2025 (5) TMI 1581 - AT - Income Tax

Penalty imposed u/s.271(1)(c) - quantum additions deleted - HELD THAT - since quantum itself has been deleted by way of quashing of assessment penalty based on the said quantum addition does not have any legal validity to survive. The aforesaid view is fortified by the judgment of R. Dalmia wherein it has been held that no penalty survives after deletion of additions forming the basis for the levy of penalty. As held in the case of Cosmopolitan Trading Corporation 2003 (7) TMI 14 - RAJASTHAN HIGH COURT and in the case of CIT Vs. Prakash Industries Ltd 2009 (10) TMI 291 - PUNJAB AND HARYANA HIGH COURT that when the entire addition had been deleted in the quantum appeal no reason survives for sustaining the penalty. Accordingly penalty imposed by the AO and sustained by the Ld. CIT(Appeals)/NFAC is quashed. Assessee appeal allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961, can be sustained when the quantum addition on which the penalty is based has been deleted by the Tribunal.

2. Whether the assessment orders framed by various Assessing Officers (A.O.s) are valid in the absence of a proper transfer order under section 127 of the Income Tax Act, 1961.

3. Whether an Assessing Officer can assume jurisdiction and transfer cases without compliance with the statutory requirements under section 127 of the Act.

4. Whether the principles of natural justice have been violated due to lack of opportunity of hearing and non-communication of reasons for transfer or assessment.

Issue-wise Detailed Analysis

Issue 1: Validity of Penalty in Light of Deletion of Quantum Addition

Legal Framework and Precedents: Section 271(1)(c) of the Income Tax Act empowers the Assessing Officer to impose penalty for concealment of income or furnishing inaccurate particulars. However, it is well settled that penalty cannot survive if the quantum addition on which it is based is deleted. This principle is supported by the decisions of the Hon'ble High Courts of Delhi (CIT Vs. R. Dalmia), Rajasthan (CIT Vs. Cosmopolitan Trading Corporation), and Punjab & Haryana (CIT Vs. Prakash Industries Ltd).

Court's Interpretation and Reasoning: The Court noted that the substantive addition made by the Assessing Officer had been deleted by the ITAT, Raipur, in ITA No.192/RPR/2024 for AY 2011-12. Since the penalty was imposed on the basis of this addition, the penalty could not legally survive.

Application of Law to Facts: The deletion of the quantum addition by the Tribunal effectively nullified the foundation for the penalty. Therefore, the penalty imposed under section 271(1)(c) was quashed.

Conclusion: The penalty sustained by the Commissioner of Income Tax (Appeals) was held to be without legal basis and thus quashed.

Issue 2 & 3: Validity of Assessment Orders Without Proper Transfer Order Under Section 127

Legal Framework and Precedents: Section 127 of the Income Tax Act mandates that the Principal Director General, Director General, Chief Commissioner, Commissioner, or Principal Commissioner must pass a formal order transferring a case from one Assessing Officer to another. This includes recording reasons for the transfer and, where possible, giving the assessee a reasonable opportunity of being heard. Subsection (3) of section 127 dispenses with the requirement of hearing only when the transfer is intra-city, but does not dispense with the requirement to record reasons and pass a transfer order.

Key precedents relied upon include the judgments of the Hon'ble Calcutta High Court in Kusum Goyal Vs. ITO & Ors. (2010) 329 ITR 283 (Cal), the Hon'ble Supreme Court in Ajanta Industries Vs. Central Board of Direct Tax, and various ITAT decisions including Roop Das Vs. ITO, Ward-2(1), Bhilai and D. Craft Entertainment P. Ltd. Vs. ITO, Kolkata.

Court's Interpretation and Reasoning: The Court carefully examined the facts and found that no valid order under section 127 had been passed for transferring the cases between different Assessing Officers, despite transfers occurring between officers belonging to different ranges or jurisdictions. The Court emphasized that an Assessing Officer cannot unilaterally transfer a case without the prescribed authority passing a transfer order recording reasons for the transfer.

The Court rejected the contention that intra-city transfers do not require any order under section 127, clarifying that while hearing may be dispensed with in such cases, the requirement to record reasons and pass a transfer order remains mandatory.

Illustrative excerpts from the Kusum Goyal judgment were cited, highlighting that non-compliance with section 127 renders the assessment order non-est in law and void. The Court also noted that the absence of a transfer order leads to invalid assumption of jurisdiction by the Assessing Officer who framed the assessment.

Key Evidence and Findings: The Court relied on documentary evidence such as the absence of any transfer order on record, letters indicating informal transfers, and notifications regarding jurisdiction. The Tribunal's earlier orders and judicial precedents were also pivotal in establishing the mandatory nature of transfer orders under section 127.

Application of Law to Facts: In the present case, assessments were framed by officers who had no valid jurisdiction due to the absence of a proper transfer order under section 127. The Court held that such assessments were void and quashed them accordingly.

Treatment of Competing Arguments: The Revenue argued that intra-city transfers did not require formal orders and that jurisdiction automatically vested with the new officer. The Court rejected this, relying on authoritative judgments to hold that statutory formalities cannot be bypassed, even in intra-city transfers.

Conclusions: The assessments framed without valid transfer orders under section 127 were quashed for lack of jurisdiction. The Court refrained from examining the merits of the additions made in these assessments, leaving those issues open for future adjudication if valid jurisdiction is established.

Issue 4: Violation of Principles of Natural Justice

Legal Framework and Precedents: Principles of natural justice require that an assessee be given a reasonable opportunity of being heard before adverse orders are passed. The Supreme Court in Ajanta Industries emphasized that recording and communication of reasons for transfer are mandatory and non-communication violates natural justice.

Court's Interpretation and Reasoning: The Court noted that no opportunity of hearing was afforded to the assessee before transfer of jurisdiction or framing of assessment. This omission compounded the illegality of the assessment proceedings.

Application of Law to Facts: The absence of a transfer order and lack of opportunity to be heard rendered the assessments void and contrary to the principles of natural justice.

Conclusion: The assessments were quashed also on the ground of violation of natural justice.

Cross-References: The issues of invalid transfer and absence of jurisdiction are intertwined, as the failure to comply with section 127 leads to invalid assumption of jurisdiction and consequent violation of natural justice. The deletion of quantum additions and quashing of assessments directly impacts the validity of penalty proceedings.

Significant Holdings

"The requirement of recording reasons under section 127(1) is a mandatory direction under the law and non-communication thereof is not saved by showing that the reasons exist in the file although not communicated to the assessee."

"An Assessing Officer cannot on his own transfer an income tax file to another officer in absence of the aforesaid order under section 127 of the Act."

"Though sub-section (3) of Section 127 of the Act dispenses with the requirement of affording a reasonable opportunity of being heard to the assessee in a case where the transfer of the case is within the same city, locality or place, it does not dispense with the statutory requirement of recording of the reasons for doing so by the concerned authority."

"Assessment orders passed by officers who have no valid jurisdiction due to absence of a transfer order under section 127 are non-est in law and liable to be quashed."

"Penalty imposed under section 271(1)(c) cannot survive when the quantum addition on which it is based has been deleted by the Tribunal."

"Non-compliance with statutory requirements under section 127 and principles of natural justice vitiates the assessment proceedings."

The Court's final determinations are:

- The penalty imposed under section 271(1)(c) is quashed as the quantum addition has been deleted.

- The assessments framed by officers lacking valid jurisdiction due to absence of transfer orders under section 127 are quashed.

- The grounds of appeal challenging the additions are left open for consideration in valid proceedings.

- Grounds of appeal not pressed are dismissed.

- The appeal is allowed in terms of the above observations.