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Commissioner Of Income-Tax v. Rampur Engineering Co. Ltd. And Others (And Other Appeals)
Structured Summary of the Opinion (Full Bench reference on section 271(1)(c))
Factual and Procedural Background
This batch of cases arises from appeals by the Revenue against orders of the Income-tax Appellate Tribunal (ITAT) which had either deleted or affirmed the deletion of penalty levied under section 271(1)(c) of the Income-tax Act, 1961. The Tribunal had relied on the Division Bench decision in Commissioner of Income-Tax, Delhi-III v. Ram Commercial Enterprises Ltd., [2000] 246 ITR 568 (Delhi), holding that the authority initiating penalty proceedings had not recorded its satisfaction regarding concealment of income or furnishing of inaccurate particulars. The Revenue challenged these ITAT orders. The Division Bench admitted the appeals and framed a substantial question of law for reference to a Full Bench: whether recording of satisfaction under section 271 could be satisfied by inference from the assessment order even if not expressed in specific words. The Full Bench was constituted to authoritatively determine that question.
The Bench noted that sub-section (1B) (sic) had been inserted into section 271 by the Finance Act, 2008, creating a deemed satisfaction in certain circumstances and made retrospective to 1 April 1989; accordingly, the reference was answered only in respect of cases where the assessment orders were made prior to 1 April 1989. The Full Bench concluded its determination and directed that individual cases be listed before the appropriate Bench on December 4, 2008, for hearing and disposal.
Legal Issues Presented
- Whether satisfaction of the officer initiating the proceedings under section 271 of the Income-tax Act can be said to have been recorded even in cases where satisfaction is not recorded in specific terms but is otherwise discernible from the order passed by the authority?
Arguments of the Parties
Revenue's Arguments
- The satisfaction required for initiating penalty proceedings should be deemed valid so long as it is discernible from the order; it need not contain the specific words “I am satisfied that the assessee has concealed his income or furnished inaccurate particulars thereof”.
- The proper test is whether a reading of the assessment/order demonstrates application of mind by the Assessing Officer to the question of concealment and whether satisfaction about such concealment is discernible from the order.
- If, on the facts available on record, a clear case of concealment is made out, the Tribunal would not be justified in deleting the penalty; all relevant facts on record must be considered by the Tribunal.
Assessees' Arguments
- Satisfaction that an assessee has concealed particulars of income or furnished inaccurate particulars must be arrived at by the Assessing Officer during the course of proceedings under the Act (i.e., the assessment proceedings), without which the jurisdiction to initiate penalty under clause (c) of section 271(1) does not arise.
- The Tribunal's practice of deleting penalty was grounded in the absence of any express finding recorded by the Assessing Officer in the assessment order conferring jurisdiction to initiate penalty proceedings.
- Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 sets out the correct legal position that an assessing authority must record its satisfaction before initiating penalty proceedings.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-Tax, Delhi-III v. Ram Commercial Enterprises Ltd., [2000] 246 ITR 568 (Delhi) | Held that the assessing authority must form and record its satisfaction before initiating penalty; absence of such a recorded satisfaction in the assessment order is fatal to jurisdiction to levy penalty. | The Full Bench treated Ram Commercial as correctly stating the law and expressed respectful agreement; it applied its principle to the reference question and followed its approach. |
| D.M. Manasvi v. CIT, [1972] 86 ITR 557 (SC) | Stated that satisfaction under sec. 271(1) must be formed in the course of proceedings under the Act; it is not essential that notice be issued during assessment proceedings; satisfaction precedes notice. | The Full Bench relied on D.M. Manasvi as establishing that satisfaction must be formed during proceedings under the Act and that the assessing authority must have recorded such satisfaction. |
| CIT v. S.V. Angidi Chettiar, [1962] 44 ITR 739 (SC) | Held that power to impose penalty depends on the satisfaction of the Income-tax Officer in the course of proceedings under the Act and satisfaction before conclusion of proceedings is a condition for exercising jurisdiction. | The Full Bench cited Angidi Chettiar for the proposition that satisfaction must exist before conclusion of proceedings and that initiation of penalty depends on that satisfaction. |
| Diwan Enterprises v. Commissioner of Income Tax, [2000] 246 ITR 571 (Delhi) | Followed the approach in Ram Commercial regarding requirement of recorded satisfaction in assessment order for initiating penalty proceedings. | The Full Bench noted that Diwan Enterprises followed Ram Commercial and treated it as supporting the settled view. |
| CLT v. K. Synthetics Ltd., [1996] 219 ITR 267 (Delhi) | Followed the view that recorded satisfaction by the assessing authority is necessary to initiate penalty proceedings under sec. 271. | The Full Bench cited CLT v. K. Synthetics Ltd. as one of the decisions following Ram Commercial's approach. |
| CIT v. Dajibhai Kanjibhai, [1991] 189 ITR 41 (Bombay) | Adopted the view that the Assessing Officer must record satisfaction regarding concealment before initiating penalty; supports the same principle adopted by Delhi decisions. | The Full Bench recorded that the Bombay High Court had taken the same view and cited it in support of the settled legal position. |
Court's Reasoning and Analysis
The Full Bench undertook a textual and precedential analysis focused on whether the statutory requirement of "satisfaction" under section 271(1)(c) can be met by implication from an assessment order that does not explicitly record satisfaction.
