Delhi High Court
Shri Bhagwant Finance Co. Ltd. vs Commissioner Of Income Tax And Anr. on 5 May, 2005
Equivalent citations: (2005)196CTR(DEL)462, [2006]280ITR412(DELHI)
Author: Swatanter Kumar
Bench: Swatanter Kumar, S. Ravindra Bhat
JUDGMENT Swatanter Kumar, J.
1. Petitioner's company filed their negative return declaring total income of Rs.7,65,310/- on 31st December, 1992 for the assessment year 1992-93. The case of the assessed was taken up for scrutiny and a notice under section 143(2) of the Income-tax Act (hereinafter referred to as `the Act') was issued in response to which the assessed appeared and the Assessing Officer vide his order dated 29th March, 1995 recorded that there was violation of provisions of section 269SS and 269T. A notice was issued to the assessed who filed a reply on 27th January, 1995. As the Assessing Officer found no substance in the reply of the asseessee, on the ground that ignorance of law is not an excuse and he directed initiation of penalty proceedings under section 271(1)(c) of the Act and also accepted the surrender of the assessed to the extent of Rs.12.75 lacs. Aggrieved from this order, the assessed preferred an appeal which was dismissed by the Commissioner of Income-tax vide his order dated 29th July, 1998 confirming the imposition of penalty under section 271(1)(c) of the Act. This order of the First Appellate Authority was an improvement by the assessed before the Income-tax Appellant Tribunal. The petitioner assessed thus has challenged the order of the Appellate Tribunal before this Court in an appeal under Section 260A of the Act.
2. After hearing learned counsel for the parties, we are of the opinion that out of all the questions framed by the assessed, only following question of law arises for consideration of the Court in the present appeal :-
"i) Whether on the facts and in the circumstances of the present case the ITAT has erred in sustaining the penalty under section 271(1)(c) of the Act in the case of the appellant, for the assessment year 1992-93, in as much as satisfaction of the assessing officer as contemplated in section 271(1)(c) of the Act was not recorded in the present case?"
3. Learned counsel for the petitioner heavily relied upon the judgment of Division Bench of this Court in the case of Commissioner of Income-tax v. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568, Diwan Enterprises v. Commissioner of Income-tax & Ors. (2000) 246 ITR 571 and Commissioner of Income-tax v. Super Metal Re-Rollers (2004) 265 ITR 82 and contended that to the show cause notice served upon the assessed for initiation of penalty proceedings, the assessed had given a detailed reply with plausible reasons and grounds and no satisfaction whatsoever has been recorded by the Assessing Officer for initiation of such proceedings. It is also the contention of the petitioner that the satisfaction recorded by the Assessing Officer should specifically indicate that there was concealment of particulars of income. More so, when surrender made by the assessed was accepted by the Assessing Officer during the assessment proceedings, there was no occasion for directing initiation of such penalty proceedings. On the other hand, the learned counsel appearing for the Department relied upon judgment of this Court in the case of Tube Facrico (I) Ltd. v. Commissioner of Income-tax, (1994) 210 ITR 1035 and Commissioner of Income-tax, Madras and Anr. v. S.V. Angidi Chettiar (1962) 44 ITR 739 to argue that once the entries were not found in the books of accounts of the petitioner, it was apparently a case of concealment and no other reasons were required to be recorded by the Assessing Officer for initiation of penalty proceedings. The Assessing Officer, in his order dated 29th March, 1995, has noticed that the assessed was served with a notice to which he filed a reply on 27th January, 1995, however, neither the content of the notice nor the reply submitted by the assessed has been mentioned in the order. The Assessing Officer has only noticed that there was no substance in the reply and as such the penalty proceeding should be initiated. In the order, it has not been recorded that the Assessing Officer was satisfied even on the facts noticed in order that it was a case of concealment of income. Admittedly, the assessed had surrendered a sum of Rs.12.75 lacs during the course of assessment and as per the statement of the assessed, it was so done for the purposes of purchasing peace of mind coupled with a genuine desire to avoid further litigation and the surrender was volunteered. However, none of these facts has discussion in the order of the Assessing Officer, but after the initiation of the penalty proceedings, the Assistant Commissioner of Income-tax Circle (III)(1) New Delhi vide order dated 29th September, 1995 held that the plea has no merit and penalty needs to be imposed upon the petitioner. In the order imposing penalty, it was noticed that the alleged loan, creditors were not found to be non-existent and genuineness of the loan remained unvarifiable. However, in the order of the Assessing Officer, it was noticed that some of the notices were returned unserved by the postal authorities while there was no remarks with regard to others. These facts by itself, may not have been sufficient to interfere with the concurrent order passed by the concerned authorities. What is most material in the present case is, that the Assessing Officer on the very day, when he passed the assessment order, had also recorded a separate note which has been produced before us having a direct bearing on the matter in controversy before us. It will be appropriate to reproduce the notes itself rather than referring its some extracts, which was recorded on 29th March, 1995. It reads as under :-
M/s Shri Bhagwant Finance Co.Ltd.
