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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • Rajesh Katoch
Judges
  • Ajay Kumar MittalShekher Dhawan
Acts
  • Section 260A of the Income Tax Act, 1961 (in short "the Act")
  • u/s 271 (1)(c) of the Income Tax Act, 1961
  • u/s 263 of the Income Tax Act, 1961
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • Rajesh Katoch
Judges
  • Ajay Kumar MittalShekher Dhawan
Acts
  • Section 260A of the Income Tax Act, 1961 (in short "the Act")
  • u/s 271 (1)(c) of the Income Tax Act, 1961
  • u/s 263 of the Income Tax Act, 1961
See more information ...
Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

The revenue filed an appeal under Section 260A of the Income Tax Act, 1961 against the Income Tax Appellate Tribunal's order dated 26.3.2014 in ITA No. 300(ASR)/2013 for assessment year 2008-09.

Relevant facts and procedure (as stated in the opinion):

  • The assessee derived income from real estate business.
  • On 11.12.2008 a search and seizure under Section 132 was conducted at the assessee's premises.
  • Notice under Section 153A was issued and the assessee filed a return on 31.3.2009 for AY 2008-09 declaring income of Rs. 78,16,530.
  • The Assessing Officer framed the assessment under Section 153A by order dated 8.12.2010 accepting the returned income.
  • The Commissioner of Income Tax (CIT) on 12.3.2013, invoking Section 263, set aside the assessment order holding it to be erroneous and prejudicial to the revenue on three stated grounds:
    1. Commission of Rs. 47,925 was paid without deduction of TDS and hence not allowable;
    2. Penalty under Section 271(1)(c) had not been initiated;
    3. Penalty under Sections 271A and 271B had not been initiated.
    The CIT directed the AO to reframe the order.
  • The assessee appealed to the Tribunal. The Tribunal, by order dated 26.3.2014, partly allowed the assessee's appeal holding:
    • The assessee was not liable to deduct TDS because his receipt did not exceed Rs. 40 lakhs in the earlier year;
    • The CIT could not direct the AO to initiate penalty proceedings under Section 271(1)(c) by exercising powers under Section 263;
    • Penalty proceedings under Sections 271A and 271B are not related to the assessment and may be initiated at any time.
  • The revenue brought the present appeal to the High Court contesting the Tribunal's order.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in cancelling the order under Section 263 by holding that the order passed by the Assessing Officer was not erroneous and prejudicial to the interest of the revenue with respect to the issue of penalty proceedings under Section 271(1)(c) read with Explanation 5A, where such penalty proceedings had not been initiated by the Assessing Officer during the assessment and whether the due date for filing return includes a return filed under Section 139(4) of the Act.
  2. More succinctly, whether the Commissioner, in exercise of power under Section 263, could hold the AO's assessment order to be erroneous and prejudicial to the interest of the revenue because the AO had not initiated penalty proceedings while completing assessment under Section 153A.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner Of Income-Tax v. Surendra Prasad Agrawal [2005] 275 ITR 113 (Allahabad) Cited by the revenue; described in the opinion as concurring with the Madhya Pradesh High Court approach (i.e., permitting a revisional direction to initiate penalty proceedings). The Court explicitly stated it was unable to subscribe to the view in this authority and therefore did not follow it.
CIT v. J.K.D's Costa [1984] 147 ITR (St.) 1 (Special Leave dismissed / Delhi HC decision cited) Establishes that penalty proceedings are independent of assessment proceedings; failure of the AO to record satisfaction about leviability of penalty in the assessment does not vitiate the assessment; the CIT cannot, under Section 263, treat penalty proceedings as part of assessment and direct initiation of penalty. The Court agreed with and followed this principle; the judgment's reasoning (as quoted in the opinion) was adopted in reaching the result that revisional power under Section 263 could not be used to direct initiation of penalty under Section 271(1)(c).
