DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(2), CHENNAI, CHENNAI vs. JAYAPRIYA COMPANY, CHENNAI

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ITA 1113/CHNY/2026Status: DisposedITAT Chennai06 August 2026AY 2016-1725 pages
AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that the initiation of penalty proceedings was invalid as the notices under Section 274 were issued after the assessment orders were finalized. The lack of recorded satisfaction in the assessment orders and the delayed issuance of notices rendered the penalty orders legally unsustainable.

What were the facts?

Following a search, the assessee disclosed additional income in returns filed under Section 148. The Assessing Officer (AO) accepted these returns without additions but initiated penalty proceedings under Section 271(1)(c) later. Notices for penalty were issued after the assessment orders were passed.

What were the issues?

Whether penalty proceedings under Section 271(1)(c) are valid if notices are issued after the completion of assessment proceedings and without prior recording of satisfaction in the assessment order.

Which sections of the Income-tax Act were involved?

Section 271(1)(c),Section 274,Section 148

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI

Before: SHRI ABY T. VARKEY & SHRI GAGAN GOYAL

Hearing: 21.07.2026

आयकर अपीलीय अिधकरण, ‘ए’ �ायपीठ, चे�ई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH: CHENNAI �ी एबी टी. वक�, �ाियक सद� एवं �ी गगन गोयल, लेखा सद�य के सम� BEFORE SHRI ABY T. VARKEY, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER

ITA. Nos. 1110 to 1113/Chny/2026 �नधा�रणवष�/Assessment Year: 2013-14 to 2016-17 & CO Nos. 21 to 24/Chny/2026 �नधा�रणवष�/Assessment Year: 2013-14 to 2016-17 Deputy Commissioner of VS Jayapriya Company Income Tax 37, Sivavishnu Complex, IIF, Central Circle 2(2), Chennai. Thyagaraya Nagar, Chennai, 600017 [PAN: AAHFJ 0958 M] (अपीलाथ�/Appellant/Revenue) (��यथ�/Respondent/Assessee) अपीलाथ� की ओर से/ : Mrs. R. Anita, CIT Appellant/Revenue by ��थ� की ओर से : Mr. G. Baskar, Advocate & Mr. P.M. Kathir, Advocate /Respondent/Assessee by सुनवाईक�तार�ख/Date of Hearing : 21.07.2026 घोषणाक�तार�ख /Date of : 06.08.2026 Pronouncement आदेश / O R D E R PER ABY T. VARKEY, JM: These are appeals preferred by the Revenue and Cross Objection (CO) preferred by assessee against the common order of the Learned Commissioner of Income Tax (Appeal), (hereinafter referred to as

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 2 :: ‘Ld.CIT(A)’), Chennai-19, dated 23.12.2025 for the Assessment Years (hereinafter referred to as ‘AY’) 2013-14 to 2016-17, passed u/s.250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).

2.

Both parties agree that the sole issue permeating in all the appeals is against the penalty levied by the AO u/s.271(1)(c) of the Act. Hence, we take the appeal of the Revenue for AY 2013-14 as the lead case, the decision of which will be applied mutatis mutandis for AY 2014-15 to AY 2016-17. CO of the assessee for all the assessment years are supporting the impugned order of the Ld. CIT(A), hence, CO of the assessee for AY 2013-14 will be considered along with appeal of the Revenue for AY 2013- 14.

3.

The grievances involved in the grounds raised by the Revenue is against the action of the Ld. CIT(A) deleting the penalty levied by the AO u/s 271(1)(c) by holding that penalty was not validly initiated by the AO which rendered the penalty order(s) as bad in law as well as on merits of the penalty levied by the AO. Since Revenue has challenged the impugned action of Ld CIT(A) allowing the legal issue raised by the assessee, holding the initiation of penalty proceedings itself as invalid, which strikes at the root of the AO levying penalty, we will address it first.

4.

The brief facts as culled out from the record are that, a search and seizure action u/s.132 of the Act was conducted in the case of M/s.

