Income Tax Appellate Tribunal - Chandigarh
Sh. Subhash Kumar Jain vs Acit on 5 May, 2003
JUDGMENT
D.R. Singh, Judicial Member
1. The assessee has filed this appeal against the order of CIT(C), Ludhiana, dated 11.1.99 for the asstt. year 94-95, passed under Section 263(1) of the I.T. Act on the ground involving the issue whether the CIT was justified in setting aside the asstt. Order only for the limited issue of passing an order after taking into consideration the provisions of Section 271(1)(c) of the I.T. Act.
2. The relevant and material facts for the disposal of this ground of appeal are that on going through the asstt. records, it was noticed that the assessee has filed a return declaring income of Rs. 89,123 and apart from salary/income from the firm M/s Glory Knitting Industries and interest income from the bank, the assessee also reflected the agricultural income of Rs. 991,090. The AO required the assessee to furnish the proof regarding the ownership of the agricultural land on lease basis and details of income from the agriculture in the form of copies of lease deeds and copies of vouchers evidencing payment of the lease money. The assessee furnished the requisite details of various expenses relating to agricultural operations. The AO deputed her Inspector to conduct enquiries regarding the agricultural activities of the assessee. The Inspector after conducting on the spot enquiries at Village Metholi, Distt. Moradabad (UP), concluded that the lease deeds produced by the assessee were not genuine as some of the Lessors who allegedly signed the deeds were illiterate and one of the Lessors had died about 10 years back; that the land owners denied having leased out their land; that the assessee had shown the sale of arhar whereas enquiries showed that the main crops of the area were wheat, sugarcane and inenthol. When this report was confronted to the assessee by the AO, the assessee came forward with surrender of Rs. 991,090 and the assessment was completed at an income of Rs. 10,80,210 vide Order under Section 143(3) dated 18.4.96 subject to no penal action under Section 271(1)(c) of the Act. According to the CIT, from these enquiries it was clearly established that the assessee had filed false documents to justify his agricultural income and only when the report of the Inquiry Officer was confronted to the assessee, then only the entire agricultural income amounting to Rs. 990.190 was surrendered and so the surrender made by the assessee was thus not spontaneous act because the surrender came only when the entire income was found to be non-genuine and the AO had in her possession necessary concrete evidence top such effect. Thus, according to CIT, in such circumstances the AO by accepting surrender of the assessee did not act in accordance with the law and in consequence thereof by not initiating penalty proceedings under Section 271(1)(c) of the I.T. Act, lawful revenue due to the State which could have been realised by levying penalty under Section 271(1)(c) has not been realised. Hence, the CIT, was of the opinion that the order passed by the AO under section 143(3) was not only erroneous but also prejudicial to the interests of the revenue. So, he issued a show cause notice under Section 263 of the I.T. Act requiring the assessee to state as to why the provisions of Section 263(1) of the I.T. Act should not be invoked for taking remedial action for the asstt. year 94-95. In its written submissions, the assessee contended that the penalty proceedings for levy of penalty are independent find separate from the asstt. proceedings and powers of CIT under Section 263 cannot be extended to rope in penalty proceedings as part of the asstt. proceedings. The assessee further contended that the failure of the AO to record his/her satisfaction for initiating penalty proceedings in the asstt. order cannot make the order erroneous or prejudicial and it is merely an opinion and failure of an opinion cannot make an order erroneous. In support of his contentions, the assessee placed reliance on the following citations:
1. Ram Lal v. CIT (1972) 84 ITR 138 (All)
2. Addl. CIT, Delhi v. Achal Kumar Jain (1983) 142 ITR 606 (Del)
3. Surendera Parshad Singh and Ors. v. CIT (1988) 173 ITR 510 (Gauhati)
4. CIT(WT) v. A.N. Sarvaria (1986) 161 ITR 694 (Del)
5. P.C. Puri v. CIT (1985) 151 ITR 584 (Del)
6. CIT v. J.K. Decosta (1981)( 133 ITR 7 (Del) 2.1 The CIT after considering these submissions and citations of the assessee and placing reliance on 123 ITR 874 (MP), 125 ITR 596 (MP), 125 ITR 373 (MP), 128 ITR 77, exercised his revisional jurisdiction under Section 263 of the Act, set aside the order passed by the AO under Section 143(3) and directed the AO to frame afresh assessment keeping in view the facts attracting the penal action under Section 271(1)(c) by making the following observations in his order:
"I have gone through the asstt. records of the assessee and written submissions filed in response to the show cause. The enquiries got made by the AO revealed that the assessee had filed false documents to justify his agricultural income and when the assessee was confronted by concrete evidence in possession of the department, the said agricultural income amounting to Rs. 991,090 was surrendered. The AO by accepting the surrender when income from agricultural was established to be non-genuine, did not act according to the provisions of law and by not initiating penalty proceedings under Section 271(1)(c) the State was deprived of lawful revenue which could have been realised by imposing penalty under Section 271(1)(c)."