CIT v. Subhash Kumar Jain [2011] 335 ITR 364 Identified by this Court as agreeing with the Delhi High Court approach that penalty proceedings are separate and the CIT cannot direct initiation of penalty under Section 271(1)(c) by exercise of Section 263. The Court relied on this precedent (referring to it as settling the issue) and treated the issue as no longer res integra; it formed a basis for rejecting the revenue's appeal.
Addl. Commissioner Of Income-Tax v. J.K. D'Costa [1982] 133 ITR 7 (Delhi) The Delhi High Court's statement that penalty proceedings are separate from assessment and failure to refer to penalty in the assessment order does not make the assessment erroneous or prejudicial to revenue. The Court followed and relied upon this authority as part of the consistent line of decisions disallowing revisional directions to initiate penalty under Section 263.
Commissioner Of Income-Tax v. Sudershan Talkies [1993] 201 ITR 289 (Del) Reiterated the view that penalty proceedings are separate and not to be treated as part of assessment proceedings for purposes of Section 263. Counted among the Delhi High Court decisions the Court relied upon; the opinion states it was followed.
CIT v. Nihal Chand Rekyan [2000] 242 ITR 45 (Delhi) Followed the principle that penalty proceedings are distinct from assessment proceedings and that omission to initiate penalty in the assessment order does not vitiate the assessment. The Court referenced and treated this authority as part of the consistent line it followed.
Commissioner Of Income-Tax v. Keshrimal Parasmal [1986] 157 ITR 484 (Rajasthan) Followed the J.K.D'Costa principle (penalty proceedings are separate from assessment for purposes of Section 263). Included among the High Court decisions the Court relied upon; the Court followed this view.
CIT v. Linotype & Machinery Ltd. [1991] 192 ITR 337 (Calcutta) Followed the principle that penalty proceedings are independent and omission to initiate them in the assessment order does not render assessment erroneous. The Court relied on this Calcutta High Court decision as supporting the same line of authority.
Surendra Prasad Singh v. CIT [1988] 173 ITR 510 (Gauhati) Followed the line that penalty proceedings are independent of the assessment and are not to be treated as part of the assessment proceedings for Section 263 purposes. The Court listed this as one of the High Court decisions it agreed with and followed.
Addl. Commissioner Of Income-Tax v. Indian Pharmaceuticals [1980] 123 ITR 874 (M.P.) Madhya Pradesh High Court's approach — described in the opinion as adopting a diametrically opposite approach (i.e., allowing revisional direction to initiate penalty proceedings). The Court expressly disagreed with this line of authority and declined to follow it.
Addl. Commissioner Of Income-Tax v. Kantilal Jain [1980] 125 ITR 373 (M.P.) Another Madhya Pradesh decision adopting the approach that the CIT could direct initiation of penalty; treated in the opinion as part of the contrary line. The Court stated its inability to subscribe to this approach and did not follow it.
Addl. CWT v. Nathoolal Balaram [1980] 125 ITR 596 (M.P.) Also part of the Madhya Pradesh line of cases adopting the opposite approach regarding revisional power and penalty initiation. The Court rejected this approach and did not apply these authorities.
CIT v. Jagriti Aggarwal [2011] 339 ITR 610 (Punjab & Har.) One of the decisions placed before the Court by the assessee in support of the assessee's position (i.e., that revisional power under Section 263 cannot be used to direct initiation of penalty under Section 271(1)(c)). The opinion records that the assessee relied on this decision; the Court's ultimate conclusion was consistent with the principle for which the assessee cited it.
CIT v. Jagtar Singh Chawla [2013] 215 Taxman 154 (Punjab & Har.) Cited by the assessee in support of the assessee's view. The opinion records reliance by the assessee; the Court's decision adhered to the broader line supporting the assessee's position.

