SAVITA BANSAL,NEW DELHI vs. ITO WARD-35(2), NEW DELHI

The captioned appeal has been filed by the Assessee against the order of the Commissioner of Income Tax (Appeals)-XII, New Delhi (‘CIT(A)’ in short) dated 25.07.2019 arising from the penalty order dated 28.06.2018 passed by the Assessing Officer (AO) under Section 271(1)(c) r.w. Section 274 of the Income Tax Act, 1961 (the Act) concerning AY 2015-16.

3. Briefly stated, the assessee in the instant case filed her return of income declaring total income at Rs.83,67,310/- against the returned income of Rs.8,74,590/-. The assessee in her return of income had shown Rs.1,13,90,000/- as receipt / sale consideration on the sale of property at Laxmi Nagar Delhi whereas total sale consideration as per sale deed of the said property was only Rs.90 lakh. Thus, the Assessing Officer treated the excess sale consideration recorded to the extent of Rs.23,90,000/- as unexplained income of the assessee under Section 68 of the Act. The Assessing Officer also disallowed deduction claimed of Rs.51,02,718/- under Section 54F of the Act. The Assessing Officer while making the aforesaid additions also initiated penalty proceedings under Section 271(1)(c) of the Act alleging that the assessee has concealed the particulars of income or furnished inaccurate particulars of such income. In purusance of such satisfaction formed in the course of assessment proceedings, the Assessing Officer imposed penalty of Rs.17,89,670/- vide penalty order dated 28.06.2018 passed under Section 271(1)(c) r.w. Section 274 of the Act.

4. Aggrieved by the imposition of penalty, the assessee preferred appeal before the CIT(A). The CIT(A) however confirmed the imposition of penalty.

5. Aggrieved by the denial of relief, the assessee preferred appeal before the Tribunal.

9. We have dispassionately considered the rival submissions and material placed before us and adverted to. The solitary issue that arises for consideration is whether the Assessing Officer was justified in imposing penalty under Section 271(1)(c) of the Act towards additional income included in the return filed under Section153A pursuant to search under Section 132 of the Act having regard to the facts and circumstances existing in the case. 9.1 Multiple objections have been raised on behalf of the assessee to assail the imposition of penalty. The first and foremost objection borne out on behalf of the assessee is that the allegation on the exact nature of default in the order of the Assessing Officer(AO) in the quantum proceedings as well as in the penalty proceedings is completely absent. As contended, neither the ‘satisfaction’ contemplated under S. 271(1)(c) rws 271(1B) towards any specific default is discernible from the assessment order, nor the consequent penalty notice issued under Section 274 r.w. Section 271(1)(c) spells out any particular limb of default specified in S. 271(1)(c) of the Act. Both assessment order as well as the penalty notice omits to firmly allege any particular default committed by the Assessee. No strike off of irrelevant portion in the penalty notice has also been carried out by the AO. The Assessee thus contends that in the absence of any satisfaction formed in the course of assessment proceedings, the directions for initiation of penalty proceedings in the assessment order itself is bad in law. 9.2 To deal with legal objection, it may be relevant to capsule the law in this regard. 9.2.1 A bare look at the provisions of Section 271(1)(c) of the Act shows that satisfaction of the concerned tax authority to the effect that the assessee has either ‘concealed the particulars of income’ or ‘furnished inaccurate particulars of income’ is the condition precedent for levy of penalty and such satisfaction must be arrived it in the course of any proceedings under the Act. These are the two eventualities or to say two limbs which empowers the AO to impose the penalty u/s 271(1)(c) of the Act. These two terms holds two distinctive meanings and carry different connotations. The two expressions cannot be interchanged or interpreted for one another, as has been held in several judgments including Shri T. Ashok Pai vs. CIT (2007) 292 ITR 11 (SC); Dilip N Shroff v. JCIT 291 ITR 519 (SC). As both the limbs i.e. ‘concealment of particulars of income’ and ‘furnishing inaccurate particulars of income’ carry different connotations, it is incumbent upon the AO to satisfy himself before initiation of penalty proceedings that the case of the assessee falls either under the first limb or under the second limb. A mandatory presence of the requisite ‘satisfaction’ of the AO before initiating the penalty proceedings has been affirmed by the courts. A reference is made to CIT v. S.V. Angidi Chettiar (1962) 44 ITR 739 (SC); D.M. Manasvi v. CIT [1973 AIR 22] (SC); CIT v. Manjunatha Cotton and Ginning Factory [359 ITR 565] [Kar.] in this regard. 9.2.2 Hence, in the backdrop of judicial pronouncements, ‘satisfaction’ of the AO vis a vis the nature of default is a sine qua non and required to be indicated by express assertion to this effect in the course of assessment proceedings. Conventionally, to comply with the requirement of law, the ‘satisfaction’ towards exact nature of default committed by Assessee is recorded in the assessment order and in the penalty notice issued in this regard by striking off the inapplicable portion in the notice u/s 274 r.w.s. 271(1)(c) of the Act.

9.2.3 Significantly Section 271(1B) was inserted by Finance Act, 2008 with retrospective effect from 1-4-1989 which also addresses the legislative intent on the subject matter. S. 271(1B) merely intends to provide latitude to the revenue towards manner of recording satisfaction in the course of assessment proceedings.