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 3 :: Jayapriya Company group on 16.12.2021. The assessee-firm is engaged in the business of real estate, whereunder it purchases lands, develops them into saleable plots and sells the said plots. In the course of the search, it was found that the assessee had been receiving portion of its consideration on sale of plots in cash. On the basis of the seized material and sworn statements, the assessee quantified and made voluntary disclosed of income vide letter dated 14.03.2022. Pursuant to the notices issued u/s 148 of the Act for AYs 2013-14 to 2016-17, the assessee is noted to have returns of income inter alia incorporating the additional income disclosed in the post search enquiries. The AO, in the course of assessment, after examining the seized material, observed that "the reply of the assessee is considered and on verification it is found that the assessee has admitted the income in the return of income filed u/s 148", and therefore no further addition was made by him. Accordingly, in the computation forming part of the assessment orders, the AO adopted the returned income as the assessed income, the column for additions being shown as "NIL". The AO, in the last paragraph of the assessment order, is noted to have observed that, "Penalty proceedings u/s 271(1)(c) will be initiated separately for concealing particulars of income."

5.

It is noticed that, no notice u/s.274 r.w.s. 271(1)(c) of the Act was issued along with, or on the date of, any of the assessment orders.

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 4 :: Instead, the notices u/s 274 of the Act came to be issued for all four years only on 31.03.2024, that is, 19 days after the assessment orders for the AYs 2013-14, 2014-15 and 2016-17 and 9 days after the assessment order for the AY 2015-16. The assessee is found to have objected to the proposed levy, contending inter alia that the disclosure was voluntary, made to buy peace and avoid litigation, and that the quantum of income had not been determined by the revenue but had been worked out by the assessee itself. The AO rejected the objections and passed orders u/s.271(1)(c) of the Act on 25.09.2024 levying penalty at 100% of the tax on additional income offered in the return(s) of income filed u/s 148 of the Act. Aggrieved by the penalty order(s), the assessee preferred an appeal before the Ld. CIT(A).

6.

In the appellate proceedings, the assessee had inter alia raised an additional ground contending that the AO having failed to initiate penalty in the course of assessment and the inaction of issuing the notice u/s.274 r.w.s. 271(1)(c) of the Act along with the assessment orders, rendered the consequent levy of penalty to be bad in law. The Ld. CIT(A), by the common impugned order dated 23.12.2025, allowed the additional ground and directed deletion of the penalties for all four years, holding that there was no recording of satisfaction in the body of the assessment orders as to concealment; and that the notices u/s.274 having been

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 5 :: issued only on 31.03.2024, the penalty proceedings had not been initiated during the course of the assessment proceedings. It was further held by the Ld. CIT(A) that, where the return filed u/s.148 of the Act had been accepted in full, the AO had failed to discharge the burden of proving concealment. Aggrieved, the revenue is in appeal before us, and the assessee has filed cross objections in support of the impugned order.

7.

The Ld. CIT, DR appearing for the Revenue submitted that the provisions of Section 271(1)(c) of the Act only mandates recording of satisfaction by the AO in the course of the assessment proceedings; which is the jurisdictional requirement and that the initiation, on the other hand, is the formal act of acting upon that satisfaction through a notice u/s. 274 of the Act, and the statute prescribes no mandate as to when such notice must issued. It was contended that, the penultimate sentence of each assessment order records that penalty proceedings u/s.271(1)(c) will be initiated separately for concealing particulars of income and therefore according to her, the satisfaction was indeed recorded by the AO. She contended that the use of words "will be initiated" was written only in the context of the formal act of initiation which was carried out on 31.03.2024. In support she relied on the decisions of the Hon’ble Supreme Court in the cases of CIT v. S.V. Angidi Chettiar [1962] 44 ITR 739 & D.M. Manasvi v. CIT [1972] 86 ITR 557 (SC) and Hon’ble Delhi

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 6 :: High Court in the case of Madhushree Gupta v. Union of India [2009] 183 Taxman 100 (Del). She further submitted that, the notice u/s.274 can be issued either during or after the completion of the assessment proceedings, and thus the subsequent issuance of notice had no bearing on the legality of penalty proceedings. The Ld. CIT, DR thereafter invited our attention to Explanation 5A to section 271(1)(c) of the Act, and pointed out that, the case of the assessee was covered by the deeming fiction of the said Explanation and thus the assessee was deemed to have concealed the particulars of its income. She relied upon the decisions of the coordinate benches of the Tribunal in the cases of Mahendra Mittal v. ACIT [2011] 9 taxmann.com 212 (Mum) and ACIT v. Kirit Dahyabhai Patel [2009] 121 ITD 159 (Ahd)(TM) and argued that, where the assessment is made in consequence of a search and the assessee himself admits and offers undisclosed income, no further satisfaction is required to be recorded by the AO. She summed up by submitting that, the satisfaction existed on the record, and therefore there was no occasion for the Ld. CIT(A) to invoke the deeming fiction u/s.271(1B) of the Act at all, and it was accordingly prayed that the order of the Ld. CIT(A) be set aside and that of the AO restored. The Ld. CIT, DR also filed written submissions in support of her arguments, which has been taken on record.

