Income Tax Appellate Tribunal - Amritsar
Smt. Kavita Kapoor vs Income Tax Officer on 11 May, 2007
Equivalent citations: (2007)110TTJ(ASR)50
ORDER
Joginder Pall, A.M.
1. By this consolidated order, I shall dispose of these two appeals of the assessee filed against two orders of CIT(A), Jalandhar, for the asst. yr. 1988-89 as the issues involved in both the appeals are common and arise from the same orders of CIT(A) and I find it convenient to do so.
2. The issue raised in ITA No. 270 of 2006 relates to sustaining the penalty of Rs. 93,060 imposed by the AO under s. 271(1)(a) for late filing of return and in ITA No. 269 of 2006 relates to sustaining the penalty of Rs. 94,000 imposed by the AO under Section 271(1)(c) of the Income-tax Act, 1961 (In short ' the Act'). The facts of the case are that the assessee had disclosed jewellery weighing 955 gms under the VDIS Scheme, 1997 for the asst. yr. 1988-89. The declaration was accompanied by an affidavit dt. 3rd Dec, 1997 before the CIT, Jalandhar. However, the assessee did not pay tax on the income disclosed under the VDIS. Therefore, the CIT treated the declaration under the VDIS as never to have been made in view of provisions of Section 67(2) of the VDIS Scheme, 1997 and certificate under Section 68(2) of the said VDIS Scheme was not issued to the assessee. Subsequently, the CIT, Jalandhar, passed on the information to the AO vide his letter dt. 4th Sept., 1998. Relying on such information, the AO initiated proceedings under Section 147 by issue of notice under Section 148 of the Act on 23rd Sept., 1998. In response to such notice, the assessee filed a return declaring therein nil income. Relying on the declaration made under VDIS Scheme, 1997 and the affidavit filed along with the said declaration, the AO completed the assessment under Section 143(3) r/w Section 147 on a total income of Rs. 2,19,650 vide his order dt. 29th Sept., 2000. At the end of the order, the AO initiated penalty proceedings under Section 271(1)(c) by recording as under:
Penalty proceedings under Section 271(1)(c) are also initiated. Assessed, issue demand notice, challan, notice under Section 271(1)(c) and copy of order.
Penalty proceedings under Section 271(1)(a) of the Act for late filing of return were not initiated.
3. The assessee filed an appeal against the said assessment order before the CIT(A). The assessee challenged the jurisdiction of the ITO, Ward-2(6), Jalandhar. This submission of the assessee was rejected by the CIT(A) on the ground that the AO has followed the proper procedure in referring the issue of jurisdiction to CIT, Jalandhar, under Section 124 of the Act. The other grievance of the assessee was that the AO had completed the assessment without allowing proper opportunity of being heard. Though the learned CIT(A) did not find much force in such submissions, yet the assessment was set aside to be made afresh after allowing one more opportunity to the assessee of being heard. The relevant findings recorded by the CIT(A) for setting aside the assessment in para 4.2. of his order dt. 26th Dec, 2000 (copy placed at pp. 4 to 9 of the paper book) are as under:
4.2.1 have considered the arguments from both the sides. I do not agree that any case has been made out for quashing the order as illegal. The AO had issued notices under Section 143(2)/142(1) in May, 1999 which were followed up in June, 1999, July, 2000 and September, 2000. The issue was also discussed with the counsel of the assessee on 27th Sept., 2000. There is nothing on record to show that the learned Counsel had requested for further time to make his submissions or to produce any material before the AO. However, in view of the submissions made during the appellate proceedings by both the sides, the assessment is set aside to be made afresh after allowing one more opportunity to the assessee of being heard.
