TaxTMI 
TaxTMI 
2005 (7) TMI 72
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....itiated revisional proceedings under section 263 of the Act on the ground that scrutiny of the assessment records showed that the Assessing Officer had failed to charge interest under section 139(8) of the Act and had also not taken steps to initiate penalty proceedings under section 271(1)(a) of the Act, there being unexplained delay in filing the return by 25 months. The assessee objected to the show-cause notice, but after hearing the representative of the assessee the Commissioner passed an order on March 17, 1987, holding that interest under section 139(8) of the Act was not charged by way of penalty but was a compensation and part and parcel of the process of assessment as held by the hon'ble Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 and, therefore, the Assessing Officer had committed an error in not charging interest under section 139(8) of the Act. The Commissioner also held that there was no evidence on record either to suggest that the assessee had any reasonable cause for delay in filing the return or that the Assessing Officer had after application of mind recorded satisfaction about the same. The assessee's content....
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....lty proceedings and in the absence of any explanation, filing of a belated return was sufficient for the Assessing Officer to be satisfied for initiation of penalty proceedings in the course of assessment proceedings. That non-application of mind by the Assessing Officer would make the assessment order revisable under section 263 of the Act. In this context the decision of the hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, with special reference to the observations at page 87, was relied upon. Referring to various decisions relied upon by the assessee before the Tribunal it was submitted that the said decisions rendered by different High Courts merely laid down that assessment proceedings and penalty proceedings are separate but the point of distinction, according to learned counsel, was that initiation and levy of penalty stand on a different footing. That non-initiation of penalty proceedings was by itself erroneous within the meaning of section 263 of the Act and it was not necessary for the Commissioner to levy penalty. In other words, the direction to the Assessing Officer to initiate penalty proceedings was sufficient compliance wit....
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.... be erroneous and prejudicial to the interests of the Revenue as initiation would depend upon the facts and circumstances of each case. That it could not be stated in such circumstances that there was non-application of mind. The revisional authority could not invoke powers of revision under section 263 of the Act on the ground that the order of assessment was erroneous and prejudicial to the interests of the Revenue because the Assessing Officer had failed to initiate penalty proceedings, as the term "assessment" as defined under section 2(8) of the Act does not include penalty proceedings and penalty proceedings are independent and distinct from assessment proceedings. In this connection reliance was placed on the following decisions: (i) Addl. CIT v. J.K. D'Costa [1982] 133 ITR 7 (Delhi); (ii) Addl CIT v. Achal Kumar Jain [1983] 142 ITR 606 (Delhi); (iii) P.C. Puri v. CIT [1985] 151 ITR 584 (Delhi); (iv) CIT v. Keshrimal Parasmal [1986] 157 ITR 484 (Raj); (v) Surendra Prasad Singh v. CIT [1988] 173 ITR 510 (Gauhati); (vi) CIT v. Linotype and Machinery Ltd. [1991] 192 ITR 337 (Cal); (vii) Addl. CIT v. Sudershan Talkies [1993] 200 ITR 153 (Delhi); (viii) CIT v. C.R.K. Swa....
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....ilment of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent, recourse cannot be had to section 263(1) of the Act. If the order is erroneous but is not prejudicial to the interests of the Revenue, or if the order is not erroneous but is prejudicial to the interests of the Revenue, the Commissioner of Income-tax cannot exercise revisional powers. It is further held that when an Assessing Officer has adopted one of the courses permissible in law and it has resulted in loss of Revenue, it cannot be treated as prejudicial to the interests of the Revenue; or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, the order cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Assessing Officer is unsustainable in law. In the present case, the action of the Commissioner will have to be tested at the anvil of the aforesaid principles. Section 271 of the Act as it stood and was applicable to the assessment year reads as under: "271. Failu....