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 7 :: 8. The Ld. AR, on the other hand, submitted that, Section 271(1B) of the Act, which alone permits an order of assessment to be deemed to constitute the satisfaction of the AO, requires two conditions to be cumulatively satisfied viz., (i) an amount must have been added or disallowed in computing the total income or loss in the order of assessment; and (ii) the said order must contain a direction for initiation of penalty proceedings under clause (c) of sub-section (1). According to him, in the present case neither condition was met. He submitted that the income returned u/s 148 of the Act was accepted in its entirety and the column for additions in the computation reads "NIL"; and that the assessment order contains no direction whatsoever. The Ld. AR emphasized that the recording that "penalty proceedings u/s.271(1)(c) will be initiated separately for concealing particulars of income" is in the simple future passive. It conveys, at highest, an intention to do something in future which may or may not come to pass. It is neither a direction nor a positive step, and it does not record any satisfaction. For this, he relied on the decision of Hon’ble Delhi High Court in the case of CIT v. Rajinder Kumar Somani (125 ITR 756) and Hon’ble Karnataka High Court in the case of CIT v. MWP Ltd. (264 CTR 502). The Ld. AR submitted that the contrary approach of the AO was discernible within the four corners of the very same assessment order. He pointed out that, while dealing with the violation of section 269SS, the AO set out the

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 8 :: material found, and applied that material to the provision, and then took a positive step by referring the matter to the Additional CIT for initiation of penalty u/s.271D. However, while dealing with section 271(1)(c), by contrast, the AO recorded a solitary sentence, unconnected with anything preceding it in the order, containing no reference to any fact and taking no step at all. The Ld. AR thus submitted that, the AO demonstrably knew how to record satisfaction and to initiate proceedings, and did so in one case i.e. Section 269SS and not in the other i.e. Section 271(1)(c) of the Act.

9.

He further argued that the interpretation of Explanation (5A) to Section 271(1)(c) met out by the Revenue was perverse. It was submitted that, Explanation 5A to section 271(1)(c) is a deeming provision qua the quantification of the default i.e., to whether concealment shall be presumed. According to him this Explanation (5A) presupposes a valid initiation founded upon a satisfaction recorded in the course of the assessment proceedings, and that, it cannot supply the jurisdictional foundation, which is missing in the present case. He thus urged us to uphold the order of the Ld. CIT(A) holding that the initiation of penalty suffered from fundamental infirmity. The Ld. AR also distinguished the decisions relied upon by the Ld. CIT, DR, and furnished a written submissions in support of his arguments, which we shall discuss

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 9 :: later in this order. On merits, he submitted that, the assessments having been completed by accepting the returned income without any addition or disallowance, no penalty was exigible, for which he relied on the decisions of PCIT v. Neeraj Jindal [2017] 393 ITR 1 (Del) and Sudarshan Silks & Sarees v. CIT [2008] 300 ITR 205 (SC).

10.

We have heard the rival contentions, perused the material available on record and gone through the orders of the authorities below as well as the judicial precedents cited before us. The controversy before us lies in a narrow compass. The issue to be answered is whether the action of the Ld. CIT(A) holding that the initiation of penalty proceedings u/s.271(1)(c) of the Act suffered from fundamental infirmity, was a view plausible in law or not, and in particular whether the solitary sentence appearing at the foot of the assessment order(s) constitutes the satisfaction and the direction contemplated by law.

11.

In order to answer the above issue, Let us first have look at the relevant provisions of the Act. Section 271(1) of the Act opens with the words "If the Assessing Officer ... in the course of any proceedings under this Act, is satisfied that any person …. he may direct that such person shall pay by way of penalty….". It is thus observed that, the satisfaction of the AO, arrived at in the course of the proceedings before him, is the sine qua non for the assumption of jurisdiction to levy penalty. The

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 10 :: Hon’ble Supreme Court in the case of CIT v. S.V. Angidi Chettiar(supra) has held that the satisfaction of the officer is a condition precedent to the exercise of the power, and must exist before the proceedings before him are concluded. Likewise, the Hon’ble Apex Court in the case of D.M. Manasvi v. CIT (supra) observed that, the issue of notice is a consequence of the satisfaction and that the two cannot be equated. The proposition which emanates from this judgment which, we may observe at once, presupposes the existence of the satisfaction and does not dispense with it. In light of the foregoing decisions, Section 271(1B), was inserted by the Finance Act, 2008 with retrospective effect from 01.04.1989, which provides a deeming fiction, and it reads as under:-