In pursuance of the order of the CTT(A), the AO completed the set aside assessment vide his order dt. 27 Nov., 2001 (copy placed at pp. 10 to 14 of the paper book). During the course of set aside assessment proceedings, the assessee was allowed an opportunity to explain the source of jewellery disclosed under the VDIS Scheme, Since the assessee could not furnish any explanation to the satisfaction of the AO, the assessment was made on the same income as assessed in the original assessment order. While doing so, the AO also observed that despite an opportunity allowed to the assessee to appear before him to verify the contentions submitted, however, the assessee failed to do so. While completing the set aside assessment, the AO recorded at the end of the assessment that notices under Section 274 r/w Section 271 for concealment of income and for late filing of return have already been issued. It would be more appropriate to reproduce hereunder concluding paras towards the end of the assessment order as under:
Penalty notices under Section 274 r/w Section 271 for concealment of income and for late filing of return have already been issued. Charge interest under Sections 139(8) and 215/217.
The assessee filed an appeal against the said assessment order before the CIT(A), where again issue regarding jurisdiction of the AO to make the assessment in this case was questioned. This plea of the assessee was rejected by the CIT(A). As regards the merits of the addition, the learned CIT(A) upheld the same by recording following findings:
Regarding second ground, I do not think there is any infirmity with the proceedings invoked under Section 147 when the appellant failed to file the return within the stipulated time. It definitely will come under 'income escaping assessment' since it has got out of the purview of VDIS after non-deposition of tax within stipulated time. Hence, second ground of appeal is also dismissed.
Now, regarding the main issue of the explanation offered by the appellant about the amount invested in jewellery, in question, the AO has observed that:
... the assessee herself has admitted in her affidavit dt. 31st Dec, 1997 submitted before the CIT, Jalandhar, that the investment in jewellery is not disclosed earlier to the IT Department and the same is being offered under VDIS 1997 which goes to show that the jewellery in question was obtained/purchased from undisclosed sources of the assessee. The assessee's assertion that three gold 'Karas' of 105 gms. each was purchased from her savings out of money received from father-in-law, husband and petty gifts received from her parents' side is unbelievable and cannot be relied upon for the reasons, firstly, that no such explanations were offered at the time of original assessment, secondly, she has not produced any documentary evidence to the effect that her father-in-law was a man of means or he had ever given any money to the assessee enabling her to save huge amount to invest on the purchase of gold 'Karas' as alleged. Presuming but not admitting that her father-in-law had been giving certain amounts during his lifetime that was hardly sufficient to meet household expenses of the family specially in view of the fact that neither the assessee nor her husband had any regular source of income as admitted in the explanation offered by the assessee. The explanation offered by the assessee is nothing but a cooked up story and an afterthought only to avoid proper taxation on investment on purchase of jewellery which she had already admitted as explained in her application submitted under the VDIS '97.' Whatever the arguments of the learned Counsel, the fact remains that despite summons under Section 131 the appellant did not present herself to clarify doubts. The line of argument taken up by the learned Counsel as stated in para 4 of the grounds of appeal is not proper, to my mind. What the AO implies is that the relatives from whom she is supposed to have taken money were not in a position to lend her that much from their regular income. This is the reason why these funds have been labelled as 'undisclosed' by the AO. I do not find any contradiction in the assessment order. As such, I fully agree with the AO that the entire argument presented was an afterthought. As such, the appeal on this ground is also dismissed.
The assessee has not filed any further appeal before the Tribunal against the quantum addition and, therefore, the addition so made has become final.
4. As regards the penalty proceedings initiated by the AO, the assessee had submitted a reply vide letter dt. 6th Feb., 2002 (a copy placed at p. 19 of the paper book). It was submitted before the AO that the penalty proceedings under Section 271(1)(a) had not been initiated by the AO at the time of completing the first assessment under Section 143(3) r/w Section 147. It was, therefore, contended that the penalty under Section 271(1)(a) could not be imposed. As regards the penalty under Section 271(1)(c), it was submitted that the Department has not brought any material on record or evidence to show that the assessee had earned income except relying on the declaration made under the VDIS Scheme, 1997. It was submitted that since the assessee had denied that any such income was earned, onus was on the Revenue to establish that this was the concealed income of the assessee. Thus, it was contended that the penalty proceedings under Section 271(1)(c) should also be dropped. Subsequently, the AO allowed another opportunity by issue of another notice. In response to such notices, the assessee submitted that she has filed appeals against the first order of the CIT(A) before the Tribunal and was also filing appeal against the second order of the AO before the CIT(A). Therefore, the AO was requested that penalty proceedings may be kept in abeyance till the disposal of the appeals filed by the assessee. However, the AO drew an adverse inference by observing that the reply of the assessee shows that she has nothing to say in the matter. He, therefore, imposed a penalty of Rs. 93,530 for delay in filing the return of income. The AO also held that the assessee concealed her income by furnishing inaccurate particulars thereof and accordingly imposed a penalty for Rs. 93.530 @ 100 per cent of the tax sought to be evaded which was rounded of to Rs.94,000.
