DHARMANANDAN DIAMONDS P. LTD,MUMBAI vs. CIT 5, MUMBAI

The Ld. Counsel for the Assessee at the outset submits that the Ld. CIT passed order u/s 263 cancelling the assessment order passed u/s 143(3) of the Act and directed the Assessing Officer to initiate penalty proceedings u/s 271(1)(c) of the Act which he omitted while passing the assessment order. The 2 M/s. Dharmanandan Diamonds Pvt. Ltd Ld. Counsel for the Assessee submits that the Assessing Officer while completing the assessment u/s 143(3) on 30.12.2011 disallowed depreciation claimed by the Assessee on revaluation of assets before conversion of partnership firm into company. The Assessing Officer did not initiate penalty proceedings u/s 271(1)(c) on the disallowance of depreciation claimed on such revalued assets by the Assessee. The Ld. Counsel submits that according to the Ld. Commissioner, the Assessing Officer should have initiated penalty proceedings u/s 271(1)(c) and since he has not initiated the penalty proceedings, the omission on the part of the Assessing Officer to initiate penalty proceedings during the course of assessment has rendered assessment order erroneous and prejudicial to the interest of the revenue. Therefore, he submits that the Ld. CIT directed the Assessing Officer to initiate penalty proceedings u/s 271(1)(c) of the Act. The Ld. Counsel for the Assessee submits that the Assessing Officer has discretion to initiate penalty proceedings or not and the Assessing Officer has taken a conscious decision not to initiate penalty proceedings and therefore assessment order cannot be said to be erroneous. Therefore, he submits that the Ld. Commissioner has no power to set aside the assessment order to initiate penalty proceedings. For this proposition he placed reliance on the following decisions : 1) CIT Vs. Paramanand M Patel [278 ITR 3 (Guj)] 2) CIT Vs. Subhash Kumar Jain [335 ITR 364 (P&H)]

The Ld. DR vehemently supported the orders of the Ld. Commissioner in setting aside the assessment order passed u/s 143(3) of the Act and directed the Assessing Officer to initiate penalty proceedings u/s 271(1)(c) of the Act.

We have heard the rival submissions, perused the orders of the authorities below. The question to be addressed in this appeal is whether the Ld. Commissioner has power u/s 263 of the Act to direct the Assessing Officer to initiate penalty proceedings u/s 271(1)(c) of the Act. The Ld. Commissioner passed order u/s 263 holding that the omission on the part of the Assessing Officer to initiate penalty proceedings during the course of assessment has rendered the assessment order erroneous and prejudicial to the interest of the revenue. He placed reliance on the decision of Allahabad High Court in the case of CIT Vs. Surendra Prasad Agarwal [275 ITR 113]. The Allahabad High Court held that omission of the Assessing Officer to initiate penalty proceedings in the course of assessment, rendered assessment order erroneous and prejudicial to the interest of the revenue and Ld. Commissioner has jurisdiction to revise such an order u/s 263 of the Act. However, we find that this decision of the Allahabad High Court has been considered and dissented by the Gujarat High Court in the case of CIT Vs. Paramanand M Patel (supra) and held that the Ld. Commissioner cannot set aside the assessment and direct the Assessing Officer to initiate penalty proceedings. Similar view has been taken by the Punjab and Haryana High Court in the case of CIT Vs. Subash Kumar Jain (supra). There are divergent views of the High Courts on the subject. Therefore, following the order of the Hon’ble Supreme Court in the case of CIT Vs. Vegetable Products [82 ITR 1], when two views are possible, the view in favour of the Assessee is to be followed. Therefore, respectfully following the decision of the Gujarat High Court in the case of CIT Vs. Paramanand Patel (supra) and the decision of Punjab & Haryana High Court in the case of CIT Vs. Subash Kumar Jain (supra) we set aside the order of the Commissioner passed u/s 263 in directing the Assessing Officer to initiate penalty proceedings u/s 271(1)(c) of the Act.

In the result, appeal of the Assessee is allowed.