02.1996 on the basis of CIB information informing the Department that the assessee is engaged in large scale purchase and sale of wheat, but it is not filing income tax. Ex-parte proceedings were initiated, which resulted in the aforesaid order, as per which net taxable income of the assesse was assessed at Rs.18,34,584/-. While framing the assessment, the Assessing Officer also observed that the assessee had contravened the provisions of Section 269SS of the Act and because of this the Assessing Officer was satisfied that penalty proceedings under Section 271E of the Act were to be initiated.

2. The assessee carried out this order in appeal. The Comissioner of Income Tax (Appeals) allowed the appeal and set aside the assessment order with a direction to frame the assessment de novo after affording adequate opportunity to the assessee.

3. After remand, the Assessing Officer passed fresh assessment order. In this assessment order, however, no satisfaction regarding initiation of penalty proceedings under Section 271E of the Act was recorded. It so happened that on the basis of the original assessment order dated 26.02.1996, show cause notice was given to the assessee and it resulted in passing the penalty order dated 23.09.1996. Thus, this penalty order was passed before the appeal of the assessee against the original assessment order was heard and allowed thereby setting aside the assessment order itself. It is in this backdrop, a question has arisen as to whether the penalty order, which was passed on the basis of original assessment order and when that assessment order had been set aside, could still survive.

4. The Tribunal as well as the High Court has held that it could not be so for the simple reason that when the original assessment order itself was set aside, the satisfaction recorded therein for the purpose of initiation of the penalty proceedings under Section 271E would also not survive. This according to us is the correct proposition of law stated by the High Court in the impugned order.

5. As pointed out above, insofar as, fresh assessment order is concerned, there was no satisfaction recorded regarding penalty proceeding under Section 271E of the Act, though in that order the Assessing Officer wanted penalty proceeding to be initiated under Section 271(1)(c) of the Act. Thus, insofar as penalty under Section 271E is concerned, it was without any satisfaction and, therefore, no such penalty could be levied. These appeals are, accordingly, dismissed.”

7. In light of this, no substantial question of law, much less, any substantial question of law is involved. The appeal is dismissed, accordingly.