Asstt. Year 1992-93 :
Taxable Income b/d : 5,09,693/-
Assessed. Issue demand notice and challan. Give credit of prepaid taxes and charge intt. accordingly. Penalty proceedings u/s 271(1)(c) have separately been initiated.
(SANJAY BAHADUR) Asstt. Commissioner of Income Tax, Coy. Cir. 3(1), New Delhi.
Dated : 21.3.95 D&CR No.: 64/9 Copy to the assessed coy.
ACIT.
OFFICE NOTE :
1. Against the fresh unsecured loans of Rs.16.5 lacs the assessed has made a surrender of Rs.11.10 lacs on the principle and Rs.1.65 lacs on intt. for A.Y. 1992-93. The assessed has made similar surrenders for A.Y. 1989-90, 1990-91 and 1991-92 amounting to Rs. 2 lacs, Rs. 7 lacs and Rs.5 lacs respectively. The total thus comes to Rs. 26.75 lacs which includes interest element as well. As a result of this surrender made during the proceedings for A.Y.1992-93, earlier asstt. Years 1989-90, 1990-91 and 91-92 are being re-opened. Issue notices u/s 147/148.
2. The assessed has made a payment of Rs. 3 lacs against its demand for A.Y. 1992-93 and has also given an undertaking in form of Indemnity Bond from the Director Sh. L.K.Jain to pay the entire demand which will be raised for A.Ys. 1989-90, 1990-91, 1991-92 and 1992-93, in equal Installments over three months. In case of default against payment of taxes the asstt. years against which the default occurs shall be excluded from surrender and penalty u/s 271(1)(c) may be initiated.
3. Penalty u/s 271(1)(c) has been initiated for A.Y.1992-93 as a safeguard against any default in payment of tax for A.Y.92-93. In case of a default the surrender shall be treated as concealment. However, if the assessed makes the full payment against the tax demand for A.Y.1992-93 within the same framed stipulated i.e. up to 30.6.95. The penalty proceedings for A.Y. 1992-93 shall be dropped since the assessed has made a surrender of its own accord before the entire increase of unsecured loans was investigated.
4. Show-cause notices u/s 271D for violation of Sec. 269SS and 271E for violation of Sec. 269T in respect of accepting/payment of loans/deposits etc. as per details given above.
Dated : 29.3.95 ACIT, Coy.Cir.3(1), N.D.
4. The bare reading of paragraphs 2 & 3 of the above note clearly indicates that there was no proper application of mind by the Assessing Officer and penalty proceedings were initiated which were confirmed and penalty imposed by the Assistant Commissioner vide his order dated 29th September, 1995. It cannot be said that satisfaction recorded by the Assessing Officer is result of due application of mind to the ingredients of section 271(1)(c) of the Act, but is founded on the threat of the mighty revenue to an assessed. We are unable to understand as to how penalty proceedings can be initiated against an assessed as a safeguard against any default in payment of tax for the same year i.e. 1992-93. It will not only be unjust and unfair, but also contrary to the scheme of the Act if the revenue authorities are permitted to use the initiation, continuation of penalty proceedings and imposition thereof, as a threat to an assessed for recovery of the tax due from the concerned assessed. Established canone of law impose a duty upon the concerned authorities to apply their mind, record satisfaction and then alone initiate penalty proceedings in conformity with the provisions of section 271 of the Act. Such application of mind essentially must be free of bias and opinion arrived at should not offend the basic rule of law. The afore-referred office note vitiates the very initiation of penalty proceedings being adopted as a coercive measure to recover the revenue rather than be founded on a subjective satisfaction in regard to the fact that the assessed has concealed the particulars of his income or furnished inaccurate particulars of such income. The Assessing Officer could not have passed two self-contradictory orders on the same very day, one computing the income of the assessed chargeable to tax and initiation of penalty proceedings while the other that such proceedings were being initiated as the safeguard and to ensure recovery of tax from the assessed. Such an approach is not contemplated under the provisions of section 271 of the Act and apparently would be impermissible. The satisfaction of the Assessing Officer under section 271 is a condition precedent to initiation of a penalty proceedings. At this stage, we may refer to the case of Dewan Enterprises (supra), where the Court held as under :-