"On examination of the asstt. proceedings and the asstt. order it is seen that the orders under Section 143(3) dated 18.4.96 was passed by the AO disregarding facts on record w.r.t. furnishing of inaccurate particulars of income by the assessee. By not initiating penalty proceedings under Section 271(1)(c) of the I.T. Act, at the time of completion of assessment, an assessment order was passed which was not only erroneous but also prejudicial to the interests of the revenue."
2.2 Before us, ld. AR for the assessee made identical submissions which he made before the CIT and contended that since the penalty proceedings are independent and separate from the asstt. proceedings, so the powers of CIT cannot be extended for directing the AO to initiate penalty proceedings against the assessee treating the same as part of the asstt. proceedings. He further contended that failure of the AO to record his/her satisfaction for initiating the penalty proceedings in the asstt. order cannot make the assessment order erroneous or prejudicial to the interests of the revenue and so, revisional order passed by the CIT under Section 263(1) of the I.T. Act is liable to be set aside. In support his contention, besides placing reliance on the citations as referred to before the CIT he placed reliance on 200 ITR 153, 120 Taxman 34.
2.3 On the other hand, ld. DR for the revenue placing strong reliance on the reasoning given in the order of the CIT, submitted that the citations relied upon by the CIT were directly applicable to the case of the assessee and so relying on these citations revisional jurisdiction has been rightly invoked under Section 263(1) and so the order passed by the CIT is liable to be upheld.
2.4 We have considered the rival submissions of both the parties, perused the records and carefully gone through the order of the tax authorities below as well as the case laws relied upon by the CIT as well as before us by both the parties. From the arguments of both the parties, the issue required to be decided by us is whether the C.I.T. can invoke powers under Section 263(1) of the I.T. Act so as to set aside the assessment order and directing the initiation of penalty proceedings in a case where the penalty proceedings were not initiated by the AO before or at the time of making the assessment. The CIT relying on the decisions of Madhya Pradesh High Court reported in 123 ITR 874, 125 ITR 596, 125 ITR 373 and 128 ITR 77 and applying the same to the instant case of the assessee, invoked his powers under Section 263(1) to set aside the assessment and directed the AO to frame afresh assessment keeping in view the facts attracting the penal action under Section 271(1)(c) of the I.T. Act because in these cases, the M.P. High Court was of the view that Commissioner can invoke his powers under Section 263(1) to set aside the assessment order and directing the AO to make afresh assessment in accordance with the law keeping the applicability of the penalty provisions. Whereas on the other hand, in the following cases relied upon by the ld. AR for the assessee as well as mentioned in the book of Chaturveri and Pithisaria's Income Tax 5th Edition, various High Courts and the Tribunals have taken a view that where the penalty proceedings were not initiated before or at the time of making the assessment, the Commissioner can invoke powers under Section 263(1) of the I.T. Act so as to set aside the assessment order and direct initiation of the penalty proceedings.
i) In 133 ITR 7 in the case of Addl. C.I.T. Delhi-I v. J.K. D'Costa (Del), their Lordships while observing:
"Section 263 of the I.T. Act 1961 refers to a particular proceeding that is being considered by the Commissioner and it is not possible, when the Commissioner in dealing with the assessment proceedings and assessment order, to expand the scope of these proceedings which are being sought to be revised by the Commissioner. Proceedings for the levy of a penalty whether under Section 271(1)(a) or Section 273(b) are proceedings independent of and separate from the assessment proceedings. There is no identity between the two. Though it is usual for the ITO to record in the assessment order that penalty proceedings are being initiated, there 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. Failure of the ITO to record in the assessment order his satisfaction or the lack of it is 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 ITO to record his opinion about the leviability of the penalty in the case."