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....the word "shall" indicates that the Assessing Officer having made up his mind to levy penalty is left with no further discretion as regards the quantum of the penalty to be imposed. On a plain reading section 271(1) of the Act stipulates that either the assessing authority or the appellate authority in the course of any proceedings under the Act is satisfied that any person- (a) has without reasonable cause failed to furnish the return of income, or failed to furnish the return of income within the time allowed or by the due date; or (b) has without reasonable cause failed to comply with various statutory notices mentioned in the clause; or (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, the assessing authority or the appellate authority may direct that such person shall pay by way of penalty the sums specified in the clauses that follow depending upon the respective defaults. Therefore, the satisfaction has to be that of either the assessing authority or the appellate authority; such satisfaction has to be in the course of any proceedings under the Act. In other words, the assessing authority has to record satisfaction in the co....
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....at the required affirmative conclusion- but the decision may rest on the reasonable probabilities of the case, which may satisfy the court that the fact was as alleged, even though some reasonable doubt may remain.' (ii) Satisfied: To be satisfied with a state of things means to be honestly satisfied in your own mind. The phrase 'satisfied' occurs in many taxing statutes and is a familiar one for a great many years. The phrase 'is satisfied' means simply 'makes up its mind'. Dixon J. defined it as 'actual persuasion.' That means 'a mind not troubled by doubt or, to adapt the language of Smith J.' a mind which has reached a clear conclusion. The provision does not empower any other authority under the Act to record satisfaction: the only authorities empowered are the Assessing Officer, the Appellate Assistant Commissioner or the Commissioner (Appeals). Even if the Commissioner is superior to the aforesaid authorities in the administrative hierarchy, when it comes to discharging the functions in a quasi-judicial capacity, one has to proceed strictly in accordance with the requirement of the provision. The Commissioner is not empowered to record satisfaction by section 271(1) of the....
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....ing already been completed. Considering the matter from a slightly different angle. Section 275 of the Act as it then stood imposes a bar of limitation for imposing penalty and under clause (b) the period prescribed is expiration of two years from the end of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed. In other words, as and when either the Assessing Officer or the specified appellate authority, in the course of any proceedings, records satisfaction and initiates penalty proceedings, from the end of the financial year in which such initiation takes place, penalty proceedings are required to be completed within a period of two years. It is not necessary for the present to take into consideration the extended period in the case of appeal proceedings. At the same time under section 263(2)(b) of the Act the Commissioner can exercise revisional powers within a period of two years from the date of the order sought to be revised. The question that would arise for consideration is whether the limitation prescribed under section 275 of the Act can be by-passed or indirectly extended by exercise of re....
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....b-section. It is not, however, essential that notice to the person proceeded against should have also been issued during the course of the assessment proceedings. Satisfaction in the very nature of things precedes the issue of notice and it would not be correct to equate the satisfaction of the Income-tax Officer or Appellate Assistant Commissioner with the actual issue of notice. The issue of notice is a consequence of the satisfaction of the Income-tax Officer or the Appellate Assistant Commissioner and it would, in our opinion, be sufficient compliance with the provisions of the statute if the Income-tax Officer or the Appellate Assistant Commissioner is satisfied about the matters referred to in clauses (a) to (c) of subsection (1) of section 271 during the course of proceedings under the Act even though notice to the person proceeded against in pursuance of that satisfaction is issued subsequently. We may in this context refer to a decision of five judges Bench of this court in the case of CIT v. S.V. Angidi Chettiar [1962] 44 ITR 739, 745. Shah J., speaking for the court, while dealing with section 28 of the Indian Income-tax Act, 1922, observed: 'The power to impose penalty....
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....x court in the case of Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26: "An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute." Therefore, even if it is lawful to impose penalty, that by itself would not be sufficient to hold that the Commissioner is entitled to exercise revisional powers....
