No penalty under Section 271B when AO fails to record satisfaction in assessment order

Case Name**: Commissioner of Income Tax vs. E.C.C. Project Pvt. Ltd. **Key Takeaways**: 1. An AO must record their satisfaction in the assessment order before initiating penalty proceedings. 2. Penalty provisions are penal in nature and must be strictly construed. 3. The court can't assume satisfaction just because penalty proceedings were initiated. 4. The assessment order must explicitly mention the intention to levy a penalty. **Issue**: The central question here is: Can a penalty under Section 271B of the Income Tax Act be levied when the Assessing Officer fails to record their satisfaction in the assessment order? **Facts**: Alright, let's break this down. The assessee (E.C.C. Project Pvt. Ltd.) filed their tax return for the assessment year 1987-88. The AO found that the audit report under Section 44AB wasn't obtained on time, so they slapped a penalty of Rs. 1,00,000 under Section 271B. The Commissioner of Income Tax (Appeals) upheld this penalty, but the ITAT cancelled it. The department wasn't happy with this, so they appealed to the High Court. **Arguments**: The department argued that: 1. The assessee had a habit of not complying with mandatory provisions. 2. They had filed belated tax audit reports in earlier years too. 3. Extensions were granted, but the assessee still didn't file on time. The assessee's counsel argued that: 1. The revenue didn't refer to any proceedings during which the penalty could be initiated. 2. There was no mention of penalty in the assessment order. **Key Legal Precedents**: The court relied on several important cases: 1. C.I.T. vs. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568: This case established that the AO must arrive at satisfaction during assessment proceedings before initiating penalty proceedings. 2. C.I.T. vs. Auto Lamps Ltd. (2005) 278 ITR 32: This case emphasized that initiating penalty proceedings without mentioning essential ingredients is a violation of relevant provisions. 3. C.I.T. vs. Vikas Promoters P. Ltd. (205) 277 ITR 337: This case held that it's mandatory for the AO to record satisfaction before levying a penalty under Section 143(3). 4. Karanveer Singh Ghoshal vs. C.I.T. 349 ITR 692 SC and Nainu Mal vs. C.I.T. 294 ITR 185 Alld: These cases also supported the view that satisfaction must be recorded. **Judgement**: The court dismissed the department's appeal, agreeing with the ITAT's decision to cancel the penalty. They emphasized that no penalty is leviable under Section 271B when the AO fails to record satisfaction in the assessment order. The court noted that there wasn't even a whisper about penalty in the assessment order. **FAQs**: Q1: What's the main takeaway from this judgment? A1: The main takeaway is that an Assessing Officer must clearly record their satisfaction in the assessment order before initiating penalty proceedings under Section 271B. Q2: Does this mean penalties can never be imposed for late filing of audit reports? A2: Not necessarily. Penalties can still be imposed, but the AO must follow proper procedure, including recording their satisfaction in the assessment order. Q3: Why is recording satisfaction in the assessment order so important? A3: It's crucial because penalty provisions are penal in nature and must be strictly construed. Recording satisfaction ensures that the AO has applied their mind to the case before initiating penalty proceedings. Q4: Can the court assume that the AO was satisfied just because they initiated penalty proceedings? A4: No, the court made it clear that mere initiation of penalty proceedings doesn't imply that the AO was satisfied. The satisfaction must be explicitly recorded in the assessment order. Q5: Does this judgment apply to all types of penalties under the Income Tax Act? A5: While this specific case dealt with Section 271B, the principles discussed could potentially apply to other penalty provisions as well. However, it's always best to consult a tax professional for specific situations.

The present appeal is filed by the department against the order dated 20.08.1999, passed by the Income Tax Appellate Tribunal, Allahabad in I.T.A. No.403(Alld.) for the assessment year 1987-88 where the penalty of Rs. 1,00,000/- imposed under Section-271-B was cancelled.

The appeal was admitted on the following substantial questions of law:-

(a) Whether on facts and in the circumstances of the case the Income Tax Appellate Tribunal was legally correct in holding that the Assessing Officer was not justified in initiating the proceedings for imposition of penalty under section 271B of the Income Tax Act at a time when no assessment proceedings or any other proceedings were pending?

