Commissioner of Income Tax vs Pearey Lal and Sons (EP) Ltd.

The Revenue has preferred this appeal u/s 260A of the Income Tax Act, 1961 (for short, "the Act"), against the order of the Income Tax Appellate Tribunal, Delhi Bench, "A", New Delhi, passed in the assessee''s appeal, i.e., I. T. A. No. 3737/Delhi/2002 for the assessment year 1982-83 dated February 28, 2005, proposing to raise the following substantial question of law:

Whether, on the facts and in the circumstances of the case, the hon''ble Tribunal has erred in law in deleting the penalty of Rs. 2,90,296 levied u/s 271(1)(c) of the Act when concealed income had been brought to tax u/s 147/148 of the Act ?

Original assessment in the case of the assessee for the assessment year 1982-83 took place on September 21,1984, u/s 143(3) of the Act. The assessment was reopened u/s 147 of the Act and completed on July 28,1989. Addition was made on account of interest income. Finally, the Assessing Officer completed the assessment on March 24, 2000, and also initiated penalty proceedings. After undergoing the procedure, penalty to the extent of 200 per cent. of the tax sought to be evaded, was imposed. On appeal, the Commissioner of Income Tax (Appeals) reduced the penalty to 100 per cent. The Tribunal set aside the penalty with the following observations:

We have examined the rival submissions. From the assessment order, we find that for the assessment year 1982-83, the Assessing Officer has only mentioned, ''penalty proceedings under Sections 271(1)(c) and 273(2) (a) are being initiated separately,'' (CIT, Spl. Range, Rohtak, vide order dated March 24, 2000). In the assessment year 1983-84 also, the same officer has initiated the penalty in a similar manner. We are accordingly, of the view that satisfaction has not been recorded at the time of initiation of penalty. Accordingly, we delete the penalties imposed by the Assessing Officer in respect of both the years before us. The appeals of the assessee are allowed for both the years and the appeals of the Revenue are dismissed for both the years.

We have heard learned Counsel for the parties.

Learned Counsel for the Revenue submitted that the only reason given by the Tribunal for setting aside the penalty was that the Assessing Officer, in the order of assessment, had only mentioned "penalty proceedings under Sections 271(1)(c) and 273(2)(a) are being initiated separately", which did not amount to compliance with the condition precedent for initiating penalty proceedings, i.e., recording of satisfaction during the course of assessment, which was a condition required to be followed in terms of Section 271(1)(c) of the Act. The view of the Tribunal was erroneous. There was no statutory requirement of any format to be followed for recording satisfaction. The only requirement is of existence of satisfaction for initiating penalty proceedings. The satisfaction has to be followed by issuance of notice and giving of opportunity to the assessee and in case for penalty was made out, the proceedings could not be held to be invalid on the ground of form of recording satisfaction. Learned Counsel for the Revenue relied upon the judgment of the Madras High Court in M. Sajjanraj Nahar Vs. The Commissioner of Income Tax, and the judgment of the Allahabad High Court in Nainu Mal Hot Chand Vs. Commissioner of Income Tax, . It has also been pointed out that by way of amendment, Section 271(1B) has been added by the Finance Act, 2008, with effect from April 1,1989, to the following effect:

(1B) Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under Clause (c) of Sub-section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause.

Learned counsel for the assessee submitted that penalty proceedings could not be initiated unless in the course of assessment, satisfaction that penalty was called for was specifically recorded, which condition cannot be held to be satisfied by mere mention being made in the order of assessment that penalty proceedings were being separately initiated. He submitted that unless there is express recording of satisfaction in the order of assessment and such satisfaction is also reflected in the findings of the Assessing Officer, initiation of penalty proceedings itself will be without jurisdiction. He relies upon the judgment of this Court in Commissioner of Income Tax Vs. Munish Iron Store, , the judgment of the Delhi High Court in Commissioner of Income Tax Vs. Ram Commercial Enterprises Ltd., and the judgment of the hon''ble Supreme Court in Dilip N. Shroff Karta of N.D. Shroff Vs. Joint Commissioner of Income Tax, Special Range Mumbai and Another, .

We have considered the rival submissions and perused the judgments relied upon.

A reference may be made to the relevant statutory provision of Section 271(1):

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-

(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,

A bare perusal of the provision shows that the only requirement of law is that in the course of assessment, satisfaction that a case for initiating penalty proceedings must exist and must be expressly reflected in the order of assessment. However, there is no requirement of format in which such satisfaction is to be recorded.

As regards the judgment of the hon''ble Supreme Court in Dilip N. Shroff Karta of N.D. Shroff Vs. Joint Commissioner of Income Tax, Special Range Mumbai and Another, , relied on behalf of the assessee, we do not find any discussion therein or any express observation therein to the effect that there was any requirement of format of recording satisfaction. In the judgment of this Court in Commissioner of Income Tax Vs. Munish Iron Store, also, all that has been observed is that the reasons given in the order of the Tribunal for cancellation of penalty were correct and the said reasons included an observation that not even a word has been written about concealment of income. This is not the situation in the present case. The Delhi High Court judgment in Commissioner of Income Tax Vs. Ram Commercial Enterprises Ltd., also refers only to requirement of existence of satisfaction during the course of assessment. It was held that mere initiation of proceedings was not enough. In the present case, existence of such satisfaction was clear. The present is not a case of inferring satisfaction from mere initiation of penalty proceedings. The said judgment is, thus, distinguishable.

As regards the judgment of the Andhra Pradesh High Court in V.V. Projects and Investments Pvt. Ltd. Vs. Dy. Commissioner of Income Tax, , we find that the only observation therein is of existence and recording of satisfaction and not of any particular format.