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....that the assessment had to be set aside because, according to him, levy of penalty was also a part of the assessment. In this connection he placed reliance on the decision rendered by the Madhya Pradesh High Court in the case of Addl. CIT v. Indian Pharmaceuticals [1980] 123 ITR 874. On going through the said decision it becomes clear that the Madhya Pradesh High Court, speaking through the Indore Bench has primarily read the term "assessment" to mean as having the widest connotation in Chapter IV in the Indian Income-tax Act, 1922, by referring to the apex court decision in the case of C.A. Abraham v. ITO [1961] 41 ITR 425, at page 879 of the report note is taken of the fact that in the subsequent Supreme Court decisions though it has been held that tax and penalty are distinct and different concepts the court was only concerned with the meaning of the word "assessment" and hence, the Madhya Pradesh High Court has proceeded to follow the decision under the old Act. The position in law is well-settled and there is no dissenting opinion that under the Act assessment and penalty proceedings are distinct and separate. It is possible for an assessee to lead evidence which is independe....
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....ed in certain circumstances on account of the assessee's conduct. The justification of this view was founded on certain observations in C.A. Abraham v. ITO [1961] 41 ITR 425 (SC). It is true that penalty proceedings under section 28 are included in the expression 'assessment' and the true nature of penalty has been held to be additional tax. But one of the principal objects in enacting section 28 is to provide a deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the Legislature considers to be against the public interest. It is significant that in C.A. Abraham's case [1961] 41 ITR 425 this court was not called upon to determine whether penalty proceedings were penal or of quasi-penal nature and the observations made with regard to penalty being an additional tax were made in a different context and for a different purpose. It appears to have been taken as settled by now in the sales tax law that an order imposing penalty is the result of quasi-criminal proceedings (Hindustan Steel Ltd. v. State of Orissa [1970] 25 STC 211 (SC))....
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....aham v. ITO [1961] 41 ITR 425 (SC); CIT v. Bhikaji Dadabhai and Co. [1961] 42 ITR 123 (SC); Jain Brothers v. Union of India [1970] 77 ITR 107 (SC) and found that imposition of penalty can take place only after the assessment has been completed. Though penalty has been regarded as additional tax in certain sense and for certain purposes penalty proceedings are not essentially continuation of proceedings relating to assessment. The assessment proceedings and the penalty proceedings are quite distinct and different." The Commissioner, therefore, cannot set aside the assessment order for the sole purpose of initiation of penalty proceedings in exercise of revisional jurisdiction. It would be a colourable exercise of jurisdiction. As there was a dichotomy between the views expressed by the High Court of Delhi on the one hand and the High Court of Madhya Pradesh on the other, in the case of P.C. Puri v. CIT [1985] 151 ITR 584 (Delhi), the learned judges constituting the Division Bench expressed a difference of opinion and the matter was referred to a third judge in terms of section 251 of the Act. The majority view has approved and confirmed the earlier view expressed by the High Court....
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....nt wholesale has far-reaching consequences, as was pointed out in D'Costa: 'Such a wholesale cancellation of the assessment with a direction to make a fresh assessment is called for only in cases where there is something totally or basically wrong with the assessment which is not capable of being remedied by amendments to the assessment order itself.' The view contended for would require much to be written into the section which is not there, would complicate its operation and would lead to practical difficulties. The consequences of accepting the interpretation put by the Revenue will lead to harsh results (CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC)). This may well lead to tax laws capable, if unchecked, of great oppression. It will be an 'intolerable inquisition', to use an expressive phrase of H.H. Monroe, if penalty proceedings can be continued even after the expiry of the original limit of two years (Intolerable Inquisition? Reflections on the Law of Tax, Hamlyn Lectures, 33 series). The object of the construction of a statute being to ascertain the will of the Legislature, it may be presumed that neither injustice nor absurdity was intended. If, therefore, a 'lit....
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....orks P. Ltd. [1992] 198 ITR 297, the apex court has cautioned against reading its own judgment in a truncated manner in these words: "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasonings. In H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India [1971] 3 SCR 9; AIR 1971 SC 530, 578. 'It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as ....