Held "Affirming the decision of the Tribunal, that the Commissioner while revising an assessment order, could not pass orders relating to penalties."
ii) In 142 ITR 606 in the case of Addl. Commissioner of Income Tax, Delhi-II, v. Achal Kumar Jain, (Del), Their Lordships of Delhi High Court, following their decision reported in 133 ITR 7, and dissenting from the decisions of the M.P. High Court reported in 123 ITR 874(MP), 125 ITR 873 (MP), 125 ITR 596 (M) and 128 ITR 17 (M) observed:
"Penalty proceedings do not form part of the assessment proceedings. Recording by the ITO of a satisfaction or direction to issue a notice under Section 271(1)(a) of the I.T. Act 1961 for late filing of return or under Section 273(b) for failure to file an estimate of advance tax and pay the tax, is not an integral part of the assessment order so that a failure to do so would render it erroneous or prejudicial to the revenue. In the context of Section 263, the expression "assessment" refers to the particular "proceeding" that is to be considered. If the Commissioner is dealing with assessment proceedings and the assessment order, he cannot expand his powers to deal with penalty proceedings when they are not before him."
Held:
"Accordingly that while examining the records of an assessment order in exercise of his powers of revision under Section 263, the Commissioner was not justified in setting aside the assessment order and directing the initiation of penalty proceedings because the Commissioner found that the ITO had not initiated penalty proceedings either under Section 271(1)(a) for late filing of return of under Section 273 for failure to file an estimate of advance tax in terms of Section 212(3) and paying tax accordingly."
iii) In 147 ITR (Statutes) 1 (SC), their Lordships of Apex Court dismissed the special leave petition of the department against this judgment of Delhi High Court reported in 133 ITR 7 whereby the High Court on a reference held that the Commissioner in a suo motu revision under Section 263 of the I.T. Act 1961 of an assessment proceedings, was not entitled to set aside the assessment order on the ground that there was no mention of initiation of penalty proceedings in the assessment order and to direct the ITO to make fresh assessment and to initiate penalty proceedings.
iv) In 151 ITR 584 (Del), in the case of P.C. Puri v. Commissioner of Income Tax, Delhi II, on difference of opinion between the two judges Justice Rohtagi concurring with Justice Chadha, held:
"that the penalty proceedings do not form part of assessment proceedings and the Commissioner cannot, in exercise of his powers under Section 263 revise an assessment order and direct the AO to initiate proceedings for the imposition of the penalty under Section 273(a)."
In this case also, their Lordships of Delhi High Court following the decision reported in 133 ITR 7 and 142 ITR 606 dissented from the decision of the M.P. High Court reported in 123 ITR 874 (MP), 125 ITR 373 (MP), & 125 ITR 596 (MP).
v) In 156 ITR 693 in the case of Addl. Commissioner of Income Tax v. Precision Metal Works and Ors. (Del), held:
"That the Commissioner was not justified in setting aside the assessment order and directing the Income Tax Officer to initiate penalty proceedings under Section 273 and 271(1)(c)."
In this case, their Lordships of Delhi High Court, followed the decision of Delhi High Court reported in 142 ITR 606 (Del).
vi) In ITR 157 484 (Raj) in the case of Commissioner of Income Tax v. Keshrimal Parasmal, observed:
"The Commissioner held that there was no sound reason for the Income Officer for not initiating proceedings under Section 271(1)(c) of the I.T. Act, 1961 for which a prima facie case existed since there was a clear confession of concealment of true particulars of income by the assessee by the act of surrendering a cash credit and hence the order of the ITO was erroneous and prejudicial to the interests of the revenue which required interference under Section 263 and set aside the order of the ITO and directed him to make a de novo assessment. The Tribunal cancelled the order of the Commissioner and also rejected the application of the revenue for referring a question of law on an application under Section 256(2): and Held:
"that the Commissioner was not entitled to set aside the assessment order passed by the ITO on the ground that there was no mention of initiation of penalty proceedings in the asstt. order and the Commissioner in the proceedings under Section 263 could not direct the ITO to make a fresh assessment for initiating penalty proceedings. Therefore, no question of law arose out of the order of the Tribunal."