(b) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was legally correct in cancelling the penalty of Rs. 1,00,000/- (Rupees One Lakh only) imposed on the assessee under section 271B of the Income Tax Act, 1961 by the Assessing Officer and confirmed in the first appeal by the Commissioner of Income Tax (Appeals)?

(c) Whether having regard to the fact that section 271B of the Income Tax Act, 1961 or any other provision of the Income Tax Act, 1961 no where prescribes a limitation for the initiation of penalty proceedings under section 271B of the Income Tax Act, 1961 and no where provides that the penalty proceedings under section 271B of the Income Tax Act, 1961 should be initiated during the course of assessment proceedings or any other proceedings under the Income Tax Act, 1961, the Income Tax appellate Tribunal was legally correct in taking a view to the contrary and in cancelling the penalty under section 271B of the Income Tax Act, 1961 imposed by the Assessing Officer and confirmed in the first appeal by the Commissioner of Income Tax Act (Appeals)?

The brief facts of the case are that for the assessment year under consideration, the assessee had filed its return. The A.O. found that the audit report under Section 44AB was not obtained well on time so he levied the penalty which was upheld by the First Appellate Authority. However, the Tribunal has cancelled the penalty. Not being satisfied the department has filed the present appeal.

With this background, heard Sri Shambhu Chopra, learned counsel for the appellant-department. He submits that time to time extension was granted for filing the return alongwith the tax audit report, but it was not filed well in time.

In earlier assessment year, the assessee has filed the belated tax audit report alongwith return. The assessee is in the habit of not complying with the mandatory provision of law.

However, on specific query from the Bench, he admits that there was no whisper about the levy of the penalty in the assessment order. The assessment order is silent as already observed by the Tribunal in para-8 of its order. On the other hand, Sri Ashish Bansal, learned counsel for the assessee has justified the impugned order. He submits that since the revenue has not referred to any proceedings during which the penalty proceeding can be started and therefore penalty cannot be levied.

We have heard both the parties at length and also gone through the materials available on record. In the case of C.I.T. Vs. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 it was observed 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 proceedings is not conferred on the assessing authority by reference to clause (c) of sub-section (1) of section 271 of the Income-tax Act, 1961.

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 who has to form his own opinion and record his 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.”

Further in the case of C.I.T. vs. Auto Lamps Ltd. (2005) 278 ITR 32, it was observed that:-

“without even mentioning the essential ingredients which the Assessing Officer is obliged to record for initiation of penalty proceedings, the order was passed to initiate penalty proceedings in a routine manner, an apparent violation of the relevant provisions. The Assessing Officer failed to record the requisite satisfaction in consonance with the settled principles of law. Therefore, the order suffered from the infirmity of non-application of mind. The Commissioner (Appeals) and the Tribunal had rightly deleted the penalty. No question of law arose for consideration of the court.”

Moreover, in the case of C.I.T. Vs. Vikas Promoters P. Ltd. (205) 277 ITR 337, it was observed that:-

“ It is mandatory for the Assessing Officer to record satisfaction before drawing an inference for the purpose of levying penalty while completing the assessment under section 143(3) of the Income-tax Act, 1961. The provisions of section 271(1) (c) are penal in nature, thus must be strictly construed, and the element of satisfaction should be apparent from the order itself. It is not for the courts to go into the mind of the authorities or trace the reasons from the file of such authorities.

Similar views were expressed in the following cases:-

(i) Karanveer Singh Ghoshal Vs. C.I.T. 349 ITR 692 SC; and

(ii)Nainu Mal Vs. C.I.T. 294 ITR 185 Alld.

In view of above, well settled legal position, we are of the view that in the instant case, no penalty is levyable under section-271B of the Act when A.O. failed to record its satisfaction in the assessment order pertaining to it. There is no whisper in the assessment order regarding the levy of the penalty. When it so then we find no reason to interfere with the impugned order. The same is hereby sustained alongwith the reasons mentioned therein.

Answer to the substantial questions of law is in favour of the assessee and against the department.

In the result, the appeal filed by the department is dismissed.

Order Date :- 25.07.2014

(Dr. Satish Chandra,J.) (Tarun Agarwala,J.)