Court's Reasoning and Analysis

The Court identified the central question as whether the CIT could use Section 263 to declare the AO's assessment order erroneous and prejudicial to the revenue on the ground that the AO had not initiated penalty proceedings (specifically under Section 271(1)(c)) while completing assessment under Section 153A.

Key analytical steps and points expressly stated in the opinion:

  1. The Court observed the issue was "no longer res integra" and referred to this Court's earlier decision in Subhash Kumar Jain which agreed with a line of High Court authorities (Delhi, Rajasthan, Calcutta, Gauhati) that adopted a uniform principle regarding the separation of penalty and assessment proceedings.
  2. The opinion quotes and follows the reasoning in the Delhi High Court's J.K.D.'s Costa decision, which held (as quoted) that:
    • Proceedings for levy of penalty are independent of and separate from assessment proceedings;
    • Section 263 is concerned with the particular assessment proceedings that the Commissioner is considering and does not permit the expansion of the scope of those proceedings to include penalty proceedings;
    • The failure of the AO to record satisfaction or opinion about leviability of penalty in the assessment order cannot be said to vitiate the assessment order; therefore an assessment cannot be declared erroneous or prejudicial merely because the AO omitted to record an opinion on penalty leviability.
  3. The Court noted the consistent followings of the J.K.D.'s Costa approach by other High Courts (Sudershan Talkies, Nihal Chand Rekyan, Keshrimal Parasmal, Linotype & Machinery, Surendra Prasad Singh) and stated its agreement with that line while expressly disagreeing with the Madhya Pradesh line of authorities (Indian Pharmaceuticals, Kantilal Jain, Nathoolal Balaram) which had adopted a contrary approach.
  4. The Court also recorded that it could not accept the view of the Allahabad High Court in Surendra Prasad Agrawal (which had concurred with the Madhya Pradesh approach).
  5. On the basis of the above authorities and reasoning, the Court concluded that initiation of proceedings under Section 263 was not justified in the circumstances of this case because the omission to initiate penalty proceedings by the AO did not render the assessment order erroneous or prejudicial to the revenue.

Holding and Implications

Holding:

APPEAL DISMISSED

The Court held that the initiation of proceedings under Section 263 of the Income Tax Act was not justified in the facts of this case and accordingly upheld the Tribunal's order cancelling the revisional order passed by the CIT. The appeal by the revenue was dismissed.

Direct implications (as stated in the opinion):

  • The CIT's revisional order under Section 263 (setting aside the assessment and directing initiation of penalty proceedings) is cancelled and the Tribunal's order in favour of the assessee is upheld.
  • The decision follows a line of authority that treats penalty proceedings (including under Section 271(1)(c)) as separate from assessment proceedings; omission to initiate penalty in the assessment order does not, by itself, make the assessment erroneous or prejudicial to the revenue for purposes of Section 263.
  • The Tribunal had observed (and the Court accepted the legal principle) that penalties under Sections 271A and 271B are not related to the assessment and can be initiated at any time; the Court's order sustains that view as part of its reasoning upholding the Tribunal.

Wider precedent impact: The opinion aligns with and follows an established line of High Court authorities and this Court's prior decision (Subhash Kumar Jain). The Court expressly rejected the contrary Madhya Pradesh line and the Allahabad High Court decision in Surendra Prasad Agrawal. The opinion does not purport to overrule or create a new rule beyond following existing authority; its practical effect is to confirm that Section 263 cannot be used to direct initiation of penalty under Section 271(1)(c) where the AO simply omitted to initiate penalty proceedings in the assessment order.

Order pronouncement (as stated): The initiation of proceedings under Section 263 was not justified; the order of the Tribunal cancelling the revisional order passed by the CIT is upheld; consequently, the appeal is dismissed.

Show full summary ...

    Commissioner of Income-tax (Central), Ludhiana v. Rakesh Nain Trivedi

    ORDER

    Ajay Kumar Mittal, J. - This appeal has been filed by the revenue under Section 260A of the Income Tax Act, 1961 (in short "the Act") against the order dated 26.3.2014 (Annexure A-III) passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (hereinafter referred to as "the Tribunal") in ITA No. 300(ASR)/2013 for the assessment year 2008-09, claiming the following substantial question of law:-

    "Whether on the facts and in the circumstances of the case, the Hon'ble ITAT was right in law in cancelling the order u/s 263 of the Income Tax Act, 1961 by holding that the order passed by the Assessing Officer is not erroneous and prejudicial to the interest of revenue, on the issue of penalty proceedings u/s 271 (1)(c) of the Income Tax Act, 1961 read with Explanation 5A which had not been initiated by the Assessing Officer during the course of the assessment proceedings on the ground that due date for filing return includes return filed u/s 139(4) of IT. Act?

