1981 (4) TMI 68 - HC - Income Tax

Penalty proceedings under ss.271(1)(a) and 273(b) are independent of assessment for s.263; interest to be decided afresh

HC held that penalty proceedings under ss.271(1)(a) and 273(b) are independent of assessment proceedings and do not form part of the assessment for ... Jurisdiction of the Commissioner u/s 263 - levy of interest - penalty proceedings for both the assessment years u/s 271(1)(a) and u/s 273(b) - erroneous and prejudicial to the interest of the revenue - HELD THAT:- 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 course 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 assessee 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 is 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 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. We, therefore, answer the first question referred to us in the affirmative and in favour of the assessee. In the present case, having come to the conclusion that there was a defect in the assessment order in so far as the question of levy of interest was not considered by the ITO, all that the Commissioner had to do was to direct the ITO to consider the question on merits and in accordance with law after giving the assessee an opportunity of being heard. It was not further necessary for him, nor did the circumstances of the case justify, that the whole assessment should be set aside. We need hardly point out that the setting aside of assessment wholesale will have far-reaching consequences under the Act and that the jurisdiction under s. 263 should not be extended so as to result in such far-reaching consequences except where the circumstances call for such a remedial action. We, therefore, also answer the second question in the affirmative and in favour of the assessee. As the assessee has succeeded, he will be entitled to costs. Issues involved: The judgment involves issues related to the jurisdiction of the Commissioner u/s 263 of the Income Tax Act, 1961, regarding the revision of assessment orders, specifically focusing on the levy of interest and penalty proceedings.Details of the Judgment:Levy of Interest:The Additional Commissioner found the assessment orders for the years 1965-66 and 1966-67 to be erroneous and prejudicial to the revenue due to the ITO's failure to charge interest u/s 139(1) and u/s 217. The Tribunal upheld the Commissioner's authority to direct the levy of interest, considering it an integral part of the assessment proceedings. The Tribunal's decision on this aspect was not challenged by the assessee, and the High Court concurred with the Tribunal's view.Penalty Proceedings:The Tribunal held that the Commissioner's jurisdiction u/s 263 does not extend to giving directions on penalty proceedings u/s 271(1)(a) and 273(b) as they are separate from assessment proceedings. The High Court agreed with the Tribunal, emphasizing the independence of penalty proceedings from assessment proceedings. The failure of the ITO to mention penalty proceedings in the assessment order does not render the assessment erroneous. The High Court answered the first question in favor of the assessee.Setting Aside Assessments:The Commissioner's decision to set aside the entire assessment orders for the years 1965-66 and 1966-67 was challenged. The Tribunal and the High Court agreed that setting aside assessments entirely should only occur when there are fundamental flaws that cannot be rectified by amending the assessment order. In this case, the High Court found that the failure to consider the levy of interest did not warrant setting aside the entire assessment. The High Court answered the second question in favor of the assessee, emphasizing that the Commissioner's power under u/s 263 should be exercised judiciously.In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee on both questions. The Commissioner's authority to direct the levy of interest was affirmed, while limitations were set on the extent to which assessments can be set aside under u/s 263, emphasizing the need for proportionate actions based on the circumstances of each case.