Income Tax Appellate Tribunal - Delhi
Genesis Overseas (P) Ltd. vs Deputy Commissioner Of Income Tax on 18 January, 2008
Equivalent citations: (2008)116TTJ(DELHI)385
ORDER
P.M. Jagtap, A.M.
1. This appeal by the assessee is directed against the order of learned CIT(A)-III, New Delhi, dt. 30th Jan., 2006 whereby he confirmed the penalty of Rs. 4,22,624 imposed by the AO under Section 271(1)(c).
2. The relevant facts of the case giving rise to this-appeal are that the assessment in the case of the assessee was completed by the AO under Section 143(3) making, inter alia, the following additions to the income returned by the assessee:
Disallowance of foreign tour and travel expenses 2,37,952
Disallowance on account of commission expenses 8,30,630
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Total 10,68,582
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3. The aforesaid additions made by the AO were challenged by the assessee in an appeal filed before the learned CIT(A) and since there was no compliance from the assessee's side to the notices of hearing issued by him during the course of appellate proceedings, the learned CIT(A) dismissed the appeal of the assessee thereby sustaining the aforesaid additions made by the AO. Thereafter, penalty proceedings under Section 271(1)(c) were initiated by the AO and since the explanation offered on behalf of the assessee in response to the show cause notice issued during the course of penalty proceedings was not found acceptable by him, the AO imposed a penalty of Rs. 4,22,624 under Section 271(1)(c). The penalty so imposed by the AO was confirmed by the learned CIT(A) dismissing the appeal filed by the assessee by his appellate order which has been impugned by the assessee in the present appeal filed before the Tribunal.
4. At the time of hearing before us, the learned Counsel for the assessee filed a copy of the order of Delhi 'E' Bench of Tribunal passed on 4th April, 2007 in ITA No. 4485/Del/2004 showing that the appellate order passed by learned CIT(A) in the quantum proceedings has already been set aside by the Tribunal and the matter has been remanded to the learned CIT(A) for disposing of the appeal of the assessee afresh on merits after affording sufficient opportunity of being heard. He contended that the assessee, however, is challenging the validity of penalty imposed in its case under Section 271(1)(c) in the present appeal filed before the Tribunal on the ground that there was no satisfaction recorded by the AO in the assessment order regarding concealment of particulars of its income by the assessee before initiating penalty proceedings under Section 271(1)(c) and in the absence of such satisfaction, the initiation itself was bad in law. In support of this contention, he has relied on the decisions of Hon'ble Delhi High Court in the cases of CIT v. Ram Commercial Enterprises Ltd. , CIT v. Vikas Promoters (P) Ltd. , CIT v. Auto Lamps Ltd. and CIT v. B.R. Sharma .
5. The learned Departmental Representative, on the other hand, invited our attention to the following observations/findings recorded by the AO in the assessment order:
(i) From the details of travelling expenses, it is found that an expense of Rs. 2,37,952 has been found to have been incurred on visits to Hong Kong, Bangkok and Kathmandu. These countries are not related to any of the business activities of the assessee as per the details furnished by it. The directors Shri Sanjay Kapoor and Shri J.M. Narula have made tours to these places and there is no substantive material on record to justify the expenses made for business purposes. Therefore this amount of Rs. 2,37,952 is disallowed since not incurred for the purpose of business.
(ii) All the relevant facts of the case clearly, show that the commission of Rs. 8,30,630 is booked as expenses by the assessee company and paid to the sister concern to reduce the income and evade tax. There were no such expenses in the past whereas the assessee has been into this business for many years. Accordingly, the commission expenses of Rs. 8,30,630 are disallowed under Section 40A(2) of the IT Act, 1961.
6. According to the learned Departmental Representative, the aforesaid observations/findings recorded by the AO in the assessment order were sufficient to show that the assessee had furnished inaccurate particulars of its income and the specific instances pointed out by the AO therein were sufficient to show his satisfaction as required for initiation of penalty proceedings under Section 271(1)(c). In support of this contention, the learned Departmental Representative relied on the decision of Hon'ble Delhi High Court in the case of Smt. Santosh Sharma rendered vide a judgment delivered on 17th Sept., 2007 in IT Appeal No. 1088 of 2006 wherein it was held by their Lordships that the observations recorded by the AO in the last part of the assessment order "penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income have separately been initiated" read with a noting made by him in the earlier portion of the assessment order about the failure on the part of the assessee to explain the source of credits in her bank account as well as her failure to adduce any evidence to support the genuineness of such credits, were sufficient to show his satisfaction as required by law for initiation of penalty proceedings.
7. We have considered the rival submissions in the light of material available on record and the various judicial pronouncements cited by learned Representatives of both the sides. The penalty imposed under Section 271(1)(c) by the AO and confirmed by the learned CIT(A) has been challenged by the assessee in the present appeal, inter alia, on the preliminary ground that the requisite satisfaction as regards the assessee having concealed the particulars of his income or having furnished inaccurate particulars of such income was not recorded by the AO in the assessment order passed under Section 143(3) and in the absence of such satisfaction recorded by him, the initiation of penalty proceedings for year under consideration itself was bad in law. In support of this contention, reliance has been placed before us by the learned Counsel for the assessee, inter alia, on the various decisions of Hon'ble Delhi High Court.
