INCOME-TAX OFFICER, WARD - 3,, ICHALKARANJI vs. SHRI. DANWADE KUTUBUDDIN SHAHABUDIN,, KOLHAPUR

This appeal by the Revenue against the order dated 01-08-2019 passed by the Commissioner of Income Tax (Appeals)-2, Kolhapur [‘CIT(A)’] for assessment year 2005-06.

The Revenue raised five grounds of appeal amongst which the only issue emanates for our consideration is as to whether the CIT(A) justified in cancelling the penalty imposed by the Addl. CIT u/s. 271D of the Act.

The ld. DR relied on the order of Addl. CIT and the ld. AR supported the impugned order.

Heard both the parties and perused the material available on record. We note that the Addl. CIT proceeded to initiate penalty proceedings u/s. 271D and 271E of the Act basing on the statement of Shri Allabaksh M. Hussain Bagwan, an employee of the Patsanstha recorded u/s. 131(1) of the Act. We note that the said employee confirmed the fact of availing cash loans of Rs.23,28,690/- and repayment thereon in cash by the assessee which is evident from para 2 of the penalty order. As noted above, the penalty imposed u/s. 271E of the Act in assessee’s own case was cancelled by this Tribunal, which is on record, basing on which the CIT(A) cancelled the penalty u/s. 271D of the Act in the present case. We note that the main contention of the assessee before the CIT(A) was that the initiation of penalty proceedings were barred by limitation. In support of the same, the ld. AR drew our attention to the provisions u/s. 275(1)(c) of the Act and argued that the assessment was completed on 30-11-2007 and penalty proceedings u/s. 271D and 271E of the Act were initiated vide notice dated 11-03-2010, is barred by limitation. He vehemently argued that Clause (c) of sub-section (1) of section 275 is applicable to the facts on hand. He relied on the order of this Tribunal in assessee’s own case u/s. 271E of the Act and drew our attention to para 6 of that order at page No. 73 of the paper book, argued that this Tribunal by placing reliance on the decision of Hon’ble High Court of Rajasthan in the case of CIT Vs. Hissaria Bros. reported in 291 ITR 244 (Raj.), held, that there is inordinate delay in initiation of penalty proceedings u/s. 271E of the Act on 11-03-2010 as against the assessment order dated 30-11-2007. The Tribunal dismissed the Revenue’s appeal by holding that the initiation of penalty proceedings u/s. 271E of the Act is beyond the limitation.

We find the order of this Tribunal in assessee’s own case for A.Y. 2005-06 in for a charge u/s. 271E of the Act at page No. 72 of the paper book. Admittedly, that this Tribunal relied on the decision of Hon’ble High Court of Rajasthan in the case of Hissaria Bros. (supra) and dismissed the appeal of Revenue by holding the penalty imposed therein u/s. 271E of the Act is barred by limitation. Further, we note that the appellant-revenue therein placed reliance on the said decision, but however, the Tribunal rejected its contention by observing that the appellant-revenue relied on part of paragraph of the said judgment but not referred to the judgment in total which is evident from para No. 16 at page No. 80 of the paper book. In view of the same, we shall reproduce the relevant part, wherein, the Hon’ble High Court of Rajasthan was pleased to examine the question No. 1 framed therein. “18. In view of the above finding in which in our opinion the Tribunal was right and which is not also under challenge by the Revenue that the present transactions were governed by the Central Board of Direct Taxes circular referred to above and did not invite the provisions of Sections 269SS and 269T and consequently no penalty was imposable under Sections 271E and 271D, now we propose to examine the issue involved in question No. 1. 19. In the facts and circumstances noticed above, the Tribunal has held the penalty orders to be barred by time in terms of Section 275(1)(c). 20. The Revenue contends that the provisions of Section 275(1)(a) are attracted so far as limitation in the present case is concerned and if Section 275(1)(a) is applicable, the limitation for completing the penalty proceedings is extended up to 6 months from the date of expiry of the month in which the order has been passed in appeal or other proceedings arising out of the assessment in the course of which penalty proceedings have been initiated and the order imposing penalties under Sections 271D and 271E had been passed within such extended period from date of the appellate decision against the assessment order for the assessment year during which notice under Sections 271D and 271E was issued. 21. It would be apposite here to refer to Section 275 in its fullness: 275. Bar of limitation for imposing penalties.--(1) No order imposing a penalty under this Chapter shall be passed— (a) in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals) under Section 246 or an appeal to the Appellate Tribunal under Section 253, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which the order of the Commissioner (Appeals)

It would not be out of place to consider the relevant legislative history of the provision in question for the present purposes.