5. Being aggrieved, the assessee impugned the levy of penalty in appeals before the CIT(A). In regard to the penalty proceedings under Section 271(1)(a), it was submitted that the AO had not recorded satisfaction at the time of completing the original assessment. Therefore, no penalty under Section 271(1)(a) could be imposed. The learned CIT(A) rejected such submission on the ground that the AO had highlighted the default committed under Section 271(1)(a) of the Act. Relying on the judgment of Hon'ble Supreme Court in the case of Gujarat Travancore Agency v. CYI , the learned CIT(A) held that for the purpose of levy of penalty under Section 271(1)(a), it was not necessary to establish the element of mens rea on the part of the assessee. Thus, she upheld the penalty imposed for late filing of the return.
6. As regards the penalty under Section 271(1)(c), it was submitted before the CIT(A) that the AO had not recorded proper satisfaction during the course of completing assessment. Relying on the judgment of Hon'ble Punjab & Haryana High Court in the case of CIT v. Munish Iron Store , it was submitted that the order for imposing penalty was illegal and bad in law. It was also submitted that mere fact addition has been made by the AO on the basis of preponderance of probability, the same does not justify imposition of penalty under Section 271(1)(c). However, none of these submissions found favour with the CIT(A), who upheld the levy of penalty by recording following findings:
4. I have considered the facts on record and the submissions of the appellant. I hold that the AO is justified in imposing penalty under Section 271(1)(c) of the IT Act, 1961 for the following reasons:
(i) The appellant filed a sworn affidavit showing purchase/acquisition of gold jewellery on 1st April, 1987 of Rs. 2,19,650. The contents of this affidavit are true and correct and the appellant has not led any evidence or cited any circumstances to retract from his sworn statement.
(ii) The affidavit filed by the appellant was supported by a valuation certificate issued by Shri Vijay Kumar Jain, Registered Valuer. In his valuation report, Shri Vijay Kumar Jain, Registered Valuer, gave the description and the valuation of jewellery purchased by the appellant on 1st April, 1987. The items of jewellery valued by him are:
(i) 2 Rani Har
(ii) 3 Rangullui
(iii) 3 Kare
(iv) 2 Jhumke The valuation report by reflecting different pieces proves the purchase of jewellery by the appellant on 1st April, 1987 by investing a sum of Rs. 2,19,650.
(iii) The order of assessment passed by the AO highlights the default committed by the appellant punishable under Section 271(1)(c) of the Act. Thus, the satisfaction of the AO is apparent and obvious from the record.
(iv) It is not for the Department to prove the source of income of the appellant to purchase the jewellery. The very act of purchase of jewellery by the appellant of Rs. 2,19,650 raises a presumption that the appellant earned an income of Rs. 2,19,650 in the asst. yr. 1988-89. This presumption was never rebutted by the appellant. Thus, the appellant knew that she had earned this income in asst. yr. 1988-89 but she did not file the return of income.
(v) The assessment of Rs. 2,19,650 is based on affidavit of the appellant and the valuation report of the Registered Valuer showing purchase of jewellery by the appellant. It is neither based on probability nor any estimation. The concealed income is equivalent to the purchase of jewellery by the appellant. She neither declared income to justify the investment nor showed the investment in jewellery thereby clearly revealing her intent to conceal income with the motive of evading tax liability.
The assessee is aggrieved with the orders of CIT(A). Hence, these appeals before us.