(1B) Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under clause (c) of sub-section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause (c). 12. Section 271(1B) being a deeming provision is to be construed strictly and confined to the purpose and the circumstances for which it has been enacted. It is seen that, two conditions are conjunctively prescribed therein, firstly, an amount must have been added or disallowed in computing the total income or loss in the order of assessment or reassessment; and secondly, that the said order must contain a direction for initiation of penalty proceedings under clause (c).

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 11 :: Only upon both conditions being met does the assessment order stand elevated, by fiction, to the status of the recorded satisfaction of the AO provided the AO gave direction in the assessment order for initiation of penalty proceedings under clause (c) of sub-section (1) of section 271 of the Act. The Ld. CIT, DR had brought to our notice that, the constitutional validity of the provision was upheld in Madhushree Gupta v. Union of India (supra). Upon reading of the said judgment, we find that, the Court had clarified the provision does not dispense with the requirement that the assessment order must disclose a prima facie satisfaction as to concealment; it only dispenses with the requirement of a separately worded recording. The Hon'ble Delhi High Court was explicit that the satisfaction of the AO as to the infraction of clause (c) must precede the conclusion of the proceedings pending before him.

13.

Having taken note of the above provisions, we revert back to the facts before us. The first requirement laid down in Section 271(1B) of the Act is the requirement of an addition or disallowance in assessment order. It permits the assessment order itself to be treated as the vehicle of satisfaction, in place of a separately articulated recording. If the revenue cannot bring itself within that facility because no addition was made, the burden of demonstrating an actual, articulated satisfaction on the face of the record becomes decisive. It is seen from the records that, the

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 12 :: computation of total income in paragraph 9 of the assessment order shows that the total income was assessed at the same sum which was declared in return filed u/s. 148 of the Act, and that there was no separate addition or disallowance in the assessment order. This factual position is identical for the other three assessment years as well. Prima facie therefore, there is force in the Ld. AR’s plea that, the first of the two conditions prescribed by section 271(1B) fails at the threshold, and thus the deeming fiction set out therein is not attracted.

14.

The Ld. CIT, DR however sought to address the above, by contending that recourse to section 271(1B) is not necessary for the reason that a valid satisfaction existed in the assessment order, which we now proceed to examine. The case of the Revenue rests on the AO’s observation viz., “Penalty proceedings u/s 271(1)(c) will be initiated separately for concealing particulars of income." According to us, the expression "will be initiated" is in the simple future tense. Grammatically and legally, it speaks of an event yet to occur. It records a proposal, or at highest an intention, to do something at some point in the future. It does not record that anything has been done, or that anything is being done, or that anyone has been directed to do anything. This is not a question of construing the language of a quasi-judicial order pedantically; rather it is

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 13 :: a question of examining whether the statutory requirement of a direction was met or not.

15.

We find this issue also to be no longer res integra. In CIT v. Rajinder Kumar Somani (supra), the Hon'ble Delhi High Court was faced with an assessment order which had a materially identical language that penalty proceedings will be initiated separately. Rejecting the revenue's plea that the sentence should not be construed narrowly, the Court held that such words are indicative not of an initiation of steps for levy of penalty but only of possible future initiation; that it is not enough for the officer to record that penalty proceedings are to be, or will be, initiated separately; and that there must be some other positive step, such as an actual direction to the office to issue a penalty notice. The Court further observed that where the officer has in fact initiated action during the assessment proceedings, the usual course is for the penalty notices to be issued and served simultaneously with the assessment order and the demand notice, and that the issue of the notices some 18 days after completion of the assessment was itself a circumstance not without significance. In the present case, also we find that the notice(s) u/s274 of the Act was issued issued 19 days after the assessment order(s). The relevant findings of the Hon’ble Delhi High Court, which has a direct bearing on the issue at hand, is as follows:-

