2010 (9) TMI 772 - HC - Income Tax

Revision u/s 263 - Penalty - Addition - assessee made an offer to surrender Rs. 9, 91, 090 subject to no penal action under section 271(1)(c) - assessee had made surrender with a clear condition that no penal action under section 271(1)(c) of the Act would be initiated. The office note further depicts that the offer of the assessee was accepted by the Department since the Department had no documentary evidence against the assessee except the report of the Inspector - it is held that the initiation of proceedings under section 263 was not justified. The Tribunal was right in holding that after examining the records of the assessment in exercise of powers under section 263 where the Commissioner of Income-tax finds that the Assessing Officer had not initiated penalty proceedings he cannot direct the Assessing Officer to initiate penalty proceedings under section 271(1)(c) of the Act - Decided in favour of the assessee

Summary

Issues:
1. Whether the agreement made by the Assessing Officer of initiating no proceedings under section 271(1)(c) is bad in law?
2. Whether the assessment so framed is erroneous and prejudicial to the interests of the Revenue?

Issue 1: Agreement on Penalty Proceedings
The appeal involved a situation where the Assessing Officer accepted the assessee's offer to surrender agricultural income subject to no penalty under section 271(1)(c) of the Income-tax Act. The Commissioner of Income-tax, under section 263, set aside the assessment order as erroneous and prejudicial to Revenue's interests, directing a fresh assessment with penalty consideration. The High Court analyzed whether the Commissioner could intervene in such cases based on the agreement between the assessee and tax authorities. The court referred to precedents stating that an order based on such an agreement cannot be challenged, as observed in Banta Singh Kartar Singh v. CIT. The court concluded that the assessment order was not erroneous, and thus, no action under section 263 could be taken.

Issue 2: Jurisdiction of Commissioner under Section 263
The second aspect of the issue examined whether the Commissioner of Income-tax could intervene under section 263 regarding penalty imposition when the original assessment order under section 143(3) did not mention penalty proceedings. The High Court cited the Delhi High Court's ruling in Addl. CIT v. J. K. D'Costa, emphasizing that penalty proceedings are separate from assessment proceedings. The court agreed with the Delhi, Rajasthan, Calcutta, and Gauhati High Courts' stance, rejecting the Madhya Pradesh High Court's contrary view. The judgment highlighted that failure to record penalty considerations in the assessment order does not render the assessment erroneous or prejudicial to Revenue's interests. Consequently, the court held that the initiation of proceedings under section 263 was unwarranted, affirming the Tribunal's decision that the Commissioner cannot direct the Assessing Officer to initiate penalty proceedings post-assessment.

In conclusion, the High Court dismissed the appeal, affirming that the agreement on penalty proceedings between the assessee and the Assessing Officer was valid and that the Commissioner could not intervene under section 263 based on penalty considerations not mentioned in the original assessment order. The judgment provided a detailed analysis of the legal principles and precedents governing such situations, ensuring clarity on the issues raised in the appeal.