2024 (2) TMI 1582 - HC - Income Tax

Revision under Section 263 valid where AO's order dropping penalty proceedings prejudiced revenue; Section 271(1)(c) satisfied

HC held that revision under section 263 was valid where the AO's order dropping penalty proceedings prejudiced revenue. Section 263's phrase 'any order' ... Revision u/s 263 - as per CIT order of the AO dropping the penalty proceedings is erroneous and results in prejudice to the interest of the revenue - HELD THAT:- Section 263 employs the word ‘any order’ and ‘in any proceeding under the Act’ which was held to have a wide connotation. The ambit and sweep of Section 263 includes the orders of either dropping the proceedings or initiating any proceedings, which could be revised. Revising the order and dropping the proceedings of penalty, was upheld by the High Court. Even at that point of time, the petitioner did not have a case that the assessment order did not record the satisfaction regarding the initiation of penalty proceedings. The penalty proceedings were initiated and then dropped; which later order was revised under Section 263. As is evident from the order impugned in the appeal, the assessment order contained the following words ‘penalty under Section 271(1)(c) is being initiated for furnishing inaccurate particulars of the income and thereby concealment of income’(sic). The Tribunal, however, found that the specific heads under which the penalty was imposed was not referred to by the Assessing Officer, which is not necessary, even going by the decisions cited by the Tribunal. Penalty proceedings have been initiated based on the order of the Commissioner of Income Tax under Section 263, approved by this Court. There can be no contention taken regarding the prima facie satisfaction having not been recorded in the assessment order; which was never taken up earlier and which demonstrably was recorded in the assessment order. We find absolutely no reason to sustain the order of the Tribunal. The question of law is answered in favor of the revenue and against the assessee. We see that the First Appellate Authority had looked at the penalty order, on the quantum and interfered with the same. It is only proper that a factual adjudication is conducted by the Tribunal for which we remand the matter to the Tribunal. ISSUES PRESENTED AND CONSIDERED 1. Whether an order dropping penalty proceedings is revisable under Section 263 of the Income Tax Act as an 'order' in 'any proceeding' under the Act. 2. Whether prima facie satisfaction required to initiate penalty proceedings under Section 271(1)(c) must be recorded in a particular form or by reference to specific heads in the assessment order, and whether such satisfaction was recorded in the assessment order in the present case. 3. Whether the Tribunal misdirected itself in holding that no satisfaction for initiation of penalty proceedings was recorded in the assessment order, when (a) penalty proceedings had been initiated and later dropped by the Assessing Officer, and (b) that dropping was subsequently revised under Section 263. 4. Whether the matter should be remanded to the Tribunal for factual adjudication on the legality and quantum of penalty after the Court's conclusions on satisfaction and revisability. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Revisability under Section 263 of an order dropping penalty proceedings Legal framework: Section 263 empowers the Commissioner to revise 'any order' which is erroneous and prejudicial to the interests of revenue in 'any proceeding under the Act'. The power extends to revising orders passed in the course of assessment proceedings. Precedent Treatment: The Court followed earlier authoritative treatments which interpret the phrase 'any order' and 'in any proceeding' broadly to include orders dropping or initiating proceedings, not limited to final assessment orders. Interpretation and reasoning: The Court construed Section 263's language purposively and expansively, holding that an order by an Assessing Officer dropping penalty proceedings falls within the ambit of an 'order' in a 'proceeding' under the Act and thus is susceptible to revision. The Tribunal's contrary view was rejected as contrary to the statutory width of Section 263. Ratio vs. Obiter: Ratio - orders dropping penalty proceedings are revisable under Section 263 where they are found erroneous and prejudicial to revenue. This is a binding principle of decision in the present judgment. Conclusion: The Commissioner lawfully exercised revisional jurisdiction under Section 263 to restore penalty proceedings that had been dropped by the Assessing Officer. Issue 2 - Requirement and sufficiency of recording prima facie satisfaction for initiating penalty under Section 271(1)(c) Legal framework: Initiation of penalty proceedings under Section 271(1)(c) requires the Assessing Officer to arrive at a prima facie satisfaction