8. In one of such decisions rendered in the case of CIT v. Ram Commercial Enterprises Ltd. (supra), it was held by the Hon'ble Delhi High Court that a bare reading of the provisions of Section 271 and the law laid down by the Hon'ble Supreme Court inter alia in the case of DM. Manasvi v. CIT make it clear that it is the assessing authority which has to form its own opinion and record its satisfaction before initiating the penalty proceedings. Explaining further, it was observed by the Hon'ble Delhi High Court that merely because the penalty proceedings have been initiated, it cannot be assumed that such a satisfaction was arrived at in the absence of the same being spelt out by the order of the assessing authority. The requisite satisfaction thus is to be arrived at by the AO in the course of any proceedings under the Act which would mean assessment proceedings and the satisfaction as envisaged by the Hon'ble Delhi High Court in the case of Ram Commercial Enterprises Ltd. (supra) has to be reached during the course of assessment proceedings by the AO and the same has to be recorded by him in the assessment order. A similar issue again came before the Hon'ble Delhi High Court in the case of Diwan Enterprises (supra) wherein it was noted by the AO in the concluding portion of his assessment order that "penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income have been initiated separately" and despite such a noting, it was held by the Hon'ble Delhi High Court following the decision rendered in the case of Ram Commercial Enterprises (supra) that the AO had nowhere recorded till the conclusion of the assessment proceedings his satisfaction about the assessee having concealed the particulars of his income or having furnished inaccurate particulars of such income. It was also held by their Lordships that there was thus a jurisdictional defect in initiating the penalty proceedings which could not be cured and consequently all the subsequent proceedings leading upto the passing of the penalty order must fail.
9. Following the aforesaid decisions, it was again reiterated by the Hon'ble Delhi High Court in the case of Shri Bhagwant Finance Co. Ltd. v. CIT that satisfaction of the AO is a condition precedent for initiation of penalty proceedings under Section 271(1)(c) and as such penalty proceedings initiated as a coercive measure to recover the revenue without arriving at subjective satisfaction that the assessee has concealed the particulars of income or furnished inaccurate particulars were not sustainable. Explaining further, it was also observed by the Hon'ble Delhi High Court that the established cannons 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. This issue again came up before the Hon'ble Delhi High Court for consideration in the case of CIT us. Globe Sales Corporation (2005) 196 CTR (Del) 187 wherein the exact requirement of law in the matter of recording satisfaction before initiating penalty proceedings was explained by their Lordships stating that a bare reading of the provisions of Section 271(1) which vests the authorities concerned with the power to impose penalty, clearly postulates that an officer has to record his satisfaction in terms of the section that it was a fit case for initiation of a penalty proceeding. It was also held by the Hon'ble Delhi High Court that the use of expression "may" clearly shows that penalty is not an automatic consequence of concealment of income or furnishing inaccurate particulars thereof. Wide discretion has been given to the AO and other authorities to apply their mind and come to a conclusion in the light of the statutory provisions as to whether they would or would not like to initiate the penalty proceedings keeping in view the facts and circumstances of the case.
10. It was further held that the cumulative reading of the provisions leaves no doubt that the discretion to be exercised by the officer has to be for valid and proper reasons which are in consonance with the spirit of Section 271(1). In the assessment order passed in the said case, not even a single reason had been recorded by the AO as to why, in his opinion, it was just and proper to initiate penalty proceedings and in the absence of the same, it was held by the Hon'ble Delhi High Court that the requisite satisfaction for initiation of penalty proceedings was not recorded by the AO and in the absence of the same, the initiation of penalty proceedings itself was bad in law.
11. It is no doubt true that the issue relating to the exact requirement of recording satisfaction in the context of initiation of penalty proceedings is now pending before the Full Bench of Hon'ble Delhi High Court in the case of CIT v. Rampur Engg. Co. Ltd./Indus Valley Promoters Ltd. (2006) 204 CTR (Del) 149 : (2006) 155 Taxman 223 (Del) wherein the following question has been referred to the Full Bench for decision:
Whether satisfaction of the officer initiating the proceedings under Section 271 of the IT 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 ?
A perusal of the aforesaid question referred to the Full Bench, however, clearly shows that the issue regarding requirement of recording the satisfaction for initiating the penalty proceedings under Section 271(1)(c), which has already been concluded by a series of judgments of the Hon'ble Delhi High Court, has not been referred to the Full Bench for reconsideration and what has been actually referred to the Special Bench and which is pending for disposal is only the issue relating to the manner and method of recording such satisfaction in the absence of any specific provisions contained in the statute in this regard. The issue referred to the Full Bench of Hon'ble Delhi High Court thus is incidental to the main issue of satisfaction inasmuch as after having held that there is a mandatory requirement of recording the satisfaction by the AO before initiating the penalty proceedings under Section 271(1)(c), the consequential issue which arises is whether such satisfaction has to be recorded in so many words or in the absence of any manner or method prescribed in the statute for recording such satisfaction, would it be sufficient if the same is otherwise discernible from the order passed by the authority in a case where such satisfaction is not recorded in specific terms.