7. The learned Authorised Representative, J.S. Bhasin, filed written submissions on 26th Feb., 2007 stating therein that the AO completed original assessment under Section 143(3) r/w Section 147 on 29th Sept., 2000 (a copy placed at pp. 1 and 2 of the paper book), where no proceedings under Section 271(1)(a) have been initiated in the assessment order. Thereafter, the said assessment was set aside by the learned CIT(A) and restored to the AO vide CIT(A)'s order dt. 26th Dec, 2000 (a copy placed at pp. 4 to 9 of the paper book). He submitted that in pursuance of the order of the CIT(A), the AO completed set aside assessment vide his order dt. 7th Dec, 2001 (a copy placed at pp. 10 to 14 of the paper book), where penalty proceedings under Section 271(1)(a) had been initiated for the first time. He submitted that it was argued before the CIT(A) that if the penalty proceedings had not been initiated at the time of completing the original assessment, the AO could not have initiated such proceedings at the time of completing the set aside assessment. However, this aspect was not considered by the CIT(A). He, therefore, contended that penalty imposed by the AO under Section 271(1)(a) without initiating the proceedings in the assessment order is without jurisdiction and such order is liable to be quashed on this ground itself. He submitted that the levy of penalty is not mandatory, but purely discretionary as the expression used in section 'May'. He relied on the judgment of Hon'ble Delhi High Court in the case of CIT v. Maya Rani Punj , Orissa High Court in the case of CIT v. Prafulla Kumar Mallik , Madhya Pradesh High Court in the case of Todarmal Safarishmal Lashkar v. CIT and Karnataka High Court in the case of M.P. Laxman v. Agrl. ITO and Anr. . Relying on the judgment of Hon'ble Supreme Court in the case of Modi Industries Ltd. and Ors. v. CIT , the learned Authorised Representative submitted that the set aside assessment completed by the AO on 27th Nov., 2001 was not a "regular assessment". It was only a consequential order passed by the AO to give effect to the appellate order of the CIT(A). Therefore, the initiation of penalty proceedings should not be considered on the basis of such order. He submitted that if the AO omitted to initiate the penalty proceedings at the time of completing the assessment, the CIT cannot exercise revisionary powers under Section 263 to initiate such proceedings. In support of such proposition, he relied on the following judgments:
(i) CIT v. Nihal Chand Rekyan
(ii) Addl. CIT v. J.K. D'Costa
(iii) P.C Puri v. CIT
(iv) CIT v. Keshiimal Paiasmal
(v) Surendm Piasad Singh and Ors. v. CIT
(vi) Decision of Tribunal, Chandigarh Bench, in the case of Sangrui Vanaspati Mills Ltd. v. Dy. CIT (2002) 74 TTJ (Chd)(TM) 857: (2002) 80 TTD 143 (Chd)(TM).
Thus, he submitted that for the purpose of initiation of penalty proceedings, the basis could only be a regular assessment completed by the AO which in this case would be first assessment itself. He further stated that the AO has not recorded proper satisfaction even in the second assessment order passed by the AO to give effect to CIT(A)'s order. Relying on the judgment of Kerala High Court in the case of CIT v. Smt. P.M. Celine , the learned Authorised Representative submitted that even for the purpose of initiating penalty proceedings under Section 271(1)(a), the satisfaction must be recorded in the assessment order itself. He further submitted that neither in the first assessment order nor in the second assessment order, the AO has recorded valid satisfaction for initiating penalty proceedings under Section 271(1)(c). He relied on the judgment of Hon'ble Punjab & Haryana High Court in the case of CIT v. Munish Iron Store (supra). He submitted that in the present case such satisfaction has not been recorded by the AO. Therefore, penalty proceedings under Section 271(1)(a) are liable to be quashed on this ground itself. He further submitted that the assessee had filed a reply on 6th