Under the Income-tax Act, 1961 as originally enacted, no limitation was prescribed for completion of the penalty proceedings. However, considering that there should not be any inordinate delay in imposing penalty and to streamline the levy of penalty within reasonable time in the Act of 1961, Section 275 was enacted as a new provision for regularising imposition of penalty. It is pertinent to notice that if at the relevant time when the scheme for levy of penalty was enacted in the 1961 Act, the case in which the penalty was envisaged under Chapter XXI, the penalty proceedings were required to be initiated during the course of relevant assessment proceedings or its appellate proceedings by the appellate authority. Attention may be invited to the provisions contained in Sections 271 and 273 which were the principal provisions for imposing penalty. The simple provision which was enacted was that no order in this Chapter shall be passed after the expiration of two years from the completion of proceedings, in the course of which the proceedings for imposition of penalty have been commenced. Thus, the limitation for imposing penalty under Section 275 as originally enacted was directly linked with the completion of proceedings in the course of which the penalty proceedings were initiated in terms of Section 271 or Section 273 which were the principal provisions for imposing penalty under Chapter XXI. Since the initiation of penalty proceedings was linked with assessment proceedings and the orders in such assessments were subject to appeal, the findings in such proceedings ordinarily became the foundation for initiating proceedings for penalty and remained relevant evidence to reach a final conclusion in penalty proceedings which were otherwise independent. Where assessment proceedings in the course of which penalty proceedings were initiated became the subject-matter of appeal and there was modification or reversal of findings, it affected final result of penalty proceedings also.

Section 275 was substituted by the Taxation Laws (Amendment) Act, 1970 which came into effect with effect from April 1, 1971. The change was explained by the Board vide circular 56 dated March 19, 1971. Significantly, it postulated that Section 275 of the Income-tax Act which specified the time- limit for completion of penalty proceedings has been substituted by a new section. Under the existing section, penalty proceedings for concealment of income or defaults in furnishing the return or accounts called for by notice or failure to pay advance tax on the taxpayer's own estimate, etc., are required to be completed within two years from the date of completion of the proceedings in the course of which the penalty proceedings were commenced. The operation of this time-limit has resulted in practical difficulties in cases where the Appellate Assistant Commissioner remands the appeal against the assessment for further enquiry by the Income-tax Officer or deletes or reduces the addition made on account of concealed income and the Department takes up the matter in further appeal before the Appellate Tribunal. Sometimes, a final decision on the quantum of the concealed income becomes available only after the expiry of the two-year time limit.

Section 275 as substituted aims at obviating difficulties in such cases, reducing avoidable work and avoiding hardship to the assessees. It provides that the time-limit for making an order imposing a penalty under the provisions of Chapter XXI of the Income-tax Act will, ordinarily, be 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. However, in a case where the relevant assessment or other order is the subject-matter of an appeal to the Appellate Assistant Commissioner or an appeal by the Income-tax Officer to the Appellate Tribunal, the time limit for completing the penalty proceedings will be either the two-years period as stated above or a period of six months from the end of the month in which the order of the Appellate Assistant Commissioner or, as the case may be, of the Appellate Tribunal is received by the Commissioner, whichever period expires later. It may be noted that the two year period will henceforth expire at the end of a financial year, instead of on different dates during the financial year, and the six month period will expire at the end of a calendar month. This facilitates the exercise of vigilance by the tax administration on the expiry of the limitation period and ensure that penalty proceedings are completed in all cases in time. 26. Secondly, the Direct Tax Laws (Amendment) Act, 1987 which came into effect with effect from April 1, 1989, Section 275 was amended. Vide amendment, the time limit for completion of penalty proceedings which was generally two years from the end of financial year in which such proceedings were completed or six months from the end of the month in which action for imposition for penalty was initiated, whichever period expired later. 27. By these amendments, the three categories were made for applying limitation for completing the penalty proceedings taking into consideration the various penalty proceedings for default of certain provisions of the Income-tax Act which are not necessarily linked with proceedings for any particular assessment year in the course of which only penalty proceedings were required to be initiated. Such consequences of default were not linked with the principal assessment proceedings for any specific assessment year but were independent of it. 28. By substituting Section 275(1), which became operative from April 1, 1989, the provision divided cases for the purpose of prescribing limitation for completing penalty proceedings into three categories: (i) Category I covers cases where the assessment to which the proceedings for imposition of penalty relate is the subject-matter of an appeal to the Deputy Commissioner (Appeals) or the Commissioner (Appeals) under Section 246 or with effect from June 1, 2000 Section 246A or an appeal to the Appellate Tribunal under Section 253; (ii) Category II covers cases where the relevant assessment is the subject-matter of revision under Section 263 ; and (iii) Category III covers all other cases not falling within Category I and Category II which is governed by Clause (c).