Key steps in the Court's reasoning:
- The Court reviewed prior Supreme Court authority (Angidi Chettiar and D.M. Manasvi) which establishes that the power to impose penalty under the corresponding statutory provisions depends upon the Assessing Officer's satisfaction formed in the course of proceedings under the Act; satisfaction must precede the issuance of any notice and is a jurisdictional requirement.
- The Court examined the Division Bench decision in Ram Commercial, which required the assessing authority to record its satisfaction in the assessment order; merely having material on record that could have justified penalty does not substitute for the Assessing Officer's specific finding.
- The Court considered the Revenue's submission that the words "I am satisfied…" need not appear and that satisfaction could be discernible from the overall order. The Court acknowledged that the mere absence of those exact words is not necessarily fatal, but emphasized that the satisfaction must nevertheless be clearly spelt out from the order.
- The Court also considered statutory developments: insertion of sub-section (1B) into section 271 by the Finance Act, 2008 (creating a deemed satisfaction where an addition/disallowance is made and a direction for penalty is issued) and its retrospective operation from 1 April 1989. Because of this statutory change, the Full Bench limited its answer to cases where assessment orders were passed prior to 1 April 1989.
- Applying the settled law, the Court concluded that in the absence of a clear finding in the assessment order that the Assessing Officer was satisfied about concealment or furnishing of inaccurate particulars, the initiation of penalty proceedings is without jurisdiction.
Holding and Implications
Holding: The Full Bench answered the reference in the negative to the extent framed: the power to impose penalty under section 271 depends upon satisfaction of the Assessing Officer formed in the course of proceedings under the Act, and such satisfaction must be recorded or be clearly spelt out from the assessment order; in the absence of a clear finding as to concealment or deliberately furnishing inaccurate particulars, initiation of penalty proceedings is without jurisdiction. The Court expressed respectful agreement with the decision in Ram Commercial Enterprises Ltd., [2000] 246 ITR 568 (Delhi).
Implications:
- Direct effect on the parties in this batch: For assessment orders made prior to 1 April 1989, initiation of penalty proceedings without a clear recorded satisfaction in the assessment order is invalid; the reference was answered accordingly and individual cases were directed to be listed before the appropriate Bench on December 4, 2008, for hearing and disposal.
- Statutory qualification: The Court noted that by virtue of the Finance Act, 2008 insertion (sub-section (1B)) made retrospective to 1 April 1989, a deemed satisfaction is created in certain circumstances (where an addition/disallowance is made and a direction for penalty is issued); therefore the Full Bench's answer was confined to pre-1 April 1989 assessment orders and does not address the legal regime as affected by that statutory fiction for post-1 April 1989 matters.
- No new legal principle was laid down beyond restating and applying existing Supreme Court and High Court authorities; the Court treated the law as settled and in alignment with Ram Commercial and the cited Supreme Court precedents.
Order: The reference is answered in accordance with the reasoning above; individual cases will be listed on December 4, 2008, before the appropriate Bench for hearing and disposal.