Feb., 2002 (copy placed at p. 19 of the paper book) in reply to the show-cause notice issued by the AO, where it was stated that no penalty proceedings under Section 271(1)(a) had been initiated at the time of completing the original assessment on 29th Sept., 2000. Therefore, penalty proceedings under Section 271(1)(a) required to be dropped. As regards the penalty proceedings under Section 271(1)(c), the assessee had submitted that appeal filed against order of assessment was pending and, therefore, the penalty proceedings may be kept pending. He submitted that provisions of the Act as these stood at the relevant time provided that order for imposing penalty could be passed within a period of one year from the end of the month in which the order of the CIT(A) or Tribunal was received. However, the AO proceeded to impose penalty without waiting for the decision of appellate authorities. He submitted that even assessee was not informed that such request could not be acceded to and he proposed to levy the penalty without waiting for the order of the CIT(A) and Tribunal before whom the appeals were pending. He submitted that even the reply submitted by the assessee on 6th Feb., 2002 was not taken into account. Thus, he submitted that the AO imposed penalty under Section 271(1)(a) and 271(1)(c) without allowing effective opportunity and thereby violated principles of natural justice. Relying on the judgment of Hon'ble Madras High Court in the case of CIT v. G.R. Rajendran and two judgments of Hon'ble Gujarat High Court in the cases of CIT v. Textile & General Engineering Co. and CIT v. Scientific Chemicals , the learned Authorised Representative submitted that the orders for imposing penalty without considering the explanation of the assessee are liable to be quashed on this ground itself. He further stated that the assessee neither in the past nor in future was being assessed to tax. She did not have any regular source of income. She was totally unaware of her obligation to file the return under the bona fide belief that she was not required to do so. This according to the learned Authorised Representative constituted a reasonable cause for the default under Section 271(1)(a) for which no penalty could be imposed. Thus, the learned Authorised Representative concluded the arguments by saying that orders for imposing penalty under Section 271(1)(a) and 271(1)(c) may be quashed after setting aside the impugned orders of the CIT(A).
8. The learned Departmental Representative, on the other hand, heavily relied on the orders of the authorities below. He also filed written submissions by his letter dt. 20th March, 2007 stating therein that it was within competence of the AO to initiate penalty proceedings under Section 271(1)(a) at the time of completing the set aside assessment because the original assessment order was set aside by the CIT(A). He has also stated that the orders for imposing penalty under Sections 271(1)(a) and 271(1)(c) had been passed after allowing reasonable opportunity to the assessee. He further submitted that the judgment of the Hon'ble Supreme Court in the case of Modi Industries Ltd. v. CIT (supra) is not applicable to the facts of the present case because that relate to charging of interest under Section 214. He also stated that the AO has recorded satisfaction at the time of initiation of the proceedings. As regards the merits of penalty under Section 271(1)(c), the learned Departmental Representative submitted that she herself declared such income under the VDIS Scheme, 1997. However, neither she paid the tax due thereon nor filed the return. Such income declared under the VDIS was supported by an affidavit of the assessee and was represented by specific investment in the jewellery. The assessee could not explain with any evidence that the investment in the jewellery was made out of income disclosed in the earlier assessment years. Thus, he submitted that the AO has rightly imposed the penalty under Section 271(1)(c) and 271(1)(a).
