Section 271E penalty cannot survive if underlying assessment order annulled: SC

CIT Vs Jai Laxmi Rice Mills Ambala City (Supreme Court of India)

The case of CIT vs. Jai Laxmi Rice Mills before the Supreme Court of India revolved around whether penalty proceedings under Section 271E of the Income Tax Act are independent of assessment proceedings. The issue arose for the assessment years 1991-1992 and 1992-1993 when the tax authorities, based on CIB information, found that the assessee was engaged in large-scale wheat trading but had not filed income tax returns. As a result, the Assessing Officer passed an order on February 26, 1996, assessing a taxable income of ₹18,34,584 and initiated penalty proceedings under Section 271E for violation of Section 269SS of the Act. However, the Commissioner of Income Tax (Appeals) overturned this assessment, directing a fresh assessment with due opportunity for the assessee. The fresh assessment order, however, did not record any satisfaction regarding the initiation of penalty proceedings under Section 271E, though the officer proposed penalty under Section 271(1)(c). Meanwhile, a penalty order dated September 23, 1996, had already been passed based on the original assessment order.

The Supreme Court upheld the ruling of the Tribunal and the High Court, stating that since the original assessment order was set aside, any satisfaction recorded for initiating penalty proceedings under Section 271E could not survive. The Court observed that penalty proceedings must be based on valid assessment orders and clear satisfaction recorded by the Assessing Officer. As no such satisfaction was noted in the fresh assessment, the penalty under Section 271E was deemed invalid. Accordingly, the Supreme Court dismissed the appeals, reinforcing the principle that penalty proceedings must have a valid legal basis and cannot survive independently if the underlying assessment order is annulled.

In these appeals, we are concerned with the question as to whether penalty proceeding under Section 271D of the Income Tax Act (hereinafter referred to as “the Act”) is independent of the assessment proceeding and this question arises for consideration in respect of Assessment Years 1991-1992 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 return. Ex-parte proceedings were initiated, which resulted in the aforesaid order, as per which net taxable income of the assessee 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.

The assessee carried out this order in appeal. The Commissioner 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.

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.

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 proceeding 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.

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.