By virtue of insertion of S. 271(1B), a mere direction of AO without spelling out the process of deriving satisfaction qua a default would sufficiently meet the requirement of S. 271(1)(c) for initiation of penalty proceedings. However, the direction qua a specific default continues to be mandatory despite insertion of S. 271(1B) of the Act. To understand the legislative intent, it may be pertinent to refer to the ‘Notes on Clauses’ of Finance Bill, 2008 on the enactment of S. 271(1B) which reads as under:

Clause 48 seeks to amend section 271 of the Income-tax Act, which relates to failure to furnish returns, comply with notices, concealment of income, etc. Under the existing provisions contained in Chapter XXI the Assessing Officer is required to be satisfied during the course of penalty proceedings. Legislative intent was that such a satisfaction was required to be recorded only at the time of levy of penalty and not at the time of initiation of penalty. However, some of the judicial interpretations on this issue are favouring the view that satisfaction has to be recorded at the time of initiation of penalty proceedings also. It is therefore proposed to insert a new sub-section (1B) in section 271 of the Income-tax Act so as to provide that 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 if such order contains a direction for initiation of penalty proceedings under 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 sub-section (1). This amendment will take effect retrospectively from 1st April, 1989.

9.2.4 As self evident from the Memorandum to the Finance Bill 2008, the new section 271(1B) was inserted with the intention to give validity to the ‘satisfaction’ made by the Assessing Officer on the basis of a simple direction to this effect without any thing more. However, the directions which tantamount to satisfaction must be with reference to a specific charge against the assessee by choosing the appropriate limb as contextually applicable.

9.2.5 The constitutionality of the above amendment was challenged in the Hon’ble Delhi High Court in the case of Madhushree Gupta v. UOI [WP (C) No. 5059 of 2008]. While contemplating on the constitutionality of the said amendment, the Hon’ble High Court interpreted the provisions of section 271(1B) in conjunction with section 271(1)(c) and made very important observations as noted hereunder:

The contra-submission of the learned ASG that prima facie satisfaction of the Assessing Officer need not be reflected at the stage of initiation but only at the stage of imposition of penalty is in the teeth of Section 271(1)(c) of the Act. Section 271(1)(c) has to be read in consonance of Section 271(1B). The presence of prima facie satisfaction for initiation of penalty proceedings was and remains a jurisdictional fact which cannot be wished away as the provision stands even today, i.e., post amendment. If an interpretation such as the one proposed by the Revenue is accepted then, in our view, the impugned provision will fall foul of Article 14 of the Constitution as it will then be impregnated with the vice of arbitrariness. The Assessing Officer would in such a situation be in a position to pick a case for initiation of penalty merely because there is an addition or disallowance without arriving at a prima facie satisfaction with respect to infraction by the assessee of clause (c) of sub-section (1) of Section 271 of the Act. A requirement which is mandated by the provision itself. 15.7 Learned ASG also sought to place reliance on the Memorandum as well as Clause 48 of the Notes on Clauses appended to the Finance Act, 2008. Even though both the Memorandum as well as Notes On Clauses refers to the conflict in judicial opinion and gives that, as the reason for insertion of the impugned provision, in our opinion, in sub- section (1B) of Section 271 does not do away with the principle that the prima facie satisfaction of the Assessing officer must be discernible from the order passed by the Assessing Officer during the course of assessment proceedings pending before him.

9.2.7 Noticiably, the Hon’ble Karnataka High Court in its later decision in the case of CIT v. MWP Ltd. [ITA No. 332 of 2007] held that phrases like ‘penalty proceedings are being initiated separately’ or ‘penalty proceedings u/s 271(1)(c) are initiated separately’ do not comply with the meaning of the word ‘direction’ as contemplated in amended section 271(1B) of the Act.

9.2.8 In view of the above judicial pronouncements, both pre and post insertion of S. 271(1B), the position of law emerges is that for initiation of penalty proceedings, the assessment order must categorically record the specific charge or default alleged. Failing to do so or where the allegation of default committed is vague or non specific, the so called deemed satisfaction contemplated under S. 271(1B) can not be validated in law.

9.3 On facts, as quoted in the assessment order in the present case, the averments concerning directions and consequent deemed satisfaction of the AO under S. 271(1B) reads as “ Hence, I am satisfied that penalty u/s 271(1)(c) of the Income Tax Act has to be initiated for which notice u/s 274 r.w.s. 271(1)(c) is being issued separately”. Manifest as it is, the AO has most casually initiated the penalty proceedings without choosing to specify any limb. Clearly, the act of the AO is vitiated by the non application of mind about the nature of default and, in consequence, vitiates the ‘satisfaction’ contemplated under section 271(1)(c ) of the Act. As observed in preceding para, the formation of satisfaction is not a mere formality or an empty ritual. In the present case, the so called ‘satisfaction’ of the AO in the assessment proceedings has not been tied up with any positive finding towards the exact nature of default and hence, the so called satisfaction is mechanical & illusory and thus cannot be countenanced in law.

9.4 This apart, the notice issued to the Assessee under s. 274 r.w.s. 271(1)(c) also does not strike off the inappropriate part and a vague notice showing tentative nature of default in the form of either/or has been issued to the Assessee. The penalty proceedings sans strike off in the penalty notice and also in the assessment order thus is wholly unsustainable in law.

9.5 We thus find apparent merit in the plea of the assessee. The Section 271(1)(c) r.w. Section 271(1B) clearly imposes duty on the Assessing Officer to record a ‘satisfaction’ toward the nature of default in the course of the assessment proceedings before initiation of penalty proceedings. The nature of default is neither traceable from the penalty notice nor from the directions in the assessment order. Thus, in the absence of satisfaction qua the nature of default committed, the initiation of penalty proceedings itself is a complete non-starter and consequent imposition of penalty is clearly vitiated in law. The imposition of penalty in question is thus liable to be quashed and set aside on this ground alone.”

Order pronounced in the open Court on 21/04/2023.