Ajit Prakash Shah, C.J:— In all these cases, the Income-tax Appellate Tribunal has either deleted or affirmed the deletion of penalty levied upon the assessee under section 271(1)(c) of the Income-tax Act, 1961. The Tribunal has, while doing so, relied upon the decision of the Division Bench of this court in Commissioner Of Income-Tax, Delhi-Iii v. Ram Commercial Enterprises Ltd, [2000] 246 ITR 568 and held that the authority initiating the penalty proceedings had not recorded its satisfaction regarding concealment of income or furnishing of inaccurate particulars thereof by the assessee. The Revenue has assailed the correctness of the said orders in these appeals. According to the Revenue, penalty proceedings initiated by the competent authority should be deemed to be valid so long as the satisfaction of the authority was discernible from the order made by it. The fact that the authority had not used the words “I am satisfied that the assessee has concealed his income or furnished inaccurate particulars thereof”, would be of no consequence. The true test is whether a reading of the order demonstrates application of mind by the authority to the question of concealment and whether satisfaction about such concealment or furnishing of inaccurate particulars is discernible from the order. In the light of these submissions, the Division Bench admitted the appeals for determination of the following substantial question of law:
“Whether satisfaction of the officer initiating the proceedings under section 271 of the Income-tax Act can be said to have been recorded even in cases where satisfaction is not recorded in specific terms but is otherwise discernible from the order passed by the authority?”
2. Keeping in view the decision of this court in Commissioner Of Income-Tax, Delhi-Iii v. Ram Commercial Enterprises Ltd, [2000] 246 ITR 568 and other cases on the subject, the Division Bench felt that it would be more appropriate if the question is authoritatively determined by a Full Bench of this court and accordingly the matter has been referred to the Full Bench.
3. We hasten to add that pending the reference, sub-section (IB) has been inserted in section 271 of the Income-tax Act by the Finance Act, 2008. The said provision purports to create a fiction by which satisfaction of the Assessing Officer is deemed to have been recorded in cases where an addition or disallowance is made by the Assessing Officer and a direction for initiation of penalty proceedings is issued.
4. The said provision is made effective retrospectively with effect from April 1, 1989. In some of the cases forming part of this batch, the assessment orders were passed after April 1, 1989. This reference is being answered only in respect of the cases where the assessment orders were made prior to April 1, 1989.
5. Learned counsel appearing for the Revenue strenuously contended that the question whether the authority was or was not satisfied about any concealment or furnishing of inaccurate particulars will depend upon the facts of each case and the order which the authority has made will have to be seen as a whole and so long as a proper reading of the order demonstrates application of mind by the authority and so long as satisfaction is discernible from the finding recorded by the authority initiating the proceeding, the same should suffice. Learned counsel contended that if on the facts available on record a clear case of concealment of income was made out then the Tribunal would not be justified in deleting the penalty. According to the learned counsel, all such relevant facts available on record will have to be kept in view by the Tribunal in deciding the question as to whether the Assessing Officer has applied his mind to the question of concealment of income or furnishing of inaccurate particulars of any such income.
6. On the other hand, learned counsel appearing for the assessees submitted that the satisfaction as to the assessee having concealed the particulars of his income or furnished inaccurate particulars of such income is to be arrived at by the Assessing Officer during the course of any proceedings under the Act, which would mean the assessment proceedings, without which the very jurisdiction to initiate the penalty proceeding is not conferred on the Assessing Officer by reference to clause (c) of sub-section (1) of section 271 of the Income-tax Act. Learned counsel submitted that what actually prevailed with the Tribunal is the absence of any finding recorded by the Assessing Officer in the order of assessment conferring jurisdiction for initiation of penalty proceedings. According to the learned counsel, the decision of this court in Ram Commercial Enterprises Ltd., [2000] 246 ITR 568 laid down the correct position of law. Section 271(1)(c) of the Income-tax Act, 1961, provides:
“271.(1) If the Income-tax Officer, or the Appellate Assistant Commissioner in the course of any proceedings under this Act is satisfied that any person—
(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income,
he may direct that such person shall pay by way of penalty, —”
