Madras High Court
Commissioner Of Income Tax vs Sara Enterprises on 12 March, 1996
Equivalent citations: [1997]224ITR169(MAD)
JUDGMENT Thanikkachalam, J.
1. At the instance of the Department, the Tribunal referred the following two questions, for the opinion of this Court, under s. 256(1) of the IT Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case and having regard to the provisions of s. 263 r/w s. 275 of the IT Act, 1961, the Tribunal was justified in cancelling the order passed by the CIT under s. 263 of the IT Act, 1961 ?
2. Whether the bar of limitation contained under s. 275 of the IT Act, 1961, would attenuate or curtail the powers of the CIT, vested in him under s. 263 of the said Act ?"
2. The assessee is a firm with five partners. The assessment for the asst. yr. 1976-77 was completed by the ITO on 2nd November, 1977, under s. 143(3) of the IT Act, 1961. In the course of assessment proceedings, penal action under s. 271(1)(c) of the Act was initiated for the detailed reasons stated in the assessment order. The ITO subsequently dropped the penalty proceedings on 22nd March, 1980, on the ground that the assessment was made on agreed basis and the assessee did not go on appeal against the assessment. The CIT (Administration) scrutinised the records in the exercise of his powers vested in him under s. 263 of the IT Act, 1961. On his scrutiny, he found that the ITO had, without considering the various facts and circumstances of the case, which led to the initiation of the penal proceedings under s. 271(1)(c), dropped the same. He, therefore, felt that the order of the ITO in dropping the penalty proceedings was erroneous and prejudicial to the interests of the Revenue. Accordingly, the CIT initiated proceedings under s. 263 of the IT Act, 1961, and after hearing the assessee, set aside the order passed by the ITO and directed the latter to consider the case in the light of the observations made by him in his order and pass appropriate orders in accordance with law.
Aggrieved by the order of the CIT, the assessee preferred an appeal before the Tribunal. The assessee contended that the CIT was not justified in interfering with the order passed by the ITO, wherein the ITO had exercised his discretionary powers.
The Tribunal held that a statutory authority should not be permitted to achieve by indirect means that which cannot be achieved by direct means. According to the Tribunal any proceedings by way of imposition of penalty should have been completed by 31st March, 1980, and if no penalty is imposed by that time, the assessee would naturally get a vested right, which cannot be tilted. The Tribunal further pointed out that if the impugned order of the CIT were to be upheld by the Tribunal, then the ITO gets an extended time to impose penalty and that is against the scheme and provisions of the IT Act, 1961. Accordingly, the Tribunal cancelled the order of the CIT passed under s. 263 of the Act.
3. Before us, learned standing counsel appearing for the Department submitted that the CIT can invoke his jurisdiction under s. 263 of the Act within two years from the date of the order passed by the ITO. In the present case, the ITO dropped the penalty proceedings by his order, dt. 22nd March, 1980, and the CIT invoked his jurisdiction under s. 263 of the Act by issuing a notice on 3rd November, 1980. Learned standing counsel further submitted that the provisions contained in s. 275 of the Act would apply only to the suo motu order passed by the ITO and not to an order passed by the ITO in pursuance of the direction given by the CIT. Under such circumstances, it was submitted that it cannot be argued that the direction given by the CIT under s. 263 of the Act in the present case would virtually make the ITO to pass an order after the period of two years initiating the penalty proceedings. In order to support this contention, learned standing counsel relied upon the decisions reported in CIT vs. National Taj Traders , J. P. Sharma & Sons vs. CIT , CIT vs. Vakharia Cotton Traders (1986) 161 ITR 441 (Guj) : TC 49R.1243 and H. H. Rajdadi Smt. Badan Kanwar Medical Trust vs. CWT (1995) 214 ITR 130 (Raj).
4. We have heard learned standing counsel for the Department and perused the records carefully. The fact remains that in the present case the ITO during the course of the assessment proceedings, initiated penalty proceedings under s. 271(1)(c) of the Act. Subsequently, the ITO dropped the penalty proceedings on 22nd March, 1980. The CIT (Administration), on a scrutiny of the order passed by the ITO, came to the conclusion that the order passed by the ITO, in dropping the penalty was erroneous and prejudicial to the interests of the Revenue. Therefore, the CIT initiated proceedings under s. 263 of the Act, set aside the order passed by the ITO in dropping the penalty proceedings initiated under s. 271(1)(c) of the Act, and directed him to reconsider the case in the light of the observations made by him in his order.