"Even after the amendment of 1964, penalty proceedings continue to be penal proceedings. Similarly, the question whether the assessed has concealed the particulars of his income continues to remain a question of fact. Where the explanation has made a difference is while deciding that question the presumption created by it has to be applied which has the effect of shifting the burden of proof. The rule regarding burden of proof enunciated in CIT v Anwar Ali [1970] 76 ITR 696 (SC), is no longer valid. Whether it is a case of undisclosed or unexplained cash deposit or any other concealment the standard is the same. The principle enunciated in Anwar Ali's case (1970) 76 ITR 696 (SC) that mere rejection of the explanation of the assessed is not sufficient for levying penalty no longer holds good and it is no longer necessary that the Department must go further and establish that there was conscious concealment of particulars of income or a deliberate failure to furnish accurate particulars. The cases to which the explanation is attracted have to be decided in the light of the law enunciated in the cases of Mussadilal Ram Bharose [1987] 165 ITR 14 (SC) and K.R. Sadayappan [1990] 185 ITR 49 (SC)."
"In spite of the above said plea of the petitioner having been rejected, the penalty imposed under section 271(1)(c) has still to be set aside through for a different reason and because the very foundation for initiation of the penalty proceedings is conspicuous by its absence. The opening clause of sub-section (1) of section 271 itself contemplates a finding as regards satisfaction of availability of grounds under clause (c ) being recorded during the assessment proceedings. Recently, in CIT v. Ram Commercial Enterprises Ltd. (I.T.C. No.13 of 1996 decided on October 8, 1998-since reported in [2000] 246 ITR 568 (Delhi), following the law laid down by their Lordships of the Supreme Court in D.M. Manasvi v. CIT [1972] 86 ITR 557 and CIT v. S.V. Angidi Chettiar [1962] 44 ITR 739 (SC), we have held that unless requisite satisfaction was recorded in the proceedings under the Act, which penalty proceedings could not have been exercised. Satisfaction has to be before the issue of notice or initiation of any step for imposing penalty. In the case at hand we find the Assessing Officer having nowhere recorded till the conclusion of the assessment proceedings his satisfaction that the assessed had concealed the particulars of his income or furnished inaccurate particulars of such income. This is a jurisdictional defect which cannot be cured. The initiation of the penalty proceedings was itself bad and, consequently, all the subsequent proceedings leading up to the passing of the penalty order must fail. C.W.P.No.3869 of 1997 is, therefore, liable to be allowed."
5. This note was obviously not referred to, for the reason that the same was not produced before the concerned authorities. The Department is expected to act fairly and disclose before the adjudicating forum all true facts from the record of the authorities, as they are holder of records in discharge of their public duties. More so, recording of a note in exercise of quasi-judicial powers have a bearing on the matter in controversy. However, the record was produced before this Court and attention of the Court has been drawn to this note which is admitted by the Department. The Court cannot ignore such a relevant document. The bare reading of the order and the office note shows that the order passed by the Assessing Officer initiating the penalty proceedings under section 271 of the Act suffers from a jurisdictional error and an element of arbitrariness in forming opinion and recording the satisfaction with an object which is not permissible under the provisions of the Act. What is known to an adjudicating authority should be non-judicial and once a fact is judicially known to the authority, it should not escape mentioning thereof in its order. It is obligatory upon the authorities to apply their mind to various facets of the case pending before them and orders passed under the stringent provisions of the revenue law should not be enforced against an assessed for a purpose which is not so stated in the provisions. The law always is not, what is said but what is done. What is said in the note is what is the background to the order initiating penalty proceedings. It is expected of the Assessing officers to understand the law in its correct perspective in light of the judgments. Non in legendo sed in intelligendo leges consistunt. Correct understanding of law is a sine qua none to its proper application to the facts of a given case.
6. In view of our detailed discussion, we would answer the question of law in the affirmative and in favor of the assessed holding that the impugned order dated 20th October, 2003 in so far as it relates to initiation of penalty proceedings is liable to be set aside. The question framed in the appeal is answered accordingly while leaving the parties to bear their own costs.