7. This is the provision as it stood at the relevant time. This provision fell for consideration of the Supreme Court in D.M Manasvi v. CIT, [1972] 86 ITR 557 wherein the Supreme Court held that what is contemplated by sub-section (1) of section 271 is that the Income-tax Officer or the Appellate Assistant Commissioner should have been satisfied in the course of proceedings under the Act regarding matters mentioned in the clauses of that sub-section. It is, however, not essential that notice to the person proceeded against should have been issued during the course of the assessment proceedings. Satisfaction in the very nature of things precedes the issue of notice and it would not be correct to equate the satisfaction of the Income-tax Officer or the Appellate Assistant Commissioner with the actual issue of notice. The issue of notice is a consequence of the satisfaction of the Income-tax Officer or the Appellate Assistant Commissioner and it would be sufficient compliance with the provisions of the statute if the Income-tax Officer or the Appellate Assistant Commissioner is satisfied about the matters referred to in clauses (a) to (c) of sub-section (1) of section 271 during the course of proceedings under the Income-tax Act even though notice to the person proceeded against in pursuance of that satisfaction is issued subsequently. The court referred to the decision of the Constitution Bench in the case of CIT v. S.V Angidi Chettiar, [1962] 44 ITR 739 (SC) wherein Shah J., speaking for the court, while dealing with section 28 of the Indian Income-tax Act, 1922, observed (page 745):
“The power to impose penalty under section 28 depends upon the satisfaction of the Income-tax Officer in the course of proceedings under the Act; it cannot be exercised if he is not satisfied about the existence of conditions specified in clause (a), (b) or (c) before the proceedings are concluded. The proceeding to levy penalty has, however, not to be commenced by the Income-tax Officer before the completion of the assessment proceedings by the Income-tax Officer. Satisfaction before conclusion of the proceeding under the Act, and not the issue of a notice or initiation of any step for imposing penalty is a condition for the exercise of the jurisdiction.”
8. In Ram Commercial Enterprises Ltd., [2000] 246 ITR 568 (Delhi) the argument of the Revenue was that on the facts available on record a clear case of concealment of income was made out and, therefore, the Tribunal was not justified in deleting the penalty. It was argued that all such relevant facts which were available on record were not kept in view by the Tribunal and, therefore, the findings arrived at by it are perverse and not binding on the High Court. The Division Bench following the law laid down in the case of D.M Manasvi, [1972] 86 ITR 557 held (page 557):
“11. The law is clear and explicit. Merely because this court while hearing this application may be inclined to form an opinion that the material available on record could have enabled the initiation of penalty proceedings that cannot be a substitute for the requisite finding which should have been recorded by the assessing authority in the order of assessment but has not been so recorded.
12. A bare reading of the provisions of section 271 and the law laid down by the Supreme Court makes it clear that it is the assessing authority which has to form its own opinion and record its satisfaction before initiating the penalty proceedings. Merely because the penalty proceedings have been initiated, it cannot be assumed that such a satisfaction was arrived at in the absence of the same being spelt out by the order of the assessing authority. Even at the risk of repetition we would like to state that the assessment order does not record the satisfaction as warranted by section 271 for initiating the penalty proceedings…….”
9. The view taken in Ram Commercial Enterprises Ltd., [2000] 246 ITR 568 (Delhi) has been followed in Diwan Enterprises v. Commissioner Of Income Tax., [2000] 246 ITR 571 (Delhi) and CLT v. K. Synthetics Ltd., [1996] 219 ITR 267 (Delhi). The same is the view taken by the Bombay High Court in CIT v. Dajibhai Kanjibhai, [1991] 189 ITR 41.
10. In our opinion, the legal position is well settled in view of the Supreme Court decisions in CIT v. S.V Angidi Chettiar, [1962] 44 ITR 739 (SC) and D.M Manasvi v. CIT, [1972] 86 ITR 557 (SC), that power to impose penalty under section 271 of the Act depends upon the satisfaction of the Income-tax Officer in the course of the proceedings under the Act. It cannot be exercised if he is not satisfied and has not recorded his satisfaction about the existence of the conditions specified in clauses (a), (b) and (c) before the proceedings are concluded. It is true that mere absence of the words “I am satisfied” may not be fatal but such a satisfaction must be spelt out from the order of the assessing authority as to the concealment of income or deliberately furnishing inaccurate particulars. In the absence of a clear finding as to the concealment of income or deliberately furnishing inaccurate particulars, the initiation of penalty proceedings will be without jurisdiction. In our opinion, the law is correctly laid down in Ram Commercial Enterprises Ltd., [2000] 246 ITR 568 (Delhi) and we are in respectful agreement with the same. The reference is answered accordingly.
11. Let the individual cases be listed before the appropriate Bench on December 4, 2008, for hearing and disposal.
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