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 14 :: “In the present case, unfortunately, it seems to us that the requirements of the statute have not been fulfilled. There is no direction for issue of penalty notice in the assessment order. All that the ITO has observed is that penalty proceedings are to be initiated separately. These are words indicative not of an initiation of steps for levy of penalty but only of possible future initiation. On behalf of the department, Sri Mukerjee submitted that the words used in the assessment order should not be construed narrowly and that the sentence at the end of the assessment order (extracted earlier) should be treated as sufficient for the purpose. We are unable to accept this submission. As explained above the language of section 275 envisages some positive step on the part of the ITO being taken before the completion of the assessment. In our opinion It not enough for the officer to record that penalty proceedings are to be or will be initiated separately. There should be some other step such as an actual direction to the office to issue a penalty notice (which thereafter needs only ministerial compliance), the actual issue of a penalty notice, a reference to the IAC or some other similar action. It is also not without significance that in this case, though the assessment was completed on November 28, 1963, the penalty notices were issued by the ITO only as late as December 16, 1963. As rightly pointed out by the Tribunal, in cases where the ITO has initiated action during the assessment proceedings, the usual course is for the penalty notices to be issued and served simultaneously with the assessment order and the demand notice. In the present case, even that was not done. The penalty notices were served upon the assessee only after the service of the assessment order and the demand notice. All these circumstances clearly justify the conclusion of the Tribunal that no action had been initiated in the course of the assessment proceedings for the levy of penalty. The conclusion of the Tribunal is one of fact based on the facts and circumstances of the case with which this court will not interfere in a reference.” 16. The Hon'ble Karnataka High Court in the case of CIT v. MWP Ltd.(supra) also considered the same question in the context of section 271(1B) and held that expression such as "penalty proceedings are being initiated separately" or "penalty proceedings under section 271(1)(c) are initiated separately" do not comply with the meaning of the word "direction" as contemplated even by the amended provisions; and that a direction must be clear and unambiguous. Following the decision of Hon’ble Delhi High Court (supra), the Court observed that a direction by a

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 15 :: statutory authority is in the nature of an order requiring positive compliance, so that where the matter is left to the option and discretion of the officer it cannot be described as a direction at all. The relevant observations of the Hon’ble High Court, are as under:-

“12. A reading of the aforesaid order makes it clear that Assessing Authority was not satisfied that there is any concealment of the income. Further there is no direction for initiation of penalty proceedings could be gathered from the said order also. It is held in the aforesaid judgment that (a) phrases like penalty proceedings are being initiated separately (b) penalty proceedings under Section 271(1)(c) are initiated separated don not comply with the meaning of the word direction as contemplated even in the amended provisions of law. The direction should be clear and without any ambiguity. The word 'direction' has been interpreted by the decision of the Apex Court in the case of Rajinder Nath v. CIT [1979] 120 ITR 14/2 Taxman 204, where it has been held that in any event whatever else it may amount to, on its very terms the observation that the ITO is free to take action, to assess the excess in the hand of the co-owners cannot be described as a direction. A direction by a statutory authority is in the nature of an order requiring positive compliance. When it is left to the option and discretion of the ITO whether or not take action, it cannot be described as a direction. 13. In the absence of such a direction, the deeming provision is not attracted. Therefore the conditions prescribed under Section 271(1)(c) of the Act, is not attracted. Therefore the Tribunal was justified in setting aside the order passed by the Assessing Authority as well as the Appellate Authority, imposing penalty. No merits. Dismissed. The substantial question of law is answered in favour of the assessee and against the Revenue.” 17. We observe that the case of the assessee is on a better footing. In the above decision (supra), the present indicative "are initiated" was held insufficient, and therefore the future tense "will be initiated" employed in the present case does not meet the statutory requirement.

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 16 :: 18. Before us, the Ld. CIT, DR had vehemently sought to distinguish the above judgments (supra) by stating that in these judgments the AO had merely recorded that penalty proceedings were being initiated separately, without any reference to concealment, whereas in the present case the AO added the words "for concealing particulars of income". We have given due consideration to this submission but are unable to accept it. Firstly, the addition of the words "for concealing particulars of income" does not alter the tense of the operative verb. The sentence remains a statement of future intention. These additional words do not convert a proposal into a direction, nor a contemplated future act into a completed present one. Secondly, and to our mind decisively, the words are entirely disembodied from the rest of the assessment order. In the present case, the AO had accepted the returned income with a positive finding that the assessee had already admitted the income in the return filed u/s.148, and did not make any addition or disallowance. In that view of the matter, a bare recital at the foot of the order that penalty will be initiated for concealment hangs in the air. It is unconnected with any finding, any material, any figure or any reasoning appearing anywhere in the order. The Hon’ble Madras High Court in the case of M. Sajjanraj Nahar v. CIT (283 ITR 230), while holding that, what is required at the stage of initiation is a subjective satisfaction and not a finding, did make it clear that such subjective satisfaction must nonetheless rest upon material. A

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 17 :: subjective satisfaction divorced from all material is not satisfaction, and only an assertion.

