2010 (4) TMI 208 - HC - Income Tax

High Court upholds Revenue's penalty imposition under Income Tax Act, remands case for review

The High Court ruled in favor of the Revenue, setting aside the Tribunal's decision to delete the penalty imposed under Section 158BFA(2) of the Income ... Block Assessment – penalty - The assessee filed a return for the block period from 1st April 1988 to 22nd December 1998 and declared an undisclosed income of Rs.65 lakhs. The assessment was completed under Section 158BC and the Assessing Officer accepted the returned income. - Penalty proceedings were initiated under Section 158BFA(2) - The Assessing Officer imposed a penalty in the amount of Rs.42.90 lakhs - While holding that the assessee had not complied with the conditions stipulated in the first proviso to Section 158BFA(2), the Assessing Officer held that since the assessee had preferred an appeal against the assessment of income which was shown for the block period, she had not fulfilled the fourth condition laid down in the first proviso to Section 158 BFA(2). On the basis of this, the Assessing Officer held that the assessee was liable to be penalized and proceeded to impose the penalty. – Held that: it is an admitted position before the Court that the assessee filed an appeal to the Commissioner (Appeals) against the order of block assessment on the ground that the rate of tax payable in respect of capital gains was not 60%, but 20%. As a result of the filing of the appeal, the assessee failed to comply with clause (iv) of the first proviso to Section 158BFA(2). As a result, the assessee was not entitled to the benefit of the prohibitory provision contained in subsection (2) of Section 158BFA. – Order of ITAT set aside – penalty confirmed. Issues:1. Interpretation of Section 158BFA(2) of the Income Tax Act, 1961 regarding penalty imposition.2. Whether an appeal against the rate of tax falls within the ambit of clause (iv) of the first proviso to Section 158BFA(2).3. Discretionary power of the Assessing Officer or Commissioner (Appeals) in imposing a penalty.Issue 1: Interpretation of Section 158BFA(2) regarding penalty impositionThe case involved an appeal by the Revenue under Section 260A of the Income Tax Act, 1961, arising from an order of the Income Tax Appellate Tribunal related to the block period of 1st April 1988 to 22nd December 1998. The primary issue was whether the Tribunal was correct in deleting the penalty imposed under Section 158BFA(2) of the Act. The Assessing Officer had imposed a penalty of Rs.42.90 lakhs on the assessee for undisclosed income of Rs.65 lakhs. The Tribunal held that the assessee's appeal against the rate of tax did not breach clause (iv) of the first proviso to Section 158BFA(2), thus setting aside the penalty. However, the High Court disagreed, stating that an appeal against the rate of tax did fall within the ambit of clause (iv) of the first proviso, rendering the penalty valid. The Court clarified that the imposition of a penalty was discretionary, but certain conditions must be met to prohibit such imposition.Issue 2: Appeal against the rate of tax under clause (iv) of the first provisoThe crux of the matter was whether an appeal against the rate of tax could be considered as an appeal against the assessment of income shown in the return, as per clause (iv) of the first proviso to Section 158BFA(2). The assessee had filed an appeal contesting the rate of tax imposed by the Assessing Officer, arguing for a lower rate. The Tribunal held that such an appeal did not breach the clause. However, the High Court opined that an appeal against the rate of tax did indeed fall within the purview of clause (iv), as it challenged an aspect of the income assessment shown in the return. Consequently, the Court concluded that the assessee's appeal against the rate of tax invalidated the protective provision against penalty imposition.Issue 3: Discretionary power in imposing a penaltyThe High Court emphasized that the imposition of a penalty under Section 158BFA(2) was discretionary, not mandatory. The provision allows the Assessing Officer or Commissioner (Appeals) to direct the payment of a penalty, subject to certain conditions outlined in the first proviso. The Court highlighted that the conditions, including not filing an appeal against the assessed income, must be met to prevent penalty imposition. In this case, the failure to comply with clause (iv) of the first proviso rendered the assessee ineligible for protection against penalty, reinforcing the discretionary nature of penalty imposition.In conclusion, the High Court ruled in favor of the Revenue, setting aside the Tribunal's decision to delete the penalty imposed under Section 158BFA(2). The Court clarified that the appeal against the rate of tax breached the conditions of the first proviso, thus allowing for reconsideration of the penalty imposition by the Tribunal. The case was remanded for further proceedings, emphasizing the discretionary power in imposing penalties and the importance of complying with statutory conditions to avoid penalties under the Income Tax Act, 1961.