9. I have heard both the parties at some length and given my thoughtful consideration to the rival submissions, gone through the facts, evidence and material placed on record as well as orders of the authorities below. I have also referred to the relevant pages of the paper book to which my attention has been drawn. The undisputed facts of the case as detailed above are that the assessee declared jewellery valuing at Rs. 2,19,650 under VDIS Scheme, 1997 and did not pay the tax on the same. The AO initiated proceedings under Section 147 on receipt of information from the CIT, completed the first assessment on 29th Sept., 2000 at an income of Rs. 2,19,650 i.e. value of jewellery declared in the VDIS Scheme, the learned CIT(A) set aside the assessment vide his order dt. 26th Dec, 2000 with a direction to make fresh assessment after allowing one more opportunity to the assessee. The AO completed the set aside assessment in pursuance of the directions of the CIT(A) on 7th Dec, 2001 at the same income of Rs. 2,19,650 as determined in the original assessment order and the addition made by the AO has been upheld by the CIT(A) vide her order dt. 16th April, 2004. The order of the CIT(A) for sustaining the addition has already become final as no further appeal to the Tribunal was filed. Now, the material question that requires to be decided by this Bench is whether for the purpose of considering the levy of penalty under Section 271(1)(a) and 271(1)(c), the satisfaction recorded by the AO in the first order dt. 29th Sept., 2000 is to be considered or the satisfaction recorded in the second order dt. 27th Nov., 2001 is to be considered? I do not find any merit in the submissions of the learned Counsel for the assessee that for the purpose of considering the initiation of proceedings, only the regular assessment made by the AO has to be considered. He has drawn support from the judgment of Hon'ble Supreme Court in the case of Modi Industries Ltd. v. CIT (supra) which is on the issue of interest under Section 214 of the Act. Section 214 itself provides that Central Government shall pay simple interest at 15 per cent per annum on the amount by which the aggregate sum of any instalments of advance tax paid during any financial year in which they are payable under Sections 207 and 213 exceeds the amount of the assessed tax from the 1st day of April next following the said financial year to the date of regular assessment for the assessment year immediately following the said financial year (emphasis in italicized, in print, supplied). Sub-section (5) of Section 215 which is also applicable to Section 214 defines the assessed tax as to mean the tax determined on the basis of regular assessment reduced by the amount of tax deducted at source. Therefore, the judgment of Hon'ble Supreme Court in the case of Modi Industries Ltd. v. CIT (supra) which is in the context of interest payable by the Central Government is not applicable to the initiation of penalty proceedings under Chapter XXI of the Act. In this context, I consider it appropriate to reproduce hereunder the provisions of Sections 271(1)(a) and 271(1)(c) of the Act:
271 (1) If the AO or the CIT (A) or the CIT in the course of any proceedings under this Act, is satisfied that any person--
(a) has failed to furnish the return of total income which he was required to furnish under Sub-section (1) of Section 139 or by notice given under Sub-section (2) of Section 139 or Section 148 or has failed to furnish it within the time allowed and in the manner required by Sub-section (1) of Section 139 or by such notice as the case may be, or
(b) has failed to comply with a notice under Sub-section (1) of Section 142 or Sub-section (2) of Section 143 or fails to comply with a direction issued under Sub-section (2A) of Section 142 or
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income.
A bare reading of the above section shows that IT authorities mentioned therein are required to initiate such proceedings in the course of any proceedings under the Act, if they are satisfied that any person has failed to furnish the return of total income within time allowed under Section 139(1) or in response to notice issued under Sub-section (2) of Section 139, or Section 148 and has concealed the particulars of his income or furnished inaccurate particulars of such income. The expression used in the section is "in the course of any proceedings under this Act". Such expression has very wide connotation and is not confined to the regular assessment alone. Such expression cannot be given restrictive meaning so as to confine only to regular assessment. What is required to be seen is when the factum of a particular default came to the knowledge of the AO and at what point of time the authority concerned assumed jurisdiction to initiate such proceedings. If such default came to the notice of the AO at the time of completing the first assessment and the AO assumed jurisdiction by issue of notices under Section 271(1)(a) and 271(1)(c) the material order would be the first assessment. The issue whether the initiation of penalty proceedings and assumption of jurisdiction by the AO were valid or not has to be determined with reference to the first assessment order. However, there can be a situation where such default comes to the notice of the AO during the course of completing the set aside assessment. For example, there could be a case where the AO completed the assessment under Section 144 on estimate basis because of failure on the part of the assessee to produce the books of account and other supporting evidence. The AO did not initiate penalty proceedings under Section 271(1)(c) because the act of concealment did not come to the notice of the AO at the time of completing exparte assessment, supposing that such assessment was set aside by the appellate authority with a direction to the AO to reframe the same after allowing proper opportunity to the assessee. During the course of set aside assessment proceedings, the assessee produced the books of account and the AO found that there is a credit entry of Rs. 1 lac in the books. When the assessee is confronted with the same, he explained that it represented sale proceeds of agricultural produce and in support of such contention the assessee filed copies of Revenue record indicating certain extent of land owned by the assessee. However, on further enquiry made by the AO it is found that Revenue records produced before him were forged and fabricated as there was no Revenue official by the name who signed the records produced before the AO and the assessee did not own any land. Based on such evidence, the AO can initiate penalty proceedings under Section 271(1)(c) at the time of completing the set aside assessment because the factum of concealment came to his knowledge during the course of completing the set aside assessment. In such a case, the legality of action of the AO for initiating the penalty proceedings under Section 271(1)(c) is to be seen from set aside assessment order irrespective of the fact that such proceedings were not initiated at the time of completing the original assessment. However, in a case where the AO also initiated penalty proceedings under Section 271(1)(a) or 271(1)(c) at the time of completing the set aside assessment, though these already stood initiated at the time of first assessment, the subsequent action of the AO would be redundant. The action of the AO for initiating the penalty proceedings would be judged from first order i.e. when the AO assumed jurisdiction and issued penalty notices under the relevant sections. However, the AO would be free to make use of the results of his subsequent investigation made during the course of set aside assessment at the time of levying the penalty under Section 271(1)(c) of the Act.