    2. Briefly stated, the facts necessary for adjudication of the instant appeal as narrated therein may be noticed. The assessee derives income from real estate business. On 11.12.2008, search and seizure operation under Section 132 of the Act was conducted at the premises of the assessee. Notice under Section 153A of the Act was issued to the assessee who filed his return of income on 31.3.2009 for the assessment year 2008-09 at Rs. 78,16,530/-. The Assessing Officer framed the assessment vide order dated 8.12.2010 (Annexure A-I) under Section 153A of the Act accepting the returned income. The Commissioner of Income Tax (Central) (for brevity "the CIT") vide order dated 12.3.2013 (Annexure A-II) in exercise of powers under Section 263 of the Act set aside the assessment order holding that the same was erroneous and prejudicial to the interest of the revenue. The assessment order was cancelled by the CIT on the ground that i) the commission of Rs. 47,925/- had been paid without deduction of TDS and was not allowable; ii) Penalty under Section 271(1)(c) of the Act had not been initiated; and iii) Penalty under Section 271A and 271B of the Act had not been initiated. Accordingly, the CIT directed the Assessing Officer to re-frame the order in accordance with the provisions of the Act. Feeling aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal vide order dated 26.3.2014 (Annexure A-III) partly allowed the appeal of the assessee holding that the assessee was not liable to deduct the TDS as his receipt did not exceed Rs. 40 lacs in the earlier year. Further, the Tribunal observed that the CIT cannot direct the Assessing Officer to initiate penalty proceedings under Section 271(1)(c) of the Act and that the penalty proceedings under Sections 271A and 271B of the Act are not related to the assessment and can be initiated at any time and, therefore, the assessment framed is not effected and there is no scope to apply provisions of Section 263 of the Act. Hence the present appeal by the revenue.

    3. Learned counsel for the revenue in support of its case has relied upon the judgment of Allahabad High Court in Commissioner Of Income-Tax v. Surendra Prasad Agrawal [2005] 275 ITR 113/142 Tanman 653 . On the other hand, learned counsel for the assessee has placed reliance upon the judgments in CIT v. J.K.D's Costa [1984] 147 ITR (St.) 1 (SC), CIT v. Subhash Kumar Jain [2011] 335 ITR 364/199 Taxman 39/9 taxmann.com 112 (Punj. - Har.) , Addl. Commissioner Of Income-Tax, Delhi-I v. J.K D'Costa. [1982] 133 ITR 7/9 Taxman 88 (Delhi) , CIT v. Jagriti Aggarwal [2011] 339 ITR 610/203 Taxman 203/15 taxmann.com 146 (Punj. & Har.) and CIT v. Jagtar Singh Chawla [2013] 215 Taxman 154/33 taxmann.com 38 (Punj. & Har.) .

    4. We have heard learned counsel for the parties.

    5. After hearing learned counsel for the parties, we find the issue that arises for consideration of this Court in this appeal is could the CIT in exercise of power under Section 263 of the Act hold the order of the Assessing Officer to be erroneous and prejudicial to the interest of the revenue where the Assessing Officer had failed to initiate penalty proceedings while completing assessment under Section 153A of the Act.

    6. It may be noticed that the said issue is no longer res integra. This Court in Subhash Kumar Jain case (supra) agreeing with the view of High Courts of Delhi in Additional J.K.D.'s Costa case (supra), Commissioner Of Income-Tax v. Sudershan Talkies. [1993] 201 ITR 289 (Delhi) and CIT v. Nihal Chand Rekyan [2000] 242 ITR 45/[2002] 123 Taxman 353 (Delhi) , Rajasthan in Commissioner Of Income-Tax v. Keshrimal Parasmal [1986] 157 ITR 484/27 Taxman 447 (Raj.) , Calcutta in CIT v. Linotype & Machinery Ltd. [1991] 192 ITR 337 (Cal.) and Gauhati in Surendra Prasad Singh v. CIT [1988] 173 ITR 510/40 Taxman 346 (Gau.) whereas dissenting with the diametrically opposite approach of Madhya Pradesh High Court in Addl. Commissioner Of Income-Tax, M.P v. Indian Pharmaceuticals. [1980] 123 ITR 874 (MP.) , Addl. Commissioner Of Income-Tax, M.P v. Kantilal Jain. [1980] 125 ITR 373/[1981] 5 Taxman 92 (MP.) and Addl. CWT v. Nathoolal Balaram [1980] 125 ITR 596/3 Taxman 170 (MP.) had concluded that where the CIT finds that the Assessing Officer had not initiated penalty proceedings under Section 271(1)(c) of the Act in the assessment order, he cannot direct the Assessing Officer to initiate penalty proceedings under Section 271(1)(c) of the Act in exercise of revisional power under Section 263 of the Act. The relevant observations recorded therein read thus:-