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.... of the Supreme Court. A judgment of the High Court which refuses to follow the decision and directions of the Supreme Court or seeks to revive a decision of the High Court which had been set aside by the Supreme Court is a nullity." Thus, it is necessary to ascertain as to what was the question involved in the case before the Supreme Court in the context of which the decision has been rendered. In the case before the apex court the Additional Commissioner of Commercial Taxes took up revisional proceedings under section 22A of the Karnataka Sales Tax Act, 1957 (the Karnataka Act), for default of the appellant therein under section 18 of the Karnataka Act and levy of consequential penalty under section 18A of the Karnataka Act. It is necessary to note that when the matter was carried before the High Court of Karnataka, the High Court took the view that the determination of tax contemplated under section 12(3) of the Karnataka Act took within its ambit the levy of penalty under section 18A of the Act and it was in the backdrop of that finding that revisional action under section 22A of the Act was upheld holding that the order under section 12(3) of the Karnataka Act was amenable t....
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....ome-tax Act, 1961. Under section 2(f) "the assessing authority" has been defined to mean a Commercial Tax Officer or Assistant Commissioner of Commercial Taxes or any other officer of the Commercial Taxes Department authorised to make any assessment by or under the Karnataka Act. "Commissioner" is defined under section 2(g) and "Additional Commissioner" is defined under section 2(m2) to mean respectively any person appointed under section 3 of the Karnataka Act. Section 3(1) empowers the State Government to appoint a Commissioner, Additional Commissioner, Joint Commissioner, Deputy Commissioner, Assistant Commissioner, State Representative and Commercial Tax Officers as the Government thinks fit for the purpose of performing functions, respectively conferred on it by or under the Act. The charge of levy is under section 5 of the Karnataka Act. The liability to taxation under the Karnataka Act in respect of transaction is provided by section 7 of the Karnataka Act Section 10 provides for registration of dealers, commission agents, etc. Section 12 of the Karnataka Act deals with returns and assessment. Under section 12(1A) every dealer is enjoined to pay in advance the full amount of....
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....aced great emphasis itself indicates that there is a difference between exercise of revisional power over orders passed by a lower authority and exercise of revisional powers in the assessment proceedings itself. In paragraph No. 22 of the reported judgment while repelling the contention on behalf of the appellant it is observed that, it could not be stated that the revisional authority or the appellate authority superior to the assessing authority is not competent to levy a penalty for the first time when no penalty has been levied by the assessing authority; the contention is thus found to be without any statutory basis and unreasonable from any point of view. The non-levy of penalty under section 18A of the Karnataka Act has been itself treated as an illegality caused by a failure to exercise jurisdiction by the assessing authority. Applying the aforesaid principles to the facts of the case it is not possible to accept the contention that the aforesaid decision rendered by the apex court concludes the issue against the assessee in the present case. In the first instance, as noticed hereinbefore, the entire scheme of the Karnataka Act is distinct and different, both in content a....
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....proceedings" before either of those two authorities; (b) The term "satisfied" means make up mind not troubled by doubt, or reach a clear conclusion on the evidence before the authority; (c) The Commissioner is not empowered by section 271(1) of the Act to record satisfaction, if he cannot do so on his own he cannot direct the Assessing Officer; (d) The Commissioner cannot substitute his satisfaction in exercise of revisional powers; (e) The Commissioner cannot exercise revisional jurisdiction qua proceedings before an appellate authority; (f) Limitation prescribed by section 275 of the Act cannot be bypassed or indirectly extended by invoking powers under section 263 of the Act; (g) The stage of recording satisfaction is before concluding the assessment proceedings, hence the Commissioner cannot direct the Assessing Officer to initiate penalty proceedings once assessment proceedings are complete; (h) Even if it is lawful to impose penalty, that by itself would not be sufficient to entitle the Commissioner to treat the assessment order as erroneous and prejudicial to the interests of the Revenue; (i) Amendment of section 271(1) of the Act by the Finance Act, 2002, with effec....