19.

Thirdly, and more importantly, there is merit in the Ld. AR’s contention that, there was an internal contradiction within the very same assessment order which evidenced that the language used in second last sub-para of Para 9 of the assessment order for proposing to initiate in future penalty u/s section 271(1)(c) was not a mistaken drafting. It was brought to our notice, that in the preceding paragraph 8 of the same assessment order, the AO had initiated penalty proceedings u/s 271D of the Act and in that context, the AO had set out the precise particulars, seized material, contents of the data and why that constituted a violation of section 269SS; and having so recorded, the AO took the positive step of referring the issue to the Additional Commissioner of Income Tax, Central Range-2 for initiation of penalty u/s.271D of the Act. That is what a recorded satisfaction followed by initiation looks like. However, two paragraphs later, while dealing with section 271(1)(c), the AO wrote a single sentence in the future tense referring to no fact and taking no step. The juxtaposition demonstrates that the AO was fully alive to the distinction between recording satisfaction and expressing an intention, and to the distinction between taking a positive step and proposing to take one. The fact that she did not do so in respect of section 271(1)(c)

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 18 :: cannot be treated as an accident of drafting to be repaired by us. Lastly, even the subsequent conduct of the AO is consistent with the inevitable conclusion that no initiation took place during the assessment proceedings. Had the AO directed the issue of notices, or intended anything beyond a future contingency, the notices would have accompanied the assessment orders and the demand notices in the usual course. However, they did not. They were issued much later only on 31.03.2024. This delay, in light of the decision of Hon’ble Delhi High Court (supra) supports the action of the Ld. CIT(A).

20.

Much reliance was placed by the Ld. CIT, DR upon Explanation 5A to Section 271(1)(c) of the Act. According to the Ld. CIT, DR; the search having taken place on 16.12.2021 and income based on entries in books of account and other documents for previous years ended before the date of search having been offered only in returns filed after the date of search, the assessee is deemed to have concealed the particulars of its income, so that no further satisfaction on the part of the AO is called for, and that the initiation and levy of penalty was automatic and a foregone conclusion. Having perused Explanation 5A, we find that, it creates a deeming fiction as to the existence of concealment; and it operates for the purposes of imposition of a penalty under clause (c) of sub-section (1). It relieves the Revenue from the burden of proving concealment in

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 19 :: the specified circumstances. It does not, and by its terms cannot, relieve the AO of the anterior obligation under the substantive provision of section 271(1) to be satisfied in the course of the proceedings before him, nor does it supply a direction where none exists. The sequence contemplated by the statute is: firstly, satisfaction in the course of the assessment proceedings, secondly, initiation of penalty proceedings, thirdly, issuance of valid notice u/s 274 of the Act and thereafter adjudication of penalty. It is only at the last stage that the deeming fiction in the Explanation 5A which may be pressed into service to establish the default. This Explanation which operates at the fourth stage cannot be trooped backwards to cure a defect at the first stage. Going by the logic of the Revenue then, in every search case the AO is absolved from recording satisfaction altogether and that the levy of penalty consequently becomes automatic. We however are unable to countenance such a proposition.

21.

Admittedly, the legislature has consciously used the word "may" in the substantive provision of Section 271(1) so far as the decision to impose penalty is concerned. The usage of the words ‘may’ negates the theory of the Revenue that, in search assessments, where additional income was offered to tax in the returns of income filed u/s 148 of the Act, would lead to automatic initiation and imposition of penalty. The term

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 20 :: 'may' vests the AO with discretionary power to impose penalties, which discretion must be exercised fairly, and not arbitrarily, justly and not fancifully. In this context, we gainfully rely on decision rendered by the Special Bench of this Tribunal in the case of Vinil Venugopal [2025] 179 taxmann.com 618 (Mumbai – Trib) wherein though in the context of Black Money (BM) Act, it was clearly explained that the usage of the word 'may' in Section 43 of BM Act indicated that there is a discretion vested with the Assessing Officer to impose penalty or otherwise depending upon facts and circumstances of each case and that the same is not automatic. At this juncture, we also find force in the submission of the Ld. AR that, Explanation 5A was not even referred to by the AO in the assessment order, nor was it the basis upon which the AO recorded the impugned sentence in dispute. Instead, it has been invoked for the first time by the Ld. CIT, DR. There is merit in Ld AR’s plea that the existence of jurisdictional fact cannot be laid in arguments, but it is required to be demonstrated that they exist on the record at the time the jurisdiction is assumed.

