2010 (4) TMI 1157 - AT - Income Tax

ITAT sets aside assessment under section 144, penalties deleted, matter remitted for fresh assessment.

M/s. Worldwide Software (Exports), Versus Income-tax Officer, Ward 18 (2) (3), Mumbai

The ITAT set aside the assessment made under section 144, remitting the matter back to the AO for a fresh assessment. The penalty imposed under section ... - ISSUES PRESENTED AND CONSIDERED 1. Whether an assessment completed under section 144 of the Act is sustainable where the assessee did not appear before the Assessing Officer in response to notices, but there existed reasonable cause for non-appearance arising from concurrent scrutiny proceedings and other factual circumstances? 2. Whether the first appellate authority (CIT(A)) was justified in refusing to admit additional evidence where the assessee sought to rely on such evidence after assessment under section 144? 3. Whether penalty under section 271(1)(b) for non-compliance with notices can be sustained where reasonable cause for non-compliance is found and section 273B may have overriding effect? 4. Whether penalty under section 271(1)(c) imposed consequent to additions made in an assessment that is subsequently set aside must also be upheld, or whether the penalty must be reviewed in light of a fresh assessment? ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of assessment under section 144 where assessee failed to appear but claimed reasonable cause Legal framework: Section 144 permits the Assessing Officer to make best judgment assessment where an assessee fails to comply with notice or to produce evidence; principles of natural justice require reasonable opportunity of hearing; appellate forum may remit for de novo assessment where non-appearance is shown to have a reasonable cause. Precedent treatment: The Tribunal applied established principles that assessments made under section 144 are open to being set aside/remitted if sufficient cause for non-compliance exists; prior judicial authority was treated as supportive of the proposition that factual circumstances can constitute sufficient cause. Interpretation and reasoning: The Tribunal examined the chronology and found concurrent scrutiny proceedings for an earlier year and the fact of receipt of a later notice by a now-deceased clerk. On these facts the Tribunal held that the assessee had reasonable cause for not appearing/complying in time. The Tribunal emphasized that where reasonable cause exists, completing an assessment under section 144 without granting a proper opportunity is not justified and a fresh assessment with opportunity should be ordered. Ratio vs. Obiter: Ratio - where factual circumstances establish reasonable cause for non-appearance (e.g., pending scrutiny for another year, administrative mishaps), an assessment under section 144 should be set aside and matter remitted for de novo assessment with fair opportunity. Obiter - none necessary beyond application of these facts to the principle. Conclusion: The impugned section 144 assessment was set aside and the matter remitted to the Assessing Officer for fresh assessment after granting a reasonable opportunity to the assessee, with liberty to lead new evidence. Issue 2: Refusal by CIT(A) to admit additional evidence post-assessment Legal framework: Appellate authorities may admit additional evidence if sufficient cause is shown for its non-production before the AO; discretion must be exercised after considering reasons for late filing and whether failure prejudiced the process; refusal without adequate consideration of reasonable cause may be revisited on appeal. Precedent treatment: The Tribunal contrasted the appellate authority's exercise of discretion with the factual finding of reasonable cause for non-appearance at assessment proceedings, indicating that the appellate refusal needed to be viewed in that factual context. Interpretation and reasoning: The CIT(A) refused to admit additional evidence on grounds of no sufficient cause; the Tribunal found, on the record, that the assessee had reasonable cause (overlap with other scrutiny proceedings and receipt of later notice by deceased clerk). Given those facts, the Tribunal concluded that the appellate authority's refusal to entertain new evidence was not sustainable and that in fresh proceedings the assessee should be permitted to lead evidence. Ratio vs. Obiter: Ratio - where the appellate authority refuses to admit evidence, such refusal must be reassessed if the record demonstrates reasonable cause for non-production before the AO; fresh proceedings should permit submission of such evidence. Obiter - procedural specifics of what constitutes sufficient cause in other contexts were not exhaustively delineated. Conclusion: The appellate refusal was effectively set aside by remitting assessment for de novo proceedings, with express liberty to the assessee to lead new evidence. Issue 3: Sustainability of penalty under section 271(1)(b) for non-compliance with notices where reasonable cause exists and section 273B applies Legal framework: Section 271(1)(b) penalizes failure to comply with notices; section 273B (saving provision) operates to relieve penalty where there is reasonable cause for default or compliance is within specified terms, and it has overriding effect in applicable circumstances. Precedent treatment: The Tribunal relied on statutory scheme and the principle that section 273B may override imposition of penalty under section 271(1)(b) where reasonable cause is established; the earlier finding of reasonable cause in assessment proceedings was applied to penalty review. Interpretation and reasoning: Given the Tribunal's finding of reasonable cause for non-compliance with notices (see Issue 1), the Tribunal concluded that the penal consequence under section 271(1)(b) could not be sustained in light of the provisions of section 273B, which would operate to preclude penalty where reasonable cause is present. The Tribunal therefore ordered deletion of the penalty. Ratio vs. Obiter: Ratio - where reasonable cause for non-compliance with notices is established, section 273B precludes sustaining penalty under section 271(1)(b); such penalty must be deleted. Obiter - none material beyond application of statutory override. Conclusion: The penalty under section 271(1)(b) imposed for non-compliance with notices was deleted in view of established reasonable cause and the operation of section 273B. Issue 4: Effect of setting aside an assessment on penalty under section 271(1)(c) imposed in consequence of that assessment Legal framework: Section 271(1)(c) penalizes concealment or furnishing inaccurate particulars of income; penalties imposed consequent to quantification in assessment proceedings are dependent on the finality of those additions; where an assessment is set aside and remitted, associated penalties require re-consideration in light of fresh adjudication. Precedent treatment: The Tribunal referred to apex court precedent (treated as authoritative) establishing that where the quantum assessment is set aside, penal consequences flowing directly from that assessment cannot survive unchanged and must be reconsidered after fresh assessment. Interpretation and reasoning: Because the Tribunal set aside the section 144 assessment and remitted the matter for de novo assessment, it held that any penalty imposed pursuant to the vacated additions could not be sustained. The Tribunal ordered that the matter be restored to the file of the Assessing Officer to consider imposition of penalty afresh, if at all warranted, after the fresh assessment. Ratio vs. Obiter: Ratio - penalty under section 271(1)(c) imposed as a direct consequence of additions upheld in an assessment that is subsequently set aside must be reconsidered; such penalty cannot be sustained without fresh adjudication. Obiter - procedural modalities for re-imposition (e.g., show-cause, evidence) were not exhaustively specified beyond remand. Conclusion: The section 271(1)(c) penalty was set aside for statistical purposes, and the matter was restored to the Assessing Officer for reconsideration of penalty, if appropriate, after completion of the fresh assessment. Cross-reference: see Issue 1 (remand for de novo assessment) and Issue 2 (admission of fresh evidence).