Penalty under 271E requires AO satisfaction in the assessment order; revision cannot initiate penalty without such recorded satisfaction

The note addresses initiation of penalty under the Act for repayments not made by prescribed modes, holding that initiation requires the assessing officer's recorded satisfaction in the assessment order; absence of such satisfaction precludes initiation of penalty proceedings and the Commissioner cannot direct initiation on revision under section 263 in those circumstances. The impugned direction to initiate penalty without AO satisfaction was set aside and the assessee's appeal allowed, reaffirming the separation between assessment satisfaction and subsequent penalty initiation and limiting revisionary power to direct such initiation.

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Issues: (i) Whether the assessment order dated 31.08.2022 is erroneous and prejudicial to the interest of revenue for failure to initiate penalty proceedings under section 271E for alleged violation of section 269T; (ii) Whether the Principal Commissioner of Income Tax could, in exercise of powers under section 263, direct initiation of penalty proceedings under section 271E in absence of satisfaction recorded by the Assessing Officer.

Issue (i): Whether the assessment order is erroneous and prejudicial for not initiating penalty u/s 271E for alleged violation of section 269T.

Analysis: The assessment record and tax audit report (Form 3CD) reported a repayment of Rs.11,00,000 otherwise than by permitted banking modes, which on its face indicated contravention of section 269T. The revisioning authority placed reliance on the tax audit report to conclude violation of section 269T and attraction of penalty under section 271E. Counterclaims that the entry was an adjustment of security deposit and a mere book entry were not shown to have been corrected by obtaining a revised audit report or certificate from the auditor.

Conclusion: The facts as reported in Form 3CD could not be treated as conclusively corrected at the revision stage; however, this finding alone does not sustain direction for initiation of penalty absent the requirement in law addressed in Issue (ii).

Issue (ii): Whether the revisionary authority could direct initiation of penalty u/s 271E under section 263 without satisfaction recorded by the Assessing Officer.

Analysis: Established authorities require recording of satisfaction before initiation of certain penalty proceedings and the Supreme Court has held that initiation/levy of penalty under provisions pari materia cannot be sustained without such satisfaction in the assessment order. The impugned order directed initiation of penalty u/s 271E despite absence of any recorded satisfaction by the Assessing Officer in the assessment order. The revisionary direction to initiate separate penal proceedings in absence of AO's satisfaction was held inconsistent with the legal requirement applicable to initiation of penalty under section 271E.

Conclusion: The direction to the Assessing Officer to initiate penalty proceedings u/s 271E in the absence of satisfaction recorded by the AO is not sustainable; the revisionary order is set aside.

Final Conclusion: The appeal is allowed and the order passed under section 263 is set aside, resulting in quashing of the direction to initiate penalty proceedings under section 271E in absence of AO's recorded satisfaction.

Ratio Decidendi: Initiation or levy of penalty under section 271E cannot be directed or sustained in exercise of revisionary powers under section 263 where the Assessing Officer has not recorded the requisite satisfaction in the assessment order for initiation of such penalty.

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