In this case, their Lordships of Rajasthan High Court followed the decision reported in 133 ITR 7 (Del) and dissented from the decision reported in 123 ITR 875 (MP).
vii) In 161 ITR 694 in the case of Commissioner of Wealth Tax v. A.B. Sarvaria (Del), their Lordships held:
"The Commissioner of Wealth Tax has no power under Section 25(2) of the Wealth Tax Act 1957 to revise the order of assessment passed by the W.T.O. on the ground that it is erroneous merely because the WTO failed to initiate penalty proceedings under Section 18(1)(a) read with Section 18(2) of the W.T.Act."
In this case, their Lordships of Delhi High Court followed the decision reported in 133 ITR 7, 142 ITR 606 and dissented from the decision reported in 123 ITR 874, 125 ITR 596, 125 ITR 373, and 128 ITR 77.
viii) In 173 ITR 510 (Gauhati) in the case of Surendera Prasad Singh and Ors. v. CIT, their Lordships of Gauhati High Court held:
"That the order of the Addl. CIT in so far as it held the assessment order as vitiated because the penalty proceedings had not been initiated was not a valid. The Addl. CIT had no jurisdiction while acting under Section 263 to an unqualified direction to the ITO to initiate penalty proceedings."
In this case also, their Lordships of Gauhati High Court followed the decision reported in 133 ITR 7 (Del).
ix) In 200 ITR 153 (Del) in the case of Addl. CIT v. Sudershan Talkies, their Lordships of Delhi High Court observing:
"Proceedings for levy of penalty, whether under Section 271(1)(a) or Section 273(b) of the I.T. Act 1961 are proceedings independent of, and separate from the assessment proceedings. Failure to initiate penalty proceedings would not give jurisdiction to the Commissioner of Income Tax to pass an order under Section 263 and direct the initiation of penalty proceedings by the Income Tax Officer"
Held:
"That the Tribunal was correct in holding that the question of levying penalty under Section 273(b) was extraneous to the scope of the assessment order and it could not be covered by recourse to Section 263 inasmuch it was neither prejudicial to the interests of the revenue nor was it erroneous."
In this case also, their Lordships of Delhi High Court followed the decision reported in 133 ITR 7 (Del) and dissented from the decision reported in 123 ITR 874(MP), 125 ITR 373 (MP), and 125 ITR 596 (MP).
x) In 192 ITR 337 (Cal) in the case of CIT v. Linotype and Machinery Limited, their Lordships of Calcutta High Court observed:
"Penalty proceedings do not form part of the assessment proceedings. Recording by the ITO of satisfaction or direction to issue a notice under Section 273 of the I.T. Act 1961 for default committed under Section 273(a) in filing of estimate of advance tax which the assessee knew or had reason to believe to be untrue, is not an integral part of the asstt. order so that failure to do so would render it ipso facto erroneous or prejudicial to the interests of the revenue. In the context of Section 263, the expression 'assessment' refers to the particular 'proceeding' which is to be considered. The Commissioner in dealing with the asstt. Proceedings and the astt. order cannot expand his powers to deal with the penalty proceedings when they are not before him."
In this very case, their Lordships of Calcutta High Court also observed that for failure of the ITO to record in the assessment order his satisfaction of the lack of it, the asstt. order cannot be said to be erroneous or prejudicial to the interests of the revenue. The ITO must record his opinion about the leviability of the penalty on the facts of the case. On further referring to the decision of the Delhi High Court in the case of Addl. CIT v. Achal Kumar Jain (1983) : 142 ITR 606 (Del); P.C. Puri v. CIT (1985) 151 ITR 584 (Del) and CWT v. A.N. Sarvaria (1986) 161 ITR 694 (Del) have reiterated the same view. The Rajasthan High Court in CIT v. Keshrimal Parasmal (1986) 157 ITR 484 and Gauhati High Court in Surendra Prasad Singh v. CIT (1988) 173 ITR 510, following the decision of the Delhi High Court in J.K. D'Costa (1982) 133 ITR 7 also took the same view. It may be mentioned that on March 2, 1984, the special leave petition filed by the department against the judgment of the Delhi High Court in J.K. D'Costa (1982) 133 ITR 7, was rejected (see (1984) 147 ITR (st.)1). Their Lordships of Calcutta High Court held:
"that the Commissioner was not entitled to exercise his powers of revision under Section 263 for failure of the ITO to initiate penalty proceedings under Section 273(a) of the Act."
xi) In 201 ITR 289 (Del) in the case of Commissioner of Income Tax v. Sudershan Talkies, their Lordships of Delhi High Court have held:
"that the decision of the Tribunal against the order passed under Section 263 had been upheld by the High Court. As a consequence thereof, only interest could be charged but no proceedings under Section 273(b) could be initiated."
xii) In 242 ITR 45 (Del) in the case of CIT v. Nihal Chand Rekyan, their Lordships of Delhi High Court observed as under:-
"while examining the records of an asstt. order, in exercise of powers of revision under Section 263 of the I.T. Act 1961, if the Commissioner finds that the AO had not initiated penalty proceedings, the Commissioner cannot direct initiation of penalty proceedings because the penalty proceedings are not a part of the assessment proceedings.