By dividing into three categories the period of limitation for cases falling under category (i) i.e. Clause (1)(a) is the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed or six months from the end of the month in which the order of the Deputy Commissioner (Appeals) or the Commissioner (Appeals) or, as the case may be, the Appellate Tribunal is received by the Chief Commissioner or Commissioner whichever period expires later.

The period of limitation for the cases falling under Category (II) is six months from the end of the month in which such order on revision is passed and the period of limitation for the cases falling under the above Category III is the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later. In the last category filing of appeal in respect of order passed in proceedings during which penalty proceedings were initiated is not relevant.

To this effect, a Circular No. 551 dated January 23, 1990 see [1990] 183 ITR (St.) 7 and another Circular No. 554 dated February 13, 1990 (see [1990] 183 ITR (St.) 130) were issued by the Central Board of Direct Taxes.

A close scrutiny of Section 275 which reproduced hereinabove shows that Clause 1(a) covers those cases where the penalty proceedings are in respect of a default related to principal assessment for a particular assessment year and the penalty proceedings are required to be initiated in the course of that proceedings only. In such case where the relevant assessment order or other orders are the subject-matter of an appeal to the Commissioner (Appeals) under Section 246 or an appeal to the Appellate Tribunal under Section 253, after the expiry of the financial year in which the proceedings in the course of which action for the imposition of penalty has been initiated, are completed, or 6 months from the end of the month in which the order of Commissioner (Appeals) or, as the case may be, of the Appellate Tribunal is received by the Chief Commissioner or Commissioner, whichever period expires later.

Apparently, Clause (a) governs the categories which are integrally related to the assessment proceedings and are not independent of it.

We have also noticed that this provision was brought into effect in 1970 with effect from April 1, 1971, so that proceedings may not require rectification or modification depending on the outcome of the appeal against the orders passed in the relevant assessment proceedings or the other proceedings in the course of which the penalty proceedings are required to be initiated.

We have also noticed that Sections 271 and 273 were the two original penalty provisions, which require the penalty proceedings to be initiated during the course of relevant assessment proceedings or the other relevant proceedings as the case may be. The penalty proceedings could also be initiated during the appellate proceedings arising out of the relevant assessment proceedings. It is only where the assessment proceedings are independent and not directly linked to the assessment proceedings that the result of such proceedings in the course of which the penalty proceedings were initiated does not affect the levy of penalty. On such penalty proceedings, independent of the assessment proceedings Clause (c) has been made applicable. In this category the period of limitation for completing the penalty proceedings is linked with the initiation of the penalty proceedings itself.

In such cases, the penalty proceedings can be initiated independent of any proceedings but obviously, the penalty proceedings can be initiated only when the default is brought to the notice of the concerned authority which may be during the course of any proceedings and, therefore, for this type of cases where the penalty proceedings have been initiated in connection with the defaults for which no statutory mandate is there about any particular proceedings during the course of which only such penalty proceedings can be initiated, a different period of limitation has been prescribed under Clause (c) as a separate category. In cases falling under Clause (c) penalty proceedings are to be completed within 6 months from the end of the month in which the proceedings during which the action for imposition of penalty is initiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later. There is no provision under Clause (c) for the extended period of limitation commensurating with completion of the appellate proceedings if any arising from the proceedings during the course of which such penalty proceedings are initiated as in the case where the penalty proceedings are linked with the assessment proceedings or the other relevant proceedings.