12. While referring the aforesaid issue to the larger Bench in the case of Indus Valley Promoters Ltd. (supra), the Division Bench of Hon'ble Delhi High Court has observed that it would depend on the facts and circumstances of each case whether or not the authority has applied its mind to the question of concealment of income or furnishing of inaccurate particulars of such income. It was also held by their Lordships that whether the authority was or was not satisfied about any such concealment or furnishing of inaccurate particulars will also depend upon the facts of each case and the order which the authority has made. The issue as to whether the requisite satisfaction for initiation of penalty proceedings is discernible from the findings/observations recorded by the AO in the assessment order thus is basically a question of fact which is required to be decided on the facts and circumstances involved in each case. In the case of Smt. Santosh Sharma (supra) cited by the learned Departmental Representative, it was held by the Hon'ble Delhi High Court having regard to the relevant observations/findings recorded by the AO in the assessment order that the requisite satisfaction as required for initiation of penalty proceedings was discernible from the said order and this issue in our opinion, needs to be considered and decided in each case independently depending on facts and circumstances involved in the said case. Our view gets support from the fact that in the case of Diwan Enterprises v. CIT (supra), there was a noting made by the AO in the assessment order to the effect that "penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income have been initiated separately" and despite such a noting made by the AO which was similar to the noting made in the case of Smt. Santosh Sharma (supra), it was held by the Hon'ble Delhi High Court having regard to the facts and circumstances involved in the case of Diwan Enterprises (supra) that the AO had nowhere recorded till the conclusion of the assessment proceedings his satisfaction about the assessee having concealed the particulars of his income or having furnished inaccurate particulars of such income. It was also held by the Hon'ble Delhi High Court that there was thus a jurisdictional defect which could not be cured and the initiation of penalty proceedings was itself bad.
13. It is observed that in the case of CIT v. Jai Bharat Maruti Ltd. (2007) 212 CTR (Del) 250, a similar issue relating to the recording of satisfaction in the context of initiation of penalty proceedings arose for consideration before the Hon'ble Delhi High Court and when a reference made in the context of similar issue to the larger Bench in the case of Indus Valley Promoters Ltd. (supra) was pointed out on behalf of the Revenue, it was observed by their Lordships after referring to the question referred to the larger Bench that the view expressed by the Court in Ram Commercial Enterprises Ltd. (supra) and other several decisions to the same effect has been accepted as correct while making the said reference, but the alternative contention raised on behalf of the Revenue was referred to a larger Bench. The contention raised on behalf of the assessee that the issue referred to the larger Bench is no more res integra in view of the judgment of Hon'ble Supreme Court in the case of Dilip N. Shroff v. Jt. CIT approving the view taken by the Hon'ble Delhi High Court in the case of Ram Commercial Enterprises Ltd. (supra) was also taken note of by the Hon'ble Delhi High Court. After taking note of all these aspects of the matter, Hon'ble Delhi High Court proceeded to dispose of the matter without expressing any view on the issue pending consideration before the larger Bench in the case of Indus Valley Promoters Ltd. (supra) and assuming a hypothetical position where the question is to be answered in the affirmative and in law the satisfaction of the AO may be discerned from the order of assessment making the initiation of penalty proceedings valid. Proceeding on this hypothesis, the assessment order passed in the case of Jai Bharat Maruti Ltd. (supra) was examined by their Lordships and it was found on such examination that it was not at all possible to discern from a reading of the said order that the AO was satisfied in terms of Section 271(1)(c) that penalty proceedings should be initiated against the assessee. It was thus held by the Hon'ble Delhi High Court that in the absence of the requisite satisfaction not being even discernible from the order of assessment, the penalty proceedings against the assessee in the case of Jai Bharat Maruti Ltd. (supra) could not be sustained in law.
14. If we adopt the same basis and proceed on the same hypothesis as done by the Hon'ble Delhi High Court in the case of Jai Bharat Maruti Ltd. (supra), we also find from the examination of the relevant assessment order passed in this case including especially the relevant portion thereof as reproduced in para No. 5 of this order to which our attention was drawn by the learned Departmental Representative read with the note given after the computation of total income "Penalty proceedings under Section 271(1)(c) are separately initiated", that the requisite satisfaction for initiation of penalty proceedings as required in law was not at all discernible from the said assessment order. This being so, we hold that the penalty proceedings initiated by the AO were bad in law and the penalty imposed under Section 271(1)(c) in pursuance of such invalid initiation is not sustainable. In that view of the matter, we set aside the impugned order of the learned CIT(A) and cancel the penalty imposed by the AO under Section 271(1)(c).
15. In the result, the appeal of the assessee is allowed.