9.1. The above position would not be applicable to a case where the assessment is quashed by the appellate authority. In such a case, the entire proceedings including the action of the AO for initiating the proceedings under the relevant sections becomes non est. The AO would not be justified for imposing penalty under Section 271(1)(a) or 271(1)(c) on the basis of assessment order which has since been quashed by the appellate authority. If he does so, such order would also be illegal and bad in law.
9.2. Now, in the present case, we find that the learned CIT(A) has not quashed the first assessment. He has only set aside the assessment and restored to the file of the AO for making it afresh after allowing one more opportunity to the assessee. It is settled law that both penalty proceedings and assessment proceedings are separate and independent proceedings, although the findings recorded in the assessment order may constitute a base for imposition of penalty. Now, when we see the order of the CIT(A) for setting aside the assessment, it only means that the quantum addition made by the AO was set aside and restored to the file of the AO. The action of the AO for initiating the penalty proceedings under Section 271(1)(c) remained intact, even though the quantum of penalty leviable would depend on the tax ultimately determined on completion of set aside assessment. Now, in this case, the basis of addition in both the first and set aside assessment remains the same i.e. income disclosed under the VDIS, 1997. There is no change in the facts and conclusions drawn by the AO in both the orders. Besides, the factum that assessee had filed the return late also remains the same as in the first assessment order. Therefore, for the purpose of deciding whether the AO had initiated valid penalty proceedings under Section 271(1)(a) and 271(1)(c) the first order has to be considered. This is also clear from the second order passed by the AO where the AO has merely recorded towards the end of the order that "penalty notices under Section 274 r/w Section 271 for concealment of income and for late filing of return have already been issued". This means that the AON has referred to the notices issued at the time of completing the first assessment when the AO assumed jurisdiction for levy of penalty under Section 271(1)(c) and 271(1)(a). Therefore, in the light of these facts and circumstances of the case and the legal position discussed above, I am of the opinion that for the purpose of levy of penalty under Section 271(1)(a) and 271(1)(c), one has to refer to the satisfaction recorded by the AO in the first assessment order on 29th Sept., 2000 (a copy of the assessment order is placed at pp. 1 and 2 of the paper book). In this order the AO has recorded following satisfaction at the time of initiating the penalty proceedings under Section 271(1)(c) at the end of the assessment order:
Penalty proceedings under Section 271(1)(c) are also initiated. Assessed. Issue demand notice, challans and notice under Section 271(1)(c) and copy of order.
