2010 (3) TMI 1235 - AT - Income Tax

Appellate Tribunal cancels penalty under Income Tax Act citing lack of satisfaction by CIT(A)

The Appellate Tribunal canceled the penalty imposed on the assessee under section 271(1)(c) of the Income Tax Act due to the lack of satisfaction recorded ... - ISSUES PRESENTED AND CONSIDERED 1. Whether imposition of penalty under section 271(1)(c) is valid where the appellate authority (CIT(A)) has not recorded a satisfaction, or a satisfaction discernible from its order, that the assessee concealed particulars of income or furnished inaccurate particulars thereof. 2. Whether insertion of section 271(1B) (with retrospective effect from 1 April 1989) operates to cure the absence of a recorded satisfaction by the CIT(A) where the enhancement of income was made by the CIT(A), i.e., whether the deemed satisfaction of the Assessing Officer (AO) under s.271(1B) can be read to include satisfaction of the CIT(A). 3. Whether the Tribunal's earlier order holding the penalty unsustainable for want of requisite satisfaction amounts to a mistake apparent from the record which can be corrected in light of s.271(1B). ISSUE-WISE DETAILED ANALYSIS Issue 1: Requirement of satisfaction by CIT(A) for imposition of penalty under s.271(1)(c) Legal framework: Section 271(1) opens with the condition 'If the CIT(A), in the course of any proceedings under this Act, is satisfied that any person...' and clause (c) authorises penalty where a person has concealed particulars of income or furnished inaccurate particulars of such income. Precedent Treatment: The Tribunal relied on established authorities holding that the satisfaction required for imposition of penalty by an appellate authority must be recorded or at least be discernible from the appellate order; absence of such satisfaction vitiates the penalty. (Tribunal decisions and higher court rulings were cited in support of this position.) Interpretation and reasoning: The language of s.271(1) makes satisfaction by the CIT(A) a precondition to directing penalty in appellate proceedings. The satisfaction must relate specifically to concealment or furnishing of inaccurate particulars. Even if the authority is not required to use formulaic words, the order must disclose a satisfaction that can reasonably be inferred; mere initiation of separate penalty proceedings without recorded or discernible satisfaction is insufficient. In the present facts, the CIT(A)'s order effecting enhancement did not record or disclose the requisite satisfaction as to concealment or inaccuracy in particulars. Ratio vs. Obiter: Ratio - where penalty is imposed by an appellate authority under s.271(1)(c), the appellate authority must record or manifest the requisite satisfaction in its order; absence thereof renders the penalty unsustainable. Observational/illustrative references to authorities are supportive rather than constituting obiter. Conclusion: The imposition of penalty by the appellate authority in the absence of recorded/discernible satisfaction under s.271(1)(c) is invalid; the penalty is liable to be cancelled on this ground. Issue 2: Effect of s.271(1B) (retrospective) and whether it cures absence of CIT(A)'s satisfaction by deeming AO's satisfaction to suffice Legal framework: Section 271(1B) deems that where any amount is added or disallowed in an order of assessment or reassessment and that order contains a direction for initiation of penalty proceedings under cl. (c) of sub-s. (1), that order shall be deemed to constitute satisfaction of the AO for initiation of penalty proceedings under that clause. Precedent Treatment: No precedent was held to alter the statutory distinction between 'AO' and 'CIT(A)'; statutory definitions (s.2(7) defining AO) and settled principles of statutory construction were applied. Interpretation and reasoning: The section expressly refers to satisfaction of the AO and does not mention CIT(A). The statutory definition of AO does not include CIT(A). Had the legislature intended to equate or include CIT(A) within the meaning of AO for this purpose, it would have done so expressly. It is a basic rule of statutory construction that clear and unambiguous language must be given effect to; courts cannot read into a statute an omission not made by the legislature. Practically, where enhancement arises in appellate proceedings, the AO may have no concern with the enhanced quantum made by the appellate authority; it is therefore illogical to treat the AO's satisfaction as satisfying the requirement for imposition of penalty based on enhancement made by CIT(A). The retrospective insertion of s.271(1B) therefore does not retroactively validate an absence of satisfaction by the CIT(A) when the penalty was to relate to income enhanced by the CIT(A). Ratio vs. Obiter: Ratio - s.271(1B) cannot be interpreted to supply or substitute the satisfaction required to be recorded by the CIT(A) under s.271(1)(c); the deeming provision applies only to the AO's satisfaction in assessment or reassessment orders and does not obviate the requirement of satisfaction by the appellate authority where the appellate authority effects enhancement and initiates penalty. Conclusion: The retrospective insertion of s.271(1B) does not affect or cure the infirmity in an order of the CIT(A) which lacks the requisite recorded/discernible satisfaction; s.271(1B) does not include CIT(A) within 'AO' and thus does not render the Tribunal's conclusion erroneous. Issue 3: Whether the Tribunal's order was a mistake apparent from the record requiring rectification in light of s.271(1B) Legal framework: Principles governing correction of mistakes apparent from the record require that any alleged mistake be plain and demonstrable on the face of the record; relief cannot be granted by re-writing or re-interpreting clear statutory language. Precedent Treatment: The Tribunal applied the statutory text and settled rules of construction; no prior authority was shown that s.271(1B) retroactively validates an appellate authority's failure to record satisfaction. Interpretation and reasoning: The Department's contention that the Tribunal's earlier conclusion is a mistake apparent from the record depends on reading s.271(1B) as covering satisfaction required of the CIT(A). Given the clear statutory distinction and absence of language to that effect, there is no patent error of law or fact on the face of the Tribunal's order that can be corrected by treating s.271(1B) as applicable. The Tribunal's earlier finding that the CIT(A) had not recorded/disclosed requisite satisfaction remains sound and unimpeached by the retrospective amendment. Ratio vs. Obiter: Ratio - the Tribunal correctly refused to treat its prior order as containing a mistake apparent from the record; statutory amendment cannot be used to alter the legal reasoning where the amendment does not, by its terms, apply to the omitted requirement. Conclusion: There is no mistake apparent from the record in the Tribunal's order; the Department's application seeking rectification in reliance on s.271(1B) is without merit and is properly dismissed. Cross-References See Issue 1 for the requirement of recorded or discernible satisfaction by the appellate authority; see Issue 2 for limits of s.271(1B) and the statutory distinction between AO and CIT(A); conclusions on Issues 1-3 are interdependent and collectively uphold cancellation of the penalty for want of requisite satisfaction by the CIT(A) and rejection of the Department's rectification application.