22.

Coming to the decisions relied upon by the Ld. CIT, DR. We have already taken note of the propositions laid down in the decisions of CIT v. S.V. Angidi Chettiar (supra), D.M. Manasvi v. CIT (supra) & Madhushree Gupta v. Union of India (supra) earlier, which we find is of no assistance

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 21 :: to the Revenue. The decision of Hon’ble Supreme Court in the case of Union of India v. Dharmendra Textile Processors (306 ITR 277) holds that penalty u/s.271(1)(c) is a civil liability and that mens rea is not required to be established. It is entirely silent on the question of the recording of satisfaction, which is a jurisdictional question anterior to the question of liability. Hence, this judgment is found to have no relevance to the issue before us. So far as the decisions of the coordinate benches in the case of Mahendra Mittal v. ACIT(supra) and ACIT v. Kirit Dahyabhai Patel (supra) are concerned, we find them to be factually distinguishable as they were rendered in the context of Explanation 5 and turned upon whether the availability of the immunity under that Explanation required a fresh satisfaction on the question of concealment or not.

23.

Overall therefore, we find ourselves to be in concurrence with the following findings of the Ld. CIT(A), which are as under:-

2.1.1 During the course of appellate proceedings, the AR of the appellant made detailed submissions in support of this ground. It was specifically pointed out that for all the four assessment years under appeal (AY(s) 2013-14 to 2016-17), the notice(s) u/s 274 r.w.s. 271(1)(c) of the Act for initiation of penalty proceedings were not issued on the date of the assessment orders. The chronology of the dates is tabulated as under: Assessment Assessment Order Notice u/s 274 Year u/s 147 of the Act r.w.s. 271(1)(c) of the Act 2013–14 12.03.2024 31.03.2024

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 22 :: 2014–15 12.03.2024 31.03.2024

2015–16 22.03.2024 31.03.2024

2016–17 12.03.2024 31.03.2024

2.1.1 From the above, it was claimed that the AO did not initiate the penalty proceedings on the date of completion of the re-assessment proceedings, the notice(s) u/s 274 r.w.s. 271(1)(c) of the Act to initiate penalty proceedings were issued nearly 10 to 20 days after the completion of assessments. The appellant firm contends that such delay violates the requirement of initiation of penalty proceedings "during the course of assessment proceedings." 2.1.2 The AR has brought to the notice of the undersigned, the decision of the Hon’ble Chennai Bench of the ITAT in the case of Srinivasan Chandrasekara Chandliya v. ACIT [ITA Nos. 1478 to 1487/Chny/2024], wherein the Hon’ble Tribunal held that penalty proceedings must be initiated during the course of the assessment proceedings, and not thereafter. The Hon’ble Tribunal emphasized that the timing of initiation is crucial, and that the AO must record his satisfaction within the assessment order itself or issue the penalty notice simultaneously on the same date. Further, reliance was placed on the decision of the Hon’ble Delhi High Court in CIT v. Rajendra Kumar Somani [(1980) 125 ITR 756 (Del)], where the Court had occasion to interpret the phrase "during the course of assessment proceedings", holding that penalty initiation must form part of the assessment process and cannot be initiated after its conclusion. 2.1.7 The undersigned, on careful examination of the assessment records observed that in the present case, although the assessment orders for AY(s) 2013-14, 2014-15, and 2016-17 were passed on 12.03.2024 and for AY 2015-16 on 22.03.2024, the notice(s) for initiation of penalty proceedings were issued only on 31.03.2024. There is no mention in the body of the assessment orders regarding the satisfaction of the AO to initiate penalty proceedings u/s 271(1)(c) of the Act, nor any reference to an annexed or simultaneously issued notice. 2.1.8 The Karnataka High Court in the case of CIT v. Manjunatha Cotton and Ginning Factory [(2013) 359 ITR 565 (Karn)] has held that

