Commissioner of Income Tax vs Rampur Engg. Ltd.

In the relevant Income Tax Return filed by the assessee in the assessment year 1985-86, it had claimed a deduction of purported consultancy fee of Rs. 14,45,927 allegedly paid to M/s. Turcon India (P.) Ltd. It was claimed that this amount was paid as consultancy fee to the aforesaid firm for getting some contracts from NTPC. The Assessing Authority in his assessment order disallowed the aforesaid expenditure on the ground that the assessee could not furnish sufficient evidence to justify the aforesaid expenditure for a genuine business cause and had not discharged the obligation placed on it as to the genuineness of the transaction. Thereafter, penalty proceedings were initiated and orders were passed by the Assessing Authority imposing penalty of Rs. 11,48,852 u/s 271(1)(c) of the Income Tax Act, 1961. Appeal of the assessee against that order filed to the CIT (Appeals) was dismissed vide its order dated 31-3-2005, however, on further appeal of the assessee before the Income Tax Appellate Tribunal, the assessee had succeeded inasmuch as vide impugned order dated 19-8-2005, appeal of the assessee has been allowed. The primary contention of the assessee before the ITAT was that before initiating proceedings u/s 271 of the Income Tax Act, no satisfaction was recorded by the Assessing Authority in the assessment order about the fulfilment of requirements contained in Section 271(1)(c) of the Act.

This matter along with certain other connected matters was referred to Full Bench for decision on the following questions of law:

Whether satisfaction of the officer initiating the proceedings u/s 271 of the Income Tax Act can be said to have been recorded even in cases where satisfaction is not recorded in specific terms but is otherwise discernible from the order passed by the authority?

The Full Bench has answered the aforesaid question vide its judgment dated 27-11-2008 in the following terms:

In our opinion, the legal position is well settled in view of the Supreme Court decisions in CIT v. S.V. Angidi Chettiar (supra) and D.M. Manasvi v. CIT, Gujarat, II Ahmedabad (supra), that power to impose penalty u/s 271 of the Act depends upon the satisfaction of the Income Tax Officer in the course of the proceedings under the Act. It cannot be exercised if he is not satisfied and has not recorded his satisfaction about the existence of the conditions specified in Clauses (a), (b) and (c) before the proceedings are concluded. It is true that mere absence of the words "I am satisfied" may not be fatal but such a satisfaction must be spelt out from the order of Assessing Authority as to the concealment of income or deliberately furnishing inaccurate particulars. In the absence of a clear finding as to the concealment of income or deliberately furnishing inaccurate particulars, the initiation of penalty proceedings will be without jurisdiction. In our opinion, the law is correctly laid down in Ram Commercial Enterprises (supra) and we are in respectful agreement with the same. The reference is answered accordingly.

It is clear from the aforesaid judgment of the Full Bench that though it is not necessary for the Assessing Authority to use specifically words "I am satisfied", at the same time, it should be inferred from the order that there is a satisfaction which was recorded about the existence of the conditions specified in Clauses (a), (b) and (c) of Section 271 of the Act, before the proceedings are concluded.

We have examined the order of the Assessing Authority keeping in view the aforesaid principle of law in mind. From the said order, we find that the Assessing Authority disallowed the aforesaid expense by observing that there was no corroborative evidence justifying the payment of the said amount of Rs. 13 lakhs for genuineness business cause. The order reflects that evidence which was sought to be given by the assessee in support of the aforesaid was not believed and was not treated as sufficient evidence discharging the obligation placed upon the assessee as to the genuineness to the transaction. However, there is nothing in the said order to indicate that any satisfaction was also recorded that transaction in question was a sham transaction or was not a genuine transaction. No doubt, the expression ''genuineness of expenses'' has crept in the order, but, reading the entire order we find that the same is in the context of the sufficient evidence justifying the said expenses and there is no prima facie satisfaction regarding furnishing of inaccurate particulars of such expenditure. Therefore, we find pre-requisites of Section 271(1)(c) are missing in the Assessment Order and thus penalty proceedings could not be initiated against the assessee. The same is the position regarding other expenses which were disallowed.

Therefore, we are in agreement with the order passed by the learned ITAT and are of the opinion no substantial question law arises in this case. This appeal is accordingly dismissed in limine.