SUNDEEP KAPILA,HIMACHAL PRADESH vs. ADDITIONAL COMMISSIONER CENTRAL, CHANDIGARH

The learned Authorised Representative (AR) submitted that the penalty proceedings initiated under section 271D are void ab initio, as the Assessing Officer had not recorded any satisfaction in the assessment order dated 13.08.2021. It was argued that recording of satisfaction by the Assessing Officer is a sine qua non for valid initiation of penalty proceedings under section 271D. Reliance was placed on the judgment of the Hon’ble Supreme Court in CIT v. Jai Laxmi Rice Mills [Civil Appeal No. 1457/2008, dated 20.11.2015], as well as the decision of the Hyderabad Bench of the Tribunal in the case of Sri Raja Reddy Nalla v. Addl. CIT, to emphasize that the absence of recorded satisfaction renders the penalty proceedings invalid in law.

It was further submitted that the impugned penalty order is barred by limitation as per the provisions of section 275(1)(c) of the Act. The assessment order was passed on 13.08.2021. The reference to the JCIT was made on 26.06.2023, and therefore, the limitation period of six months ended on 31.12.2023. The penalty order having been passed on 28.02.2024 is thus clearly beyond the permissible time limit. It was emphasized that the reference date made by the Assessing Officer constitutes the date of initiation of penalty for the purposes of section 275(1)(c), and not the date of issuance of notice by the JCIT. In support, reliance was placed on the judgment of the Hon’ble Delhi High Court in PCIT v. Mahesh Wood Products Pvt. Ltd. [(2017) 394 ITR 312 (Del.)] and the decision of the Chennai Bench in DCIT v. Smt. Subramanian Thanu [ITA Nos. 785–788/CHNY/2023, dated 13.03.2024].

On merits, the learned AR submitted that the cash amount of ₹2,80,000/- received by the assessee was not in the nature of a loan or deposit but was earnest money in connection with a property transaction.

On the other hand, the learned Departmental Representative (DR) strongly supported the order of the JCIT. It was submitted that the assessee had accepted ₹2,80,000/- in cash, in clear violation of section 269SS of the Act. The learned DR submitted that the show cause notice under section 271D was issued on 16.08.2023 and the penalty order was passed on 28.02.2024, well within six months, and therefore the order was not barred by limitation. It was argued that the relevant date for computation of limitation under section 275(1)(c) is the date of issuance of the show cause notice by the competent authority, i.e., the JCIT, and not the date of reference by the Assessing Officer.

With regard to the absence of satisfaction recorded by the Assessing Officer, the learned DR contended that the JCIT is the competent authority under section 271D to impose penalty and there is no legal requirement for the satisfaction to be recorded in the assessment order by the AO. It was further argued that the issuance of a show cause notice by the JCIT under section 271D itself evidences application of mind and constitutes a valid initiation of proceedings. The learned DR attempted to distinguish the judgment of the Hon’ble Supreme Court in Jai Laxmi Rice Mills by stating that the said decision was rendered in a different statutory context when the authority to initiate penalty proceedings vested with the DCIT and not the JCIT.

It was finally contended that the scheme of the Act envisages that the authority imposing the penalty should also be the one to apply his mind to the facts and circumstances of the case. Accordingly, the JCIT, having issued the notice and imposed the penalty, fulfilled the statutory mandate, and the penalty order suffers from no legal infirmity.

We have carefully considered the rival submissions of both parties and examined the material available on record. While the learned Authorised Representative (AR) and the learned Senior Departmental Representative (DR) addressed all grounds raised

Section 275(1)(c) provides two alternative timelines for concluding penalty proceedings i.e the penalty order must be passed either (i) before the expiry of the financial year in which the proceedings (in the course of which action for imposition of penalty has been initiated) are completed, or (ii) within six months from the end of the month in which action for imposition of penalty is initiated — whichever expires later.

In the present case, it is undisputed that the assessment order was passed by the Assessing Officer on 13.08.2021. Consequently, the financial year ended on March 31, 2022. However, the reference for initiation of penalty under section 271D was made by the Assessing Officer only on 26.06.2023. Pursuant to this reference, the Joint Commissioner of Income Tax (JCIT) issued the show cause notice on 16.08.2023, and ultimately passed the penalty order on 28.02.2024.

The learned AR submitted that for the purpose of computing limitation under section 275(1)(c), the relevant date is the date of reference by the Assessing Officer, i.e., 26.06.2023, and therefore the last permissible date for passing the penalty order was 31.12.2023. Since the order was passed on 28.02.2024, it is clearly beyond the prescribed limitation.

On the other hand, the Revenue argued that the limitation should be reckoned from the date of issuance of the notice by the competent authority (JCIT), i.e., August 16, 2023, and hence the order passed on February 28, 2024, was within six months and valid.

We find merit in the contention advanced by the learned AR. As this issue is no longer res-integra. The Hon’ble Delhi High Court in PCIT v. Mahesh Wood Products Pvt. Ltd. [(2017) 394 ITR 312 (Del.)] and also in CIT vs Turner General Entertainment in of 2024 in judgment dated 6/11/2024 in para 19 has held as under:- “The expression ‘action for imposition of penalty is initiated’ must, thus, clearly refer to the date on which the first introductory step for such action is taken, it must necessarily mean the start of such action. It must mean the commencement of action for imposition of penalty. As noted above, the AO had found that it was the admitted case that the assessee had defaulted in deduction of TDS, which it was obliged to do. It had, accordingly, made a reference to the learned JCIT. This was obviously for the purposes of imposition of penalty. The reference, thus, clearly marked the first step for initiation of action for imposition of penalty. The Show Cause Notice issued subsequently was to provide the assessee an opportunity to show cause why penalty not be imposed.

Thus, the Hon'ble High Court has categorically held that the limitation under section 275(1)(c) begins from the date of reference made by the Assessing Officer to the competent authority, and not from the date of notice issued by the latter. This view has also been reaffirmed by various benches of the Tribunal, including the Chennai Bench in DCIT v. Smt. Subramanian Thanu [ITA No. 785–788/CHNY/2023].

In the present case, since the date of initiation of penalty proceedings is 26.06.2023, the penalty order ought to have been passed on or before 31.12.2023. However, the impugned order was passed on 28.02.2024. Therefore, we hold that the said penalty order is barred by limitation under section 275(1)(c) of the Act.

Having allowed the appeal on the issue of limitation, we do not consider it necessary to adjudicate the other grounds raised by the assessee, including the question of jurisdiction, due to the absence of a recorded satisfaction in the assessment order and the nature of the transaction as an earnest money deposit. These issues are therefore left open for adjudication in an appropriate case, if required.

In view of the above discussion, we hold that the penalty order dated 28.02.2024 passed under section 271D of the Act is time-barred and liable to be quashed. Accordingly, the appeal filed by the assessee stands allowed.

In the result, all the appeals filed by the assessee are allowed.