On the other hand, in the judgment of the Madras High Court in M. Sajjanraj Nahar Vs. The Commissioner of Income Tax, , it has been observed as under (pages 250-51):

38 ...that a mere indication as to the initiation of the penalty proceedings separately in the assessment order is tantamount to an indication as to the satisfaction of the authorities that the assessee has concealed income or furnished inaccurate particulars.... There is no evidence on record that the Income Tax Officer was not satisfied in the course of the assessment proceeding that the firms had concealed its income. The assessment order is dated the 10th of November, 1951, and there is an endorsement at the foot of the assessment order by the Income Tax Officer that action u/s 28 had been taken for concealment of income indicating clearly that the Income Tax Officer was satisfied in the course of the assessment proceeding that the firm had concealed its income.

At the stage of initiating penalty proceedings, what is required is only a subjective satisfaction and not a finding as to the satisfaction based on materials. Therefore, penalty proceedings can be initiated only after an assessment order has been made. Therefore, passing of the assessment order cannot be held to be a bar for initiating penalty proceedings.... In other words, the acceptance of revised order (return?) itself cannot be a bar for initiating penalty proceedings u/s 271(1)(c) of the Act against the assessee for concealment of income....

44 ... In any event, it is a settled law that once the authorities have arrived at a subjective satisfaction under the facts and circumstances of the case, it may not be proper for this Court to enter into the merits of the controversy at all in the proceedings under reference ...

Similarly, in the judgment of the Allahabad High Court in Nainu Mal Hot Chand Vs. Commissioner of Income Tax, , it was observed (pages 191, 192, 195):

So far as the question of recording the satisfaction by the Income Tax Officer is concerned, we find that the apex court in the case of D.M. Manasvi Vs. Commissioner of Income Tax, Gujarat, II Ahmedabad, has held that merely because notices for imposition of penalty were issued subsequent to making of the assessment order, would not show that there was no satisfaction of the Income Tax Officer during the assessment proceedings that the assessee had concealed the particulars of his income or has furnished incorrect particulars of such income. In paragraph 8 of the report, the apex court has held as follows (page 561):

The fact that notices were issued subsequent to the making of the assessment orders would not, in our opinion, show that there was no satisfaction of the Income Tax Officer during the assessment proceedings that the assessee had concealed the particulars of his income or had furnished incorrect particulars of such income. What is contemplated by Clause (1) of Section 271 is that the Income Tax Officer or the Appellate Assistant Commissioner should have been satisfied in the course of proceedings under the Act regarding matters mentioned in the clauses of that sub-section. It is not, however, essential that notice to the person proceeded against should have also been issued during the course of the assessment proceedings. Satisfaction in the very nature of things precedes the issue of notice and it would not be correct to equate the satisfaction of the Income Tax Officer or the Appellate Assistant Commissioner with the actual issue of notice. The issue of notice is a consequence of the satisfaction of the Income Tax Officer or the Appellate Assistant Commissioner and it would, in our opinion, be sufficient compliance with the provisions of the statute if the Income Tax Officer or the Appellate Assistant Commissioner is satisfied about the matters referred to in Clauses (a) to (c) of Sub-section (1) of Section 271 during the course of proceedings under the Act even though notice to the person proceeded against in pursuance of that satisfaction is issued subsequently. We may in this context refer to a decision of five judges Bench of this Court in the case of Commissioner of Income Tax, Madras, and Another Vs. S.V. Angidi Chettiar, Shah J., speaking for the court, while dealing with Section 28 of the Indian Income Tax Act, 1922, observed:

The power to impose penalty u/s 28 depends upon the satisfaction of the Income Tax Officer in the course of proceedings under the Act; it cannot be exercised if he is not satisfied about the existence of conditions specified in Clause (a), (b) or (c) before the proceedings are concluded. The proceeding to levy penalty has, however, not to be commenced by the Income Tax Officer before the completion of the assessment proceedings by the Income Tax Officer. Satisfaction before conclusion of the proceeding under the Act, and not the issue of a notice or initiation of any step for imposing penalty is a condition for the exercise of the jurisdiction.

... we find that under the provisions of the Act, the Income Tax Officer is not required to record his satisfaction in a particular manner or reduce it in writing. It can be gathered from the assessment order itself. In D.M. Manasvi Vs. Commissioner of Income Tax, Gujarat, II Ahmedabad, , the apex court has clearly held that the Income Tax Officer should be satisfied during the course of the assessment proceedings that the assessee had concealed his particulars of income or has furnished inaccurate particulars of such income. The satisfaction can be gathered from the assessment order.

We are in agreement with above observations. Whether satisfaction existed and was not recorded during assessment is not a matter of form but of substance and the issue has to be gone into from case to case. Absence of satisfaction could not be inferred from the fact that only words used in the assessment order are that proceedings were being separately initiated. In fact, this coupled with the findings of assessment showed that satisfaction existed in the course of assessment itself.

Accordingly, we hold that the view taken by the Tribunal that mere making of mention that penalty proceedings were being separately initiated in the order of assessment did not justify initiation of penalty proceedings, cannot be upheld and is set aside. The Tribunal has not discussed the issue whether case for imposition of penalty under Sections 271(1)(c) and 273(2)(a) of the Act was made out, which issue may now be gone into by the Tribunal. The question is answered in favour of the Revenue.

Accordingly, this appeal is allowed in above terms and the matter is remanded to the Tribunal for a fresh decision on the issue of penalty in accordance with law.