Commissioner of Income Tax vs Subhash Kumar Jain

This appeal has been filed by the revenue u/s 260A of the Income Tax Act, 1961 (in short "the Act") against the order dated 5-5-2003 passed by the Income Tax Appellate Tribunal, Chandigarh Bench B, Chandigarh (hereinafter referred to as "the Tribunal") in ITA No. 149/CHANDI/99 for the assessment year 1994-95, proposing following substantial question of law:

Whether the agreement made by the assessing officer of initiating no proceedings u/s 271(1)(c) is bad in Law? and

Whether the assessment so framed is erroneous and prejudicial to the interest of revenue?

The facts for adjudication as narrated in the appeal may be noticed. The Assessee filed his return on 14-12-1984 declaring an income of Rs. 89,123. His assessment was framed u/s 143(3) of the Act vide order dated 18-4-1996 at an income of Rs. 10,80,213 after making an addition of Rs. 9,91,090 on account of agricultural income. As the Assessee failed to explain the agricultural income, enquiries were got conduct by the Inspector who submitted his report pointing out various defects in the documents furnished by the Assessee. Thereafter, the Assessee made an offer to surrender Rs. 9,91,090 subject to no penal action u/s 271(1)(c). Accordingly, the assessment was framed by the assessing officer. Commissioner of income tax (in short "the CIT") vide order dated 11-1-1999 in exercise of power u/s 263 of the Act set aside the assessment order holding that the same was erroneous and prejudicial to the interest of the revenue. The CIT directed the assessing officer to frame fresh assessment after taking into account the facts attracting penal action u/s 271(1)(c) of the Act. Feeling aggrieved, the matter was taken up in appeal by the Assessee and the Tribunal vide order dated 5-5-2003 set aside the order of the CIT holding that the CIT cannot direct the assessing officer to initiate penalty proceedings u/s 271(1)(c) as the same were not part or the assessment proceedings. Hence the present appeal by the revenue.

We have heard learned Counsel for the parties.

The issue involved in this appeal has two facets. Firstly, when the assessing officer while passing the assessment order u/s 143(3) of the Act had given an office note that the surrender of the agricultural income which was made by the Assessee was subject to no penal action u/s 271(1)(c), could the CIT in exercise of power u/s 263 hold the order of the assessing officer to be erroneous and prejudicial to the interest of the revenue. Secondly, whether the CIT could exercise jurisdiction u/s 263 of the Act by holding that the failure of the assessing officer to initiate penalty proceedings while completing assessment u/s 143(3) of the Act was an order which was erroneous and prejudicial to the interest of the revenue.

Adverting to the first aspect of the issue, it may be noticed that the assessing officer while passing the assessment order u/s 143(3) had made an office note, the relevant portion of which is as under:

The report of the Inspector was confronted to the Assessee who in turn accepted the ungenuineness of agricultural income shown by him and thus came forward with a surrender of agricultural income, subject to no penal action u/s 271(1)(c) of the Income Tax Act. Since the department had no documentary evidence against the Assessee but only the report of the inspector, therefore, the offer of the Assessee was accepted.

A perusal of the same clearly shows that the Assessee had made surrender with a clear condition that no penal action u/s 271(1)(c) of the Act would be initiated. The office note further depicts that the offer of the Assessee was accepted by the department since the department had no documentary evidence against the Assessee except the report of the Inspector. Once that was so, the department could not take somersault and seek to levy penalty.

A Division Bench of this Court in Banta Singh Kartar Singh Vs. Commissioner of Income Tax, relying upon Bombay High Court decision in Jivatlal Purtapshi Vs. Commissioner of Income Tax, Bombay, had an occasion to consider as to whether an agreement between Assessee and the income tax authorities arrived at regarding imposition of penalty while surrendering the income was to be acted upon or not. It was observed that an order based on an agreement cannot give rise to grievances and the same cannot be agitated.

Accordingly, it could not be said that the assessment order was erroneous and prejudicial to the interest of the revenue. Once that is so, no order u/s 263 could be passed by the CIT.

Now adverting to the second limb, it may be noticed that the Delhi High Court in judgment in Addl. CIT v. J.K.D Costa (1982) 133 ITR 72 has held that the CIT cannot pass an order u/s 263 of the Act pertaining to imposition of penalty where the assessment order u/s 143(3) is silent in that respect. The relevant observations recorded are:

It is well established that proceedings for the levy of a penalty whether u/s 271(1)(a) or u/s 273(b) are proceedings independent of and separate from the assessment proceedings. Though the expression "assessment" is used in the Act with different meanings in different contexts, so far as Section 263 is concerned, it refers to a particular proceeding that is being considered by the Commissioner and it is not possible when the Commissioner is dealing with the assessment proceedings and the assessment order to expand the scope of these proceedings and to view the penalty proceedings also as part of the proceedings which are being sought to be revised by the Commissioner. There is no identity between the assessment proceedings and the penalty proceedings; the latter are separate proceedings, that may, in some cases, follow as a consequence of the assessment proceedings. As the Tribunal has pointed out, though it is usual for the Income Tax Officer to record in the assessment order that penalty proceedings are being initiated, this is more a matter of convenience than of legal requirement. All that the law requires, so far as the penalty proceedings are concerned, is that they should be initiated in the course of the proceedings for assessment. It is sufficient if there is some record somewhere, even apart from the assessment order itself, that the Income Tax Officer has recorded his satisfaction that the Assessee is guilty of concealment or other default for which penalty action is called for. Indeed, in certain cases it is possible for the Income Tax Officer to issue a penalty notice or initiate penalty proceedings even long before the assessment is completed though the actual penalty order cannot be passed until the assessment is finalised. We, therefore, agree with the view taken by the Tribunal that the penalty proceedings do not form part of the assessment proceedings and that the failure of the Income Tax Officer to record in the assessment order his satisfaction or the lack of it in regard to the leviability of penalty cannot be said to be a factor vitiating the assessment order in any respect. An assessment cannot be said to be erroneous or prejudicial to the interest of the revenue because of the failure of the Income Tax Officer to record his opinion about the leviability of penalty in the case.

SLP against the said decision was dismissed by the Apex Court Controller of Estate Duty Vs. Prakashchand, . The same view was reiterated by the Delhi High Court in Commissioner of Income Tax Vs. Sudershan Talkies, and followed in CIT v. Nihal Chand Rekyan (2000) 242 ITR 453 . The Rajasthan High Court in Commissioner of Income Tax Vs. Keshrimal Parasmal, ; Gauhati High Court in Surendra Prasad Singh and Others Vs. Commissioner of Income Tax, and Calcutta High Court in Commissioner of Income Tax Vs. Linotype and Machinery Ltd., have followed the judgment of Delhi High Court in J.K.D Costas case (supra).

However, Madhya Pradesh High Court in Addl. Commissioner of Income Tax Vs. Indian Pharmaceuticals, which has been followed by the same High Court in Addl. Commissioner of Income Tax Vs. Kantilal Jain, and Addl. Commissioner of Wealth Tax Vs. Nathoolal Balaram, has adopted diametrically opposite approach.

We are in agreement with the view taken by the High Courts of Delhi, Rajasthan, Calcutta and Gauhati, and express our inability to subscribe to the view of Madhya Pradesh High Court.

Accordingly, it is held that the initiation of proceedings u/s 263 was not justified. The Tribunal was right in holding that after examining the records of the assessment in exercise of powers u/s 263, where the CIT finds that the assessing officer had not initiated penalty proceedings, he cannot direct the assessing officer to initiate penalty proceedings u/s 271(1)(c) of the Act.

Consequently, the appeal is dismissed.