From the above, it is clear that the AO had not at all initiated penalty proceedings under Section 271(1)(a) though he has initiated penalty proceedings under Section 271(1)(c) of the Act. It is also a fact that the AO was aware of the fact that assessee had not filed the return of income within time allowed under Section 139(1). This was the reason that the AO issued notice under Section 148 on 23rd Sept., 1998. Still, however, the AO did not initiate penalty proceedings under Section 271(1)(a). Section 271 of the Act mandates recording of satisfaction in the assessment order before initiating the penalty proceedings under any of the sub-sections mentioned therein. This is the mandatory requirement of law without which the AO cannot assume jurisdiction. If the satisfaction is not recorded by the AO or the same is not proper, the proceedings initiated under this section would be invalid and without jurisdiction. The recording of satisfaction means that the assessment order must apparently show that there was an application of mind by the AO. The application of mind can only be gathered by the reasons stated in the assessment order. This view finds support from the judgments of Delhi High Court in the cases of CIT v. Auto Lamps Ltd. (2005) 196 CTR (Del) 454, CIT v. Super Metal Re-Rollers (2003) 185 CTR (Del) 349: (2004) 265 ITR 82 (Del), Diwan Enterprises v. CIT , CIT v. B.R. Sharma and CIT v. Ram Commercial Enterprises Ltd. . Besides, in the case of CIT v. Munish Iron Store (supra), the Hon'ble Punjab & Haryana High Court has also held that the jurisdiction to impose penalty flows from recording of the satisfaction of the AO regarding concealment of income. In case, there is defect in the assumption of jurisdiction i.e. if satisfaction has not been recorded, such defect cannot be cured. The Hon'ble Punjab & Haryana High Court, apart from relying on the two judgments of Delhi High Court in the cases of CIT v. Ram Commercial Enterprises Ltd. (supra) and Diwan Enterprises v. CIT (supra) has also relied on two judgments of Hon'ble Supreme Court in the cases of Jain Bros. v. Union of India and DM. Manasvi v. CIT . Even for the purpose of initiation of penalty proceedings under Section 271(1)(a), it was mandatory on the part of the AO to record satisfaction in the assessment order itself. In the present case, the AO has failed to record such satisfaction at the time of completing the first assessment. Therefore, the order for imposing penalty under Section 271(1)(a) is illegal and without jurisdiction. Accordingly, the order of the CIT(A) is set aside and the penalty imposed by the AO under Section 271(1)(a) is quashed on this ground itself.
10. As regards the penalty imposed by the AO under Section 271(1)(c), I find that the AO has merely mentioned towards the end that the penalty proceedings under Section 271(1)(c) are also initiated. There are two limbs of Section 271(1)(c) i.e. concealing the particulars of income or furnishing inaccurate particulars of income.
Nowhere, the AO has mentioned whether the assessee was guilty of concealing particulars of income or furnishing of inaccurate particulars of income. This only shows lack of application of mind by the AO at the time of initiating the penalty proceedings. The judgment of jurisdictional High Court of Punjab & Haryana in the case of CIT v. Munish Iron Stow (supra) supports the view that the order for imposing penalty without recording valid satisfaction is illegal and bad in law. The other judgments referred to in preceding para 9.2. are also directly applicable to the present case. On identical facts, the Tribunal, Amritsar Bench, vide its orders dt. 24th Nov., 2006 and 5th March, 2007 in the cases of Shew Punjab Agricultural Works v. ITO and Sh. Jaswant Rai v. AO, in ITA No. 87(ASR)/2006 and ITA Nos. 430 & 431/(ASR)/2006 for the asst. yrs. 1989-90 & 2002-2003 and 2003-2004 has quashed the penalty orders on the ground that the same were invalid and without jurisdiction. The facts of the present case are also similar. Therefore, respectfully following the various judgments cited above and the decisions of the Tribunal, Amritsar Bench, I hold that the learned CIT(A) was not justified in sustaining the order for imposing penalty under Section 271(1)(c) of the Act. Accordingly, 1 set aside the order of the CIT(A) and quash the order under Section 271(1)(c) being invalid and without jurisdiction. The grounds of appeal of the assessee are allowed.
11. Since the orders for imposing the penalty have been quashed, I do not consider it necessary to decide the grounds relating to merits of the penalty imposed under Section 271(1)(a) and 271(1)(c) of the Act. These grounds of appeal are disposed of in these terms.
12. In the result, both the appeals filed by the assessee are allowed.