KIRI DYES & CHEMICALS LTD. ,AHMEDABAD vs. THE PR. CIT-2,, AHMEDABAD

The captioned appeal has been filed at the instance of the assessee against the revisional order passed by the Principal Commissioner of Income Tax-2, Ahmedabad (‘Pr.CIT’ in short) dated 28.03.2018 under S. 263 of the Income Tax Act, 1961 (the Act) arising as a consequence of assessment order dated 07.10.2015 passed by the Assessing Officer (AO) under s.143(3) r.w.s. 254 of the Act relevant to AY. 2003-04.

In its appeal, the assessee seeks to assail the action of the Pr.CIT in invoking Section 263 of the Act and contends that the subject assessment order framed under s.143(3) r.w.s. 254 of the Act passed by the AO cannot be termed as ‘erroneous and prejudicial to the interest of the Revenue’ to put Section 263 in motion.

The Relevant facts in brief are that the assessment under s.143(3) of the Act for AY 2003-04 was framed vide order dated 30.03.2006 whereby the AO inter alia disallowed the claim of Rs.3,78,28,641/- under s.10B of the Act. The aforesaid action of the AO was subjected to judicial scrutiny at various levels and eventually the matter was restored to the AO for re- adjudication. The order passed by the AO in the second round of proceedings was once again remitted back by the ITAT to the AO with certain directions. An assessment order under s.143(3) r.w.s. 254 of the Act was consequently passed on 07.10.2015 in the third round of proceedings. The AO maintained its original stance of disallowance of claim of deduction under s.10B of the Act. However, while denying deduction claimed under s.10B of the Act, the AO did not choose to initiate penalty under s.271(1)(c) of the Act while passing the impugned order under s.143(3) r.w.s. 254 of the Act.

The failure of the AO to initiate penalty proceedings under s.271(1)(c) of the Act on denial of deduction under s.10B of the Act while passing the assessment order prompted the Pr.CIT to exercise its jurisdiction under s.263 of the Act to correct the aforesaid failure of the AO.

The relevant para of the order of the ITAT in the said case is extracted hereunder for easy reference:-

As per the arguments, the legal issue that emerges for adjudication is whether the Commissioner under the umbrella of revisionary powers is entitled to upset the finality of assessment proceedings before the AO who has omitted to initiate penalty proceedings in respect of defaults stipulated under section 271(1)(c) when the circumstances for doing so exists. The other integral issue that arises is whether scope of assessment includes initiation of penalty proceedings under S. 271(1)(c) or not. There are long line of judicial precedents on the issue both for and contra. The Hon’ble Gujarat High also had occasion to deal with the issue relevant to assessment year 1982-83 in CIT vs. Parmanad M. Patel 278 ITR 3 (2005) wherein the decision was rendered in favour of the assessee. Riding on the decision of the Hon’ble Gurarat High Court, the co-ordinate bench of Tribunal in J. P. Construction vs. CIT Ahd./ 2009 order dated 24.07.2009 [ AY 2005-06] cancelled the action of the CIT under section 263 wherein the assessment order was set aside for framing assessment afresh in order to initiate penalty under S. 271(1)(c) of the Act. The assessee herein seeks to place reliance on the decision of Gujarat High Court in Parmanand Patel ( supra) followed by Tribunal in JP Construction. The Revenue on the other hand seeks to dispute the position of law as read by the Hon’ble Jurisdictional High Court in Parmanand M. Patel case (supra) on the grounds of amendment carried out in S. 271(1)(c). The Revenue submits that the impugned decision in Parmanand Patel case was rendered prior to amendment carried out in Section 271(1)(c). Post amendment, the Pr. CIT/ CIT is also inserted as a designated authority for the purposes of exercising powers under S. 271(1)(c). Thus the handicap which formed the basis for outcome in Parmanand Patel stands addressed by the legislative amendment. It is therefore contended that in view of the legislative changes, the decision in Parmanand Patel has lost its proposition. Continuing further, negating the ratio of decision of Tribunal in J P Construction (supra), the revenue submits that the aforesaid ITAT order has been set aside and remanded back to ITAT for fresh adjudication in CIT vs. J P Construction in Tax appeal no. 2581 of 2009 order dated 22/10/2013 by the Hon’ble Gujarat High Court taking cognizance of this legislative amendment. 11.1. Having regard to the controversy involved, it would be desirable to reproduce hereunder the relevant paras of the order of the Tribunal in J P Construction case in ITA No.1304/Ahd/2009 to begin with.

In the wake of developments narrated above, the controversy has resurfaced again and issue has become open to debate having regard to the amendment in S. 271(1)(c), which we seek dwell upon.