during assessment that the assessee has concealed particulars of income or furnished inaccurate particulars. Precedent Treatment: The Court accepted precedent that the Assessing Officer need not record such satisfaction in any prescribed form, need not reduce it to a formal separate note, nor must specific charges or heads be recited verbatim in the assessment order; what is required is that satisfaction be discernible from the assessment record. Interpretation and reasoning: The assessment order in the present case contained explicit language that 'penalty under Section 271(1)(c) is being initiated for furnishing inaccurate particulars of the income and thereby concealment of income'. The Court found this sufficient to evidence prima facie satisfaction. Reliance was placed on authorities holding that specific, detailed allegations are not mandatory at the stage of recording prima facie satisfaction during assessment. Ratio vs. Obiter: Ratio - prima facie satisfaction need not be in a particular form or with detailed enumeration of heads; discernibility of satisfaction from the assessment order suffices to validate initiation of penalty proceedings. This is central to the decision. Conclusion: The Assessing Officer had recorded prima facie satisfaction in the assessment order sufficient to initiate penalty proceedings under Section 271(1)(c); absence of detailed specific heads did not invalidate that satisfaction. Issue 3 - Validity of Tribunal's finding that satisfaction was not recorded Legal framework: Tribunal's function is to examine legality and correctness of orders based on record and applicable law; it cannot ignore clear language in the assessment order indicating satisfaction for penalty initiation. Precedent Treatment: The Court relied on tribunal and high court authorities which permit satisfaction to be discerned from assessment records without formalistic requirements, and treated the Tribunal's contrary conclusion as misdirected. Interpretation and reasoning: The Court reviewed the assessment order wording and prior appellate history; it held that the Tribunal erred in concluding that satisfaction was not recorded. The fact that penalty proceedings were initiated, later dropped, and subsequently restored under Section 263 demonstrated that prima facie satisfaction had been recorded and acted upon. The Court noted no prior contention on this point at earlier stages and emphasized finality of appellate findings insofar as the record showed satisfaction. Ratio vs. Obiter: Ratio - Tribunal misdirected itself; where assessment order manifestly records prima facie satisfaction, the Tribunal cannot hold otherwise. This is a dispositive point of law in the judgment. Conclusion: The Tribunal's finding that no satisfaction was recorded was unsustainable; the Court answered the legal question in favour of the revenue and against the assessee on this point. Issue 4 - Remand for factual adjudication on penalty quantum and legality after legal conclusions on satisfaction and revisability Legal framework: Where legal issues are decided (e.g., revisability and existence of prima facie satisfaction) but factual determinations (quantum, applicability of penalty on facts) remain, the proper course is remand to the Tribunal for factual adjudication. Precedent Treatment: The Court followed the procedural principle that the Tribunal is the proper forum for detailed fact-finding and quantification after legal questions have been resolved by the Court. Interpretation and reasoning: Given the Court's findings that (a) satisfaction was recorded and (b) revisional action under Section 263 to restore proceedings was valid, the Court observed that the First Appellate Authority had interfered on quantum and that the Tribunal should now conduct factual adjudication on the legality and quantum of penalty. The Court therefore restored the appeal and cross-objection to the Tribunal and directed expeditious disposal within six months of parties' appearance. Ratio vs. Obiter: Ratio - remand for factual adjudication is appropriate where appellate court determines legal sufficiency but leaves factual penalty determinations to the Tribunal. This procedural directive is part of the operative decision. Conclusion: The matter is remitted to the Tribunal for factual consideration of the legality and quantum of penalty, to be decided expeditiously (six months from appearance), consistent with the Court's legal conclusions. Overall Disposition The Court allowed the appeal, held that (i) orders dropping penalty proceedings are revisable under Section 263, (ii) prima facie satisfaction for initiating penalty need not be recorded in a prescribed form and was adequately recorded in the assessment order, (iii) the Tribunal's contrary finding was a misdirection, and (iv) the matter is remitted to the Tribunal for factual adjudication on the penalty, to be completed within six months.