2.5 On examining the above mentioned citations referred to by both the parties, it is clear that there were only five decisions of Madhya Pradesh High Court in which the Hon'ble High Court held that the CIT in exercise of powers of revision under Section 263 of the I.T. Act can direct the AO to initiate penalty proceedings in case the AO has not initiated penalty proceedings. Whereas, on the other hand, the initial decision of Delhi High Court reported in 133 ITR 7, against which even the SLP has been dismissed by the Apex Court in 147 ITR (st) 1 (SC) in which the Delhi High Court held that even if while examining the records of an asstt. order in exercise of his powers of revision under the said section, the Commissioner finds that the AO has not initiated penalty proceedings, he cannot direct initiation of penalty proceedings because penalty proceedings are not a part of the assessment proceedings. It was further held that the Commissioner cannot pass an order under Section 263 of the Act pertaining to the penalty while dissenting from the decisions of Madhya Pradesh High Court (supra) has been followed by the Delhi High Court in a catena of decisions (supra) referred to herein above in this order. The other High Courts, Gauhati, Calcutta and Rajasthan, have also taken a similar view to as that taken by the Delhi High Court in 133 ITR 7 (Del) after dissenting from the decision of the M.P. High Court (supra) and by mainly following the decision of Delhi High Court reported in 133 ITR 7, besides other decisions of Delhi High Court cited (supra) and detailed by us herein above in our order.
2.6 In this view of the matter, the law of judicial precedents demands that the majority view of the High Courts cited (supra), wherein it has been held that even if while examining the records of an asstt. order in exercise of his powers of revision under Section 263, the Commissioner finds that the AO has not initiated penalty proceedings, he cannot direct the initiation of penalty proceedings because the penalty proceedings are not a part of the asstt. proceedings and thus, the Commissioner cannot pass an order under Section 263 of the Act pertaining to the penalty, should be followed by the Tribunal instead of following the decisions of M.P. High Court (supra) which after proper discussion have been dissented from by the above mentioned High Court in the decisions (supra), whereas, there is no other decision of any other High Court brought to our notice, agreeing with the view taken by the M.P. High Court nor there is any subsequent decision of M.P. High Court dissenting from the decision delivered by the High Courts in the cases cited (supra). Lastly, the main decision of Delhi High Court reported in 133 ITR 7, following which the subsequent decisions cited (supra) were delivered by the High Court against which, even the SLP filed by the department has been dismissed by the Apex Court in 147 ITR (st) 1 (SC) should be followed by this Tribunal.
2.7 Hence, in view of our detailed discussions mentioned herein above with regard to the decision of the High Court to be followed by the Bench, we are of the opinion that the majority view should be followed by the Tribunal, in which the Hon'ble High Courts have held that a Commissioner cannot pass an order under Section 263 of the Act pertaining to the initiation of penalty proceedings by the AO. In this view of the matter and respectfully following the decisions reported in 133 ITR 7 and other decisions (supra) while considering the scope and powers of the Commissioner under Section 263 of the I.T. Act, it is held that even if, while examining the records of an asstt. order in exercise of his powers of revision under Section 263, the Commissioner finds that the AO has not initiated penalty proceedings, he cannot direct the AO to initiate the penalty proceedings against the assessee under Section 271(1)(c) because the penalty proceedings are not a part of the asstt. proceedings and also because the non initiation of penalty proceedings by the AO under Section 271(1)(c) during the course of asstt. proceedings neither make the order of the AO erroneous nor prejudicial to the interests of the revenue. Accordingly, the order of the CIT(A) passed under Section 263(1) of the I.T. Act after setting aside the asstt. order of the AO and directing the AO to initiate penalty proceedings against the assessee, is set aside and the ground of appeal taken by the assessee is allowed.
3. In the result, the appeal is allowed.