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 23 :: recording of satisfaction for initiation of penalty must be evident from the assessment order itself, and the notice must not be issued as an afterthought. The timing and manner of initiation of penalty proceedings is not a mere procedural formality but goes to the root of the validity of penalty proceedings. 2.1.9 In the present case, it is evident from the assessment records and dates noted above that the AO failed to initiate the penalty proceedings during the course of re-assessment proceedings, and the notice(s) u/s 274 r.w.s 271 (1) (c) of the Act were issued only after the re- assessment orders had already been passed. There is no record of satisfaction in the assessment orders, nor any contemporaneous issuance of notice on the date of conclusion of the re-assessment proceedings. This lapse is not curable and strikes at the jurisdiction of the AO to levy penalty. Therefore, following the binding judicial precedents and consistent view of the higher appellate forums, the penalty orders passed u/s 271(1)(c) of the Act for all four assessment years are legally unsustainable. 2.1.10 In view of the above findings, the penalty levied for the years under consideration consequence to the issue of a belated notice u/s 271 (1) (c) of the Act are devoid of merits. Therefore, the additional ground raised by the appellant upon the levy of penalty is hereby treated as be allowed

24.

The above findings are found to be ably supported by the decision of the coordinate bench of this Tribunal in Srinivasan Chandrasekara Chandilya v. ACIT (ITA Nos.1478 to 1487/Chny/2024), wherein, on a substantially identical recording by the AO, the penalty was deleted, by observing as under:-

6.

…The controversy raised qua lack of clarity as to whether assessee had concealed its income or had furnished inaccurate particulars thereof, is also not supported by facts as the Ld. AO in the assessment order dated 13.12.2019 clearly indicated that assesse had concealed true particulars of his income. It is however seen that in spite of above facts, the penalty imposed by the Revenue u/s 271(1)(c) of the Act, is non- maintainable in the eyes of law and hence deserves to be quashed. The

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 24 :: Ld. DR has submitted vide his paper book dated 13.08.2024 which, inter-alia, contains original penalty notices u/s 271(1)(c) issued to the assesse. It is seen that the said notices were issued on 19.12.2019. As discussed herein above, the original assessment order was passed on 13.12.2019. Consequently, the penalty notice ought to have been issued on or before 13.12.2019. Any notice issued after 13.12.2019 becomes non est in the eyes of law. 7.0 It is seen that section 271(1)(c) of the Act clearly empowers an assessing officer to initiate penalty proceedings if "...in the course of any proceedings under this Act is satisfied that any person..." has concealed the particulars of his income or furnished inaccurate particulars thereof. The law therefore mandates that there should be existence of "... any proceedings..." under the Act so as to give the Ld. AO the authority to initiate any penalty proceedings. With this understanding of the law, the Ld. AO was required to have issued penalty notice u/s 271(1) (c) of the Act on 13.12.2019 only. His issuance of notice u/s 271(1)(c) on 19.12.2019 Supra therefore makes the penalty order dated 01.02.2022 invalid as it is not based upon any lawfully issued notice. Pertinently no proceedings were pending against the assessee on 19.12.2019 when the notice u/s 271(1)(c) was issued. In above view of the matter, we hold that the penalty order u/s 271(1)(c) dated 01.02.2022 is invalid and bad in law. The same is therefore quashed and set aside.”

25.

For the reasons discussed above, we are of the view that the action of the Ld. CIT(A) holding the initiation of penalty proceedings as invalid was a plausible view in law and thus does not warrant our interference. We thus dismiss the grounds of the Revenue against the impugned action of Ld CIT(A) qua legal issue supra. Since we have upheld the action of Ld CIT(A) on legal issue discussed supra, we are not inclined to examine the ground on merits, which is left open. Hence the Revenue appeal is dismissed and the cross objections filed by assessee are rendered infructuous.

ITA No. 1110 to 1113/Chny/2026 & CO 21 to 24/Chny/2026 (AY 2013-14 to 2016-17) Jayapriya Company :: 25 :: 26. Our above decision in the appeal for the A.Y. 2013-14 shall apply mutatis mutandis to the appeals of the Revenue for the A.Ys. 2014-15 to 2016-17, and those appeals are likewise dismissed.

27.

In the result, all the appeals filed by the revenue and the cross objections of the assessee stands dismissed.

Order pronounced on the 06th day of August 2026, in Chennai.

Sd/- Sd/- (गगन गोयल) (एबी टी. वक�) (GAGAN GOYAL) (ABY T. VARKEY) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai, �दनांक/Dated: 6th August, 2026. YS YASHVIR Digitally signed by YASHVIR SINGH SINGH Date: 2026.08.06 18:44:25 +05'30' आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु�/CIT, Chennai / Madurai / Salem / Coimbatore. 4. िवभागीय�ितिनिध/DR 5. गाड�फाईल/GF

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