  • "9. Now adverting to the second limb, it may be noticed that the Delhi High Court in judgment reported in Addl. CIT vs. J.K.D.'Costa (1981) 25 CTR (Del) 224 : (1982) 133 ITR 7 (Del) has held that the CIT cannot pass an order under s. 263 of the Act pertaining to imposition of penalty where the assessment order under s. 143(3) is silent in that respect. The relevant observations recorded are:
  • "It is well established that proceedings for the levy of a penalty whether under s. 271(1)(a) or under s. 273(b) are proceedings independent of and separate from the assessment proceedings. Though the expression "assessment" is used in the Act with different meanings in different contexts, so far as s. 263 is concerned, it refers to a particular proceeding that is being considered by the Commissioner and it is not possible when the Commissioner is dealing with the assessment proceedings and the assessment order to expand the scope of these proceedings and to view the penalty proceedings also as part of the proceedings which are being sought to be revised by the Commissioner. There is no identity between the assessment proceedings and the penalty proceedings; the latter are separate proceedings, that may, in some cases, follow as a consequence of the assessment proceedings. As the Tribunal has pointed out, though it is usual for the ITO to record in the assessment order that penalty proceedings are being initiated, this is more a matter of convenience than of legal requirement. All that the law requires, so far as the penalty proceedings are concerned, is that they should be initiated in the court of the proceedings for assessment. It is sufficient if there is some record somewhere, even apart from the assessment order itself, that the ITO has recorded his satisfaction that the assessed is guilty of concealment or other default for which penalty action is called for. Indeed, in certain cases it is possible for the ITO to issue a penalty notice or initiate penalty proceedings even long before the assessment is completed though the actual penalty order cannot be passed until the assessment finalised. We, therefore, agree with the view taken by the Tribunal that the penalty proceedings do not form part of the assessment proceedings and that the failure of the ITO to record in the assessment order his satisfaction or the lack of it in regard to the leviability of penalty cannot be said to be a factor vitiating the assessment order in any respect. An assessment cannot be said to be erroneous or prejudicial to the interest of the revenue because of the failure of the ITO to record his opinion about the leviability of penalty in the case."
  • 10. Special leave petition against the said decision was dismissed by the Apex Court ((1984) 147 ITR (St) 1. The same view was reiterated by the Delhi High Court in CIT vs. Sudershan Talkies (1993) 112 CTR (Del) 165 : (1993) 201 ITR 289 (Del) and followed in CIT vs. Nihal Chand Rekyan (1999) 156 CTR (Del) 59 : (2000) 242 ITR 45 (Del). The Rajasthan High Court in CIT vs. Keshrimal Parasmal [1985] 48 CTR (Raj) 61 : [1986] 157 ITR 484 (Raj), Gauhati High Court in Surendra Prasad Singh & Ors. vs. CIT (1988) 71 CTR (Gau) 125 : (1988) 173 ITR 510 (Gau) and Calcutta High Court in CIT vs. Linotype & Machinery Ltd. (1991) 192 ITR 337 (Cal) have followed the judgment of Delhi High Court in J.K.D's Costa's case (supra).
  • 11. However, Madhya Pradesh High Court in Addl. CIT vs. Indian Pharmaceuticals (1980) 123 ITR 874 (MP) which has been followed by the same High Court in Addl. CIT vs. Kantilal Jain (1980) 125 ITR 373 (MP) and Addl. CWT vs. Nathoolal Balaram (1980) 125 ITR 596 (MP) has adopted diametrically opposite approach.
  • 12. We are in agreement with the view taken by the High Courts of Delhi, Rajasthan, Calcutta and Gauhati, and express our inability to subscribe to the view of Madhya Pradesh High Court.
  • 13. Accordingly, it is held that the initiation of proceedings under s. 263 was not justified. The Tribunal was right in holding that after examining the record of the assessment in exercise of powers under s. 263, where the CIT finds that the AO had not initiated penalty proceedings, he cannot direct the AO to initiate penalty proceedings under s. 271(1)(c) of the Act."

    • 7. In view of the above, equally we are unable to subscribe to the view adopted by Allahabad High Court in Surendra Prasad Aggarwal's case (supra) where judgment of Madhya Pradesh High Court in Indian Pharmaceuticals' case (supra) noticed hereinbefore has been concurred with.

    8. Accordingly, it is held that the initiation of proceedings under Section 263 of the Act was not justified and we uphold the order of the Tribunal cancelling the revisional order passed by the CIT.

    9. Consequently, the appeal is dismissed.

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    Comments

    Commissioner of Income-tax (Central), Ludhiana v. Rakesh Nain Trivedi
    (Oct 29, 2015)