The expression other relevant thing used in Section 275(1)(a) and Clause (b) of Sub-section (1) of Section 275 is significantly missing from Clause (c) of Section 275(1) to make out this distinction very clear.

We are, therefore, of the opinion that since penalty proceedings for default in not having transactions through the bank as required under Sections 269SS and 269T are not related to the assessment proceeding but are independent of it, therefore, the completion of appellate proceedings arising out of the assessment proceedings or the other proceedings during which the penalty proceedings under Sections 271D and 271E may have been initiated has no relevance for sustaining or not sustaining the penalty proceedings and, therefore, Clause (a) of Sub-section (1) of Section 275 cannot be attracted to such proceedings. If that were not so Clause (c) of Section 275(1) would be redundant because otherwise as a matter of fact every penalty proceeding is usually initiated when during some proceedings such default is noticed, though the final fact finding in this proceeding may not have any bearing on the issues relating to establishing default e.g. penalty for not deducting tax at source while making payment to employees, or contractor, or for that matter not making payment through cheque or demand draft where it is so required to be made. Either of the contingencies does not affect the computation of taxable income and levy of correct tax on chargeable income; if Clause (a) was to be invoked, no necessity of Clause (c) would arise.

Thus, both on the ground that the transaction in question retention of sale price by the kachha adhatiya did not amount to deposit and its utilisation and dealing with it at the instance of farmer constituents did not amount to repayment of loan or deposits within the meaning of Section 269SS or Section 269T and on the ground that limitation under Section 275(1)(c) applies to such proceedings we hold in favour of the respondents.

Accordingly, these appeals fail and are hereby dismissed. No order as to costs.”

On careful reading of the above, we note that the assessee therein is a firm doing the business of kachcha adhatiya acting as agent for its farmer constituents. The AO found use of the money received by the assessee therein through sale of crops of his farmers constituents to be in the nature of deposits and invoked the provisions of Section 269SS to the amount received and for repayment u/s. 269T of the Act. As a result of the same, initiated penalty proceedings u/s. 271D and 271E of the Act. The CIT(A) cancelled the penalties holding the instance to be known as balancing of accounts. The Tribunal found, on the question of limitation that the order of penalty should have been passed within 6 months from the end of the month in which the assessment was completed and held that since all the penalty orders were passed beyond 6 months from the end of the month in which assessments were completed, the penalty orders were barred by time. The Hon’ble High Court held that the transaction in question retention of sale price by the kachha adhatiya did not amount to deposit and its utilisation and dealing with it at the instance of farmer constituents did not amount to repayment of loan or deposits within the meaning of Section 269SS or Section 269T and as such the limitation u/s. 275(1)(c) applies to such proceedings.

Further, discussed the relevant legislative history of the provisions u/s. 275 of the Act for the present purpose, wherein, was pleased to observe by the Amendment Act, 1987 which came into effect from 01-04- 1989, three categories were made for applying limitation for completing the penalty proceedings in section 275 of the Act. Category (1) i.e. section 271(1)(a) of the Act covers cases where the assessment to which the proceedings for imposition of penalty relate is the subject matter of an appeal to the Dy. Commissioner (Appeals) or the Commissioner (Appeals) or an appeal to the Appellate Tribunal. Category (2) i.e. section 275(1)(b) of the Act covers cases where the relevant assessment is the subject matter of revision u/s. 263 of the Act. Category (3) i.e. section 275(1)(c) of the Act covers all the cases not falling within category (1) and (2) i.e. section 275(1)(a) and 275(1)(b) respectively, governed by Clause (c) of sub-section (1) of section 275 of the Act. That being so, the Co-ordinate Bench of this Tribunal in assessee’s own case in for penalty charge u/s. 271E of the Act following the decision of Hon’ble High Court of Rajasthan in the case of Hissaria Bros. (supra) held the penalty proceedings initiated u/s. 271E of the Act is barred by limitation.