On perusal of the decision of Hon’ble Gujarat High Court in Parmanand Patel case (pre amended law), we note that basis for holding that the CIT lacks jurisdiction under S. 263 to cancel the assessment for failure of the AO to initiate penalty proceedings were multifold. The propositions emerging therein are broadly summarized as under: (A) S. 271(1)(c) confers discretionary jurisdiction on the AO or the CIT(Appeals) to initiate penalty proceedings. The provision does not empower any other authority to exercise discretion. Even while being a superior authority, the administrative CIT is not a designated authority to form satisfaction prior to amendment of S. 271(1)(c) effective from 1-6.2002. The CIT is thus not permitted substitute satisfaction arrived at by AO, in exercise of revisional powers. In the absence of powers conferred to invoke the penalty provision, the CIT could not direct the AO to do so in colourable exercise of powers. (B) The satisfaction for default committed as stipulated under clause (c) to S. 271(1)(c) has to be arrived at ‘in the course of any proceedings’ and not subsequent thereto. Thus, the stage of forming satisfaction is before conclusion of the proceedings under the Act. (C) Section 271(1)(c) requires the specified authority to be satisfied in the course of ‘any proceedings’ which means any proceedings before any of the authority. The CIT cannot create proceedings. (D) The assessment and penalty proceedings are separate and distinct proceedings. Therefore, the CIT cannot set aside the assessment order for the sole purpose of initiation of penalty proceedings in exercise of revisional jurisdiction. As a corollary, assessment order can not be set aside to initiate and impose penalty notwithstanding the fact the imposition of penalty is lawful.

A reading of later judgment of Gujarat High Court in J P Construction(supra) would show that the Hon’ble Court has remanded the matter only in respect of proposition (A) enumerated above. As a necessary implication, other propositions continue to apply [Kiri Dyes and Chemicals Ltd. Vs. Pr.CIT] A.Y. 2003-04 - 6 -

Judicial utterances were made in the context of the case therein.

To sum up, in the light of various propositions culled out from decision of Hon’ble Gujarat High Court in Parmanand Patel ( supra) we are disposed to hold that non initiation of penalty proceedings under S. 271(1)(c) while framing assessment is not a good ground for invoking revisional powers conferred under S. 263 of the Act. To reiterate, when proceeded in strict requirement of the provision, the CIT can not, after the conclusion of the assessment proceedings, make up mind or arrive at the required affirmative conclusion towards initiation of penalty proceedings in substitution of the lapse committed by the AO. Section 271(1)(c) read in conjunction with S. 263 of the Act, gives an unmistakable impression that while in the wake of amendment under S. 271(1)(c) w.e.f 1-6- 2002, it may be lawful for the administrative CIT to impose penalty, that by itself would not be sufficient to hold that the CIT is entitled to exercise revisional powers by treating the assessment order as erroneous and prejudicial to the interest of revenue. There must exist an order, which is sought to be revised by the Commissioner. If there is no order, question of revising the order does not arise. In the instant case, there is no order in so far as penalty proceedings are concerned. The proceedings in respect of assessment and penalty are different and distinct notwithstanding the precondition that later has to be initiated in the course of former proceedings. Though expression ‘assessment’ is used in the Act with different meanings in different context, in so far as Section 263 is concerned, it refers to that particular proceeding which is being considered by the Commissioner. It is not possible to expand the scope of assessment proceeding and assessment, which is subject matter of revision, for the purposes of initiating a new and distinct penalty proceedings of onerous nature. Failure of AO to initiate or impose penalty cannot be a factor capable of vitiating the assessment order in any respect. An assessment, in our considered view, cannot be said to be erroneous or prejudicial to the interest of revenue owing to such failure with respect to initiate a distinct proceedings with a view to evaluate imposition of penalty therein. In view of the forgoing discussion, the Pr. CIT/ CIT is not competent to direct the AO to redo the assessment with a view to initiate and levy penalty in respect of erroneous claim of deduction under S. 10B.”

It was essentially held in the aforesaid case that; (i) Assessment and Penalty proceedings are separate and distinct. Except initiation, they are not dependent on assessment order. (ii) It is not open to CIT to exercise the revisional powers to create a nonexistent proceedings under S. 263 by holding the assessment proceeding as erroneous in so far as prejudicial to the interest of revenue. (iii) ‘Satisfaction’ required by s.271(1)(c) of the Act cannot be formed post conclusion of assessment proceedings. (iv) There must exist an order, which is sought to be revised by the Commissioner. If there is no order, question of revising the order does not [Kiri Dyes and Chemicals Ltd. Vs. Pr.CIT] A.Y. 2003-04 - 8 - arise. In the instant case, there is no order in so far as penalty proceedings are concerned.

In the light of the ratio of the decision extracted hereinabove, we find merit in the plea of the assessee towards inherent lack of authority of Pr.CIT to exercise jurisdiction conferred under s.263 of the Act for the purposes of initiation of penalty proceedings under s.271(1)(c) of the Act. The revisional order is accordingly set aside and quashed.

In the result, the appeal of the assessee is allowed.