2013 (12) TMI 1214 - HC - Income Tax

Scope of term Direction in the Assessment Order to initiate penalty proceedings - Whether penalty proceedings can be initiated when there is no loss to revenue - Held that - Following Commissioner Of Income Tax Vs. Manjunatha Cotton & Ginning Factory 2013 (7) TMI 620 - KARNATAKA HIGH COURT - The assessment order should contain a direction for initiation of penalty proceedings - The meaning of the word direction is of importance - Merely saying that penalty proceedings are being initiated will not satisfy the requirement. The direction to initiate proceedings should be clear and not be ambiguous - It is well settled law that fiscal statutes are to be construed strictly and more so the deeming provisions by way of legal fiction are to be construed more strictly - As the words used in the legal fiction or the deeming provisions of Section 271(1B) is Direction it is imperative that the assessment order contains a direction - Use of the phrases like (a) penalty proceedings are being initiated separately and (b) penalty proceedings under Section 271(1)(c) are initiated separately do not comply with the meaning of the word direction as contemplated even in the amended provisions of law - The word direction has been interpreted by the Apex Court - In any event whatever else it may amount to on its very terms the observation that the ITO is free to take action to assess the excess in the hand of the co-owners cannot be described as a direction - A direction by a statutory authority is in the nature of an order requiring positive compliance - When it is left to the option and discretion of the ITO whether or not take action it cannot be described as a direction. In the case of assessee - Assessing Authority was not satisfied that there is any concealment of the intent - There was no direction for initiation of penalty proceedings - In the absence of such a direction the deeming provision is not attracted - The conditions prescribed under Section 271(1)(c) of the Act is not attracted Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961.
2. Whether the assessee's withdrawal of the claim for diminution in value of investment constitutes concealment of income.
3. Requirement of explicit direction for initiation of penalty proceedings in the assessment order.

Issue-wise Detailed Analysis:

1. Validity of Penalty Proceedings under Section 271(1)(c):
The Revenue appealed against the Tribunal's order which set aside the penalty imposed on the assessee. The Tribunal had determined that there was no concealment of income or loss of revenue, and the withdrawal of the claim was done to avoid litigation. The High Court examined Section 271(1)(c) and relevant case law, including the judgment in Commissioner Of Income Tax Vs. Manjunatha Cotton & Ginning Factory. It was emphasized that the satisfaction of the Assessing Officer (AO) regarding concealment must be evident in the assessment order. The Court noted that the phrases like "penalty proceedings are being initiated separately" do not meet the requirement of a clear direction for initiation of penalty proceedings. Consequently, the absence of such a direction invalidated the penalty proceedings.

2. Withdrawal of Claim for Diminution in Value of Investment:
The assessee, a Limited Company engaged in investment business, had initially claimed a loss due to diminution in the value of investment. Upon scrutiny, the assessee withdrew this claim to avoid litigation. The Tribunal found that the withdrawal was done before any detailed investigation by the department, indicating no intent to conceal income. The High Court agreed with the Tribunal, noting that the assessee's actions were bona fide and in compliance with Accounting Standard 13. The Court concluded that there was no concealment of income, as the withdrawal was voluntary and aimed at maintaining peace with the tax authorities.

3. Requirement of Explicit Direction for Initiation of Penalty Proceedings:
The High Court emphasized the necessity of a clear and unambiguous direction for initiating penalty proceedings in the assessment order. Citing the Manjunatha Cotton & Ginning Factory case, the Court reiterated that merely stating "penalty proceedings are being initiated separately" does not constitute a valid direction. The assessment order must explicitly reflect the AO's satisfaction regarding concealment of income. In this case, the assessment order lacked such a clear direction, rendering the penalty proceedings invalid. The Court held that the deeming provision under Section 271(1)(c) was not applicable due to the absence of an explicit direction.

Conclusion:
The High Court dismissed the Revenue's appeal, upholding the Tribunal's decision to set aside the penalty. It was concluded that the assessee's withdrawal of the claim did not amount to concealment of income, and the assessment order did not contain a clear direction for initiating penalty proceedings. The substantial question of law was answered in favor of the assessee and against the Revenue.