Under s. 275 of the IT Act, 1961, no order imposing a penalty under this Chapter shall be passed after the expiration of a period of two years from the end of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed. Therefore, normally when the penalty proceedings are initiated under s. 275(1) of the Act, the ITO was to complete the proceedings within two years from the date of initiating the proceedings, as otherwise the order passed by the ITO would be barred by limitation. In the present case, the penalty proceedings were dropped by the ITO on 22nd March, 1980. Within two years from this date, on 3rd November, 1980, the CIT initiated proceedings under s. 263 of the Act. Therefore, the CIT is well within the period of limitation in invoking his jurisdiction under s. 263 of the Act. But the point for consideration is that if the ITO completed his penalty proceedings as directed by the CIT in his order under s. 263 of the Act, beyond the period of two years prescribed under s. 275(1) of the IT Act, whether such an order is hit by the provisions of s. 275(1) of the Act.
5. The Supreme Court had an occasion to consider a question of similar nature in the decision in CIT vs. National Taj Traders (supra) wherein while considering ss. 33(4), 33B(2)(b), (4) of the Indian IT Act, 1922, and s. 263(3) of the IT Act, 1961, it held : "The words 'no order shall be made under sub-s. (1) after the expiry of two years from the date of the order sought to be revised', in s. 33B(2)(b) of the Indian IT Act, 1922 are applicable only to suo motu orders of the CIT in revision and not to orders made by him pursuant to a direction or order passed by the Tribunal under sub-s. (4) or by a higher authority. Sec. 33B is not a charging section.
The enactment of s. 263(3) of the IT Act, 1961, must be regarded as declaratory of the law which was already prevailing. The enactment of an ex majore cautela provision in the 1961 Act would be a legislative recognition of the legal position that obtained as a result of judicial pronouncement qua the 1922 Act".
In similar circumstances, the Rajasthan High Court in J. P. Sharma & Sons vs. CIT (supra), while considering the provisions of ss. 271(1)(a) and 274(1) of the IT Act, 1961, was of the opinion that "it is firmly established that the bar created by the provisions of s. 275 of the IT Act, 1961, refers only to the initial order and if an order of penalty is passed on account of the direction by a higher authority in appeal or revision or on account of an answer given in a reference by the High Court in the exercise of original jurisdiction under Art. 226 of the Constitution, then the time-limit laid down in s. 275 will not apply".
So also the Gujarat High Court in CIT vs. Vakharia Cotton Traders (1986) 161 ITR 441 (Guj), while considering the provisions of s. 275 of the IT Act, 1961, held that the bar of limitation under s. 275 would apply only to the initial order of the authority, which imposes penalty and the bar would not apply to a fresh order passed on remand.
In H. H. Rajdadi Smt. Badan Kanwar Medical Trust vs. CWT (supra), the Rajasthan High Court, while considering the provisions of s. 25(2) of the WT Act, 1957, held that the CWT can invoke his revisional jurisdiction under s. 25 of the WT Act, 1957, even with regard to an order dropping the penalty proceeding.
6. Thus, we have seen that even though the order passed by the CIT under s. 263 of the Act empowers the ITO to complete the penalty proceedings after the two year period prescribed under s. 275(1) of the Act, such an order is a valid order and it is not hit by the provisions of s. 275 of the Act as per the decisions cited supra. Accordingly, the order passed by the Tribunal, cancelling the order passed by the CIT under s. 263 of the Act is not in order. In that view of the matter, we answer the first question referred to us in the negative and in favour of the Department. Inasmuch as question No. 1 is answered in the negative and in favour of the Department, it is not necessary to answer question No. 2, which is of academic nature. No costs.
7. Under these circumstances, it is open to the assessee to contest the order passed by the CIT under s. 263 of the IT Act, on the merits, while the Tribunal proceeds to pass the consequential order in pursuance of the order passed by this Court in this tax case.