Further, opined that section 275(1)(a) of the Act governs categories which are integrally related to the assessment proceedings and are not independent of it, the expression, other relevant thing used in section 275(1)(a) and 275(1)(b) is significantly missing from Clause (c) of section 275(1) to make out the distinction very clear where the filing of appeal in respect of order passed in proceedings during which the penalty proceedings were initiated is not relevant, where the assessment proceedings are independent. In Clause (c) of sub-section (1) of section 275 of the Act has been made applicable to the independent of the assessment proceedings, the period of limitation for completing the penalty proceedings is linked with the initiation of the penalty proceedings itself. There is no provision under Clause (c) for the extended period of limitation commensurating with completion of the appellate proceedings if any arising from the proceedings during the course of which such penalty proceedings are initiated as in the case where the penalty proceedings are linked with the assessment proceedings or the other relevant proceedings. The Hon’ble supreme Court was pleased to confirm the decision of Hon’ble High Court of Rajasthan in the case of Hissaria Bros. (supra) vide its decision dated 22-08-2016 reported in (2016) 386 ITR 719 (SC).

In view of the decision of Hon’ble High Court of Rajasthan in the case of Hissaria Bros. (supra), for better understanding, for ready reference the provisions u/s. 275(1)(c) of the Act relevant to F.Y. 2007 (31-07-2007) is reproduced here-in-below : “Bar of limitation for imposing penalties. 275. (1) No order imposing a penalty under this Chapter shall be passed— ( a) in a case where the relevant assessment or other order is the subject- matter of an appeal to the Commissioner (Appeals) under section 246[or section 246A] or an appeal to the Appellate Tribunal under section 253, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which the order of the Commissioner (Appeals) or, as the case may be, the Appellate Tribunal is received by the Chief Commissioner or Commissioner, whichever period expires later :

On careful reading of the above said provisions, we note that section 275 prescribes bar of limitation for imposing penalties. Sub-section (1) explains no order imposing a penalty under this chapter shall be passed. Clause (c) of sub-section (1) prescribes bar of limitation, “in any other case, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed”, which means, the Addl. CIT barred from initiating penalty proceedings after the expiry of the financial year in which assessment was completed. In the present case, the first para of the penalty order clearly shows the assessment was completed on 30-11-2007, thereby, the Addl. CIT cannot impose penalty after the financial year in which the assessment was completed i.e. the relevant financial year is F.Y. 2007 and end of such financial year is 31-03-2008, which means the Addl. CIT barred from imposing penalty after the end of financial year in which assessment was completed, i.e. admittedly after 31-03-2008. As it is evident from para 2 in page 2 of the penalty order that the Addl. CIT initiated penalty proceedings by issuing notice u/s. 274 r.w.s. 271D and 271E of the Act on 11-03-2010 and imposed penalty vide order dated 24-09-2010. It is clear from the above that the Addl. CIT initiated penalty proceedings on 11-03-2010 i.e. after the expiry of financial year in which the proceedings, in the course of which action for the imposition of penalty to be initiated, therefore, the very initiation is barred by limitation as the Addl. CIT did not initiate penalty proceedings in the course of assessment proceedings.

The Tribunal in assessee’s own case in for A.Y. 2005-06 for penalty u/s. 271E of the Act vide its order dated 24-11- 2017 observed that there was no merit in the reliance placed upon by the Revenue in the case of Hissaria Bros. (supra), by holding so, referring to CBDT Circular No. 09/DV/2016 dated 26-04-2016, held that Range Head will issue the penalty notice and shall dispose/complete the proceedings within the limitation prescribed u/s. 275(1)(c) of the Act. Therefore, we find, the facts and circumstances of the present case are identical to the facts in ITA No. 1238/PUN/2015, thereby, applying the finding rendered by the Co-ordinate Bench, in our opinion, the limitation as provided in section 275(1)(c) of the Act is applicable to the facts on hand as laid down by the Hon’ble High Court of Rajasthan in the case of Hissaria Bros. (supra) which was confirmed by the Hon’ble Supreme Court, followed by the Co-ordinate Bench in assessee’s own case in ITA No. 1238/PUN/2015. Thus, we find no infirmity in the order of CIT(A) in holding the penalty proceedings u/s. 271D of the Act initiated by the Addl. CIT are barred by limitation and it is justified. Thus, the grounds raised by the Revenue are dismissed.

In the result, the appeal of Revenue is dismissed.