Why did Bombay HC not uphold tax officer's penalty order?

Facts of the case:

1. Assessee filed return with his jurisdictional A.O
2. The case was selected for scrutiny assessment. After completion of assessment, penalty proceedings were initiated against the assessee.
3. Post launching of penalty proceedings, the case was transferred from Bombay jurisdiction to Nagpur jurisdiction at the order of CBDT.
4. Nagpur, A.O passed the penalty order without offering an opportunity of being heard.

Issue Involved:

1. Whether decision of Nagpur, A.O to pass penalty order without offering sufficient opportunity of being heard just and reasonable?

Provisions:

1. Section 129 deals with change of incumbent of an office:
2. "Whenever in respect of any proceeding under this Act an income-tax authority ceases to exercise jurisdiction and is succeeded by another who has and exercises jurisdiction, the income-tax authority so succeeding may continue the proceeding from the stage at which the proceeding was left by his predecessor.
3. Provided that the assessee concerned may demand that before the proceeding is so continued the previous proceeding or any part thereof be reopened or that before any order of assessment is passed against him, he be reheard."

Revenue Contention:

The new A.O is not bound to intimate to the assessee regarding change in office since the word used in Section 129 is “may”. It is not duty of new A.O to inform the assessee. The new A.O can continue the proceedings from the stage at which they were left by the previous officer.

Bombay HC Pronouncement:

1. The word used “may” is for the option of A.O to start proceedings fresh or to continue with existing provisions. The word “may" has no implication with respect to the assessee’s right of being heard. The successor authority has no authority to pass an order of penalty without giving the assessee a fresh opportunity of being heard.
2. Reliance was also placed by the Hon’ble HC to the case of Anantha Naganna Chetty. In this case also it was held that new A.O has to first provide an opportunity of being heard to the assessee before finalising of assessment.

Essence of Above:

It is necessary that the successor intimates to the assessee before passing of the order about his intention to continue the proceedings from the stage at which they were left by his predecessor.