Commissioner Of Income Tax-I, Ludhiana v. Shri Subhash Kumar Jain

ITA No. 225 of 2003 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Commissioner of Income Tax-I, Ludhiana Versus Shri Subhash Kumar Jain ITA No. 225 of 2003 Date of Decision: 10.9.2010 ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Rajesh Katoch, Advocate for the appellant. Mr. Pankaj Jain, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1.This appeal has been filed by the revenue under Section260A of the Income Tax Act, 1961 (in short “the Act”) against the orderdated 5.5.2003 passed by the Income Tax Appellate Tribunal,Chandigarh Bench 'B', Chandigarh (hereinafter referred to as “theTribunal”) in ITA No. 149/CHANDI/99 for the assessment year 1994-95,proposing following substantial question of law:- “Whether the agreement made by the AssessingOfficer of initiating no proceedings u/s 271(1)(c) isbad in Law? and Whether the assessment so framed is erroneous andprejudicial to the interest of Revenue?” 2.The facts for adjudication as narrated in the appeal may benoticed. The assessee filed his return on 14.12.1984 declaring anincome of Rs.89,123/-. His assessment was framed under Section143(3) of the Act vide order dated 18.4.1996 at an income ofRs.10,80,213/- after making an addition of Rs.9,91,090/- on account ofagricultural income. As the assessee failed to explain the agriculturalincome, enquiries were got conduct by the Inspector who submitted hisreport pointing out various defects in the documents furnished by theassessee. Thereafter, the assessee made an offer to surrenderRs.9,91,090/- subject to no penal action under Section 271(1)(c).Accordingly, the assessment was framed by the Assessing Officer.Commissioner of Income Tax (in short “the CIT”) vide order dated11.1.1999 in exercise of power under Section 263 of the Act set asidethe assessment order holding that the same was erroneous andprejudicial to the interest of the revenue. The CIT directed theAssessing Officer to frame fresh assessment after taking into accountthe facts attracting penal action under Section 271(1)(c) of the Act.Feeling aggrieved, the matter was taken up in appeal by the assesseeand the Tribunal vide order dated 5.5.2003 set aside the order of theCIT holding that the CIT cannot direct the Assessing Officer to initiatepenalty proceedings under Section 271(1)(c) as the same were not partof the assessment proceedings. Hence the present appeal by therevenue. 3.We have heard learned counsel for the parties. 4.The issue involved in this appeal has two facets. Firstly,when the Assessing Officer while passing the assessment order under Section 143(3) of the Act had given an office note that the surrender ofthe agricultural income which was made by the assessee was subject tono penal action under Section 271(1)(c), could the CIT in exercise ofpower under Section 263 hold the order of the Assessing Officer to beerroneous and prejudicial to the interest of the revenue. Secondly,whether the CIT could exercise jurisdiction under Section 263 of the Actby holding that the failure of the Assessing Officer to initiate penaltyproceedings while completing assessment under Section 143(3) of theAct was an order which was erroneous and prejudicial to the interest ofthe revenue. 5.Adverting to the first aspect of the issue, it may be noticedthat the Assessing Officer while passing the assessment order underSection 143(3) had made an office note, the relevant portion of which isas under:- “The report of the Inspector was confronted to theassessee who in turn accepted the ungenuineness ofagricultural income shown by him and thus cameforward with a surrender of agricultural income,subject to no penal action u/s 271(1)(c) of the I.T.Act. Since the Department had no documentaryevidence against the assessee but only the report ofthe Inspector, therefore, the offer of the assesseewas accepted.” 5.Adverting to the first aspect of the issue, it may be noticedthat the Assessing Officer while passing the assessment order underSection 143(3) had made an office note, the relevant portion of which isas under:- “The report of the Inspector was confronted to theassessee who in turn accepted the ungenuineness ofagricultural income shown by him and thus cameforward with a surrender of agricultural income,subject to no penal action u/s 271(1)(c) of the I.T.Act. Since the Department had no documentaryevidence against the assessee but only the report ofthe Inspector, therefore, the offer of the assesseewas accepted.” 6.A perusal of the same clearly shows that the assessee hadmade surrender with a clear condition that no penal action underSection 271(1)(c) of the Act would be initiated. The office note further depicts that the offer of the assessee was accepted by the departmentsince the department had no documentary evidence against theassessee except the report of the Inspector. Once that was so, thedepartment could not take somersault and seek to levy penalty. 7.A Division Bench of this Court in Banta Singh KartarSingh v. Commissioner of Income-Tax, Patiala, (1980) 125 ITR 239(P&H) relying upon Bombay High Court decision in Jivatlal Purtapshiv. CIT (1967) 65 ITR 261 had an occasion to consider as to whether anagreement between assessee and the income tax authorities arrived atregarding imposition of penalty while surrendering the income was to beacted upon or not. It was observed that an order based on anagreement cannot give rise to grievances and the same cannot beagitated. 8.Accordingly, it could not be said that the assessment orderwas erroneous and prejudicial to the interest of the revenue. Once thatis so, no order under Section 263 could be passed by the CIT. 9.Now adverting to the second limb, it may be noticed thatthe Delhi High Court in judgment reported in Commissioner of IncomeTax v. J.K. D'costa [1981] 133 ITR 7 has held that the CIT cannot passan order under Section 263 of the Act pertaining to imposition of penaltywhere the assessment order under Section 143(3) is silent in thatrespect. The relevant observations recorded are:- “It is well established that proceedings for the levy ofa penalty whether under s. 271(1)(a) or under s. 273(b) are proceedings independent of and separatefrom the assessment proceedings. Though the expression “assessment” is used in the Act withdifferent meanings in different contexts, so far as s.263 is concerned, it refers to a particular proceedingthat is being considered by the Commissioner and itis not possible when the Commissioner is dealingwith the assessment proceedings and theassessment order to expand the scope of theseproceedings and to view the penalty proceedingsalso as part of the proceedings which are beingsought to be revised by the Commissioner. There isno identity between the assessment proceedings andthe penalty proceedings; the latter are separateproceedings, that may, in some cases, follow as aconsequence of the assessment proceedings. Asthe Tribunal has pointed out, though it is usual for theITO to record in the assessment order that penaltyproceedings are being initiated, this is more a matterof convenience than of legal requirement. All that thelaw requires, so far as the penalty proceedings areconcerned, is that they should be initiated in thecourse of the proceedings for assessment. It issufficient if there is some record somewhere, evenapart from the assessment order itself, that the ITOhas recorded his satisfaction that the assessee isguilty of concealment or other default for whichpenalty action is called for. Indeed, in certain cases it is possible for the ITO to issue a penalty notice orinitiate penalty proceedings even long before theassessment is completed though the actual penaltyorder cannot be passed until the assessment isfinalised. We, therefore, agree with the view takenby the Tribunal that the penalty proceedings do notform part of the assessment proceedings and that thefailure of the ITO to record in the assessment orderhis satisfaction or the lack of it in regard to theleviability of penalty cannot be said to be a factorvitiating the assessment order in any respect. Anassessment cannot be said to be erroneous orprejudicial to the interest of the revenue because ofthe failure of the ITO to record his opinion about theleviability of penalty in the case.” 10.Special leave petition against the said decision wasdismissed by the Apex Court [1984] 147 ITR (St.) 1. The same viewwas reiterated by the Delhi High Court in Commissioner of IncomeTax v. Sudarshan Talkies, [1993] 201 ITR 289 (Del) andfollowed inCIT v. Nihal Chand Rokyan, [2000] 242 ITR 45 (Del). The RajasthanHigh Court in Commissioner of Income Tax v. Keshrimal Parasmal(1986) 157 ITR 484 (Raj), Gauhati High Court in Surendera ParshadSingh and others v. CIT, (1988) 173 ITR 510 and Calcutta High Courtin Commissioner of Income-Tax v. Linotype and Machinery Ltd.,(1991) 192 ITR 337 (Cal)have followed the judgment of Delhi HighCourt in J.K. D'costa's case (supra). 11.However, Madhya Pradesh High Court inAddl.Commissioner of Income-Tax, M.P. v. Indian Pharmaceuticals,[1980] 123 ITR 874 (MP) which has been followed by the same HighCourt in Addl. CIT v. Kanti Lal Jain, [1980] 125 ITR 373 and Addl.CWT v. Nathoo Lal Bela Ram, [1980] 125 ITR 596 has adopteddiametrically opposite approach. 12.We are in agreement with the view taken by the HighCourts of Delhi, Rajasthan, Calcutta and Gauhati, and express ourinability to subscribe to the view of Madhya Pradesh High Court. 13.Accordingly, it is held that the initiation of proceedingsunder Section 263 was not justified. The Tribunal was right in holdingthat after examining the records of the assessment in exercise ofpowers under Section 263, where the CIT finds that the AssessingOfficer had not initiated penalty proceedings, he cannot direct theAssessing Officer to initiate penalty proceedings under Section 271(1)(c) of the Act. 14.Consequently, the appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE September 10, 2010gbs (ADARSH KUMAR GOEL)JUDGE