2006 (11) TMI 148 - HC - Income Tax

Summary

Issues Involved:
1. Justification of cancelling the penalty by the Tribunal.
2. Legitimacy of initiating penalty proceedings under section 273(b) in reassessment proceedings.

Issue-wise Detailed Analysis:

1. Justification of Cancelling the Penalty:

The Tribunal had to decide whether the penalty imposed under sections 271(1)(a), 271(1)(b), 271(1)(c), and 273(b) of the Income-tax Act, 1961, was justified. The respondent-assessee was found with 2240 kgs of smuggled ganja valued at Rs. 6,72,000, and the Income-tax Officer treated this amount as unexplained investment, leading to the imposition of penalties. The Tribunal, however, referenced the Supreme Court's decision in CIT v. Piara Singh [1980] 124 ITR 40 (SC), which allowed for the deduction of business losses incurred during illegal activities, and CIT v. Smt. Jagjit Kaur [1980] 126 ITR 540 (All), which stated that assessments under section 147(a) were not "regular assessments" for the purposes of section 273(b).

The Tribunal concluded that the confiscated ganja represented a business loss, resulting in nil income for the assessee, and thus no penalty was leviable under the mentioned sections. This decision was supported by the fact that the assessee's claim of business loss was not unreasonable, given the conflicting judicial opinions on the matter. Therefore, the Tribunal's decision to cancel the penalties was upheld as the assessee had a reasonable cause for not filing the return or concealing particulars of income.

2. Legitimacy of Initiating Penalty Proceedings under Section 273(b) in Reassessment Proceedings:

The Tribunal had to determine whether reassessment could be treated as a regular assessment for the purposes of initiating penalty proceedings under section 273(b). The Tribunal initially held that reassessment under section 147 could not be considered a regular assessment, referencing the decision in CIT v. Smt. Jagjit Kaur [1980] 126 ITR 540 (All). However, the court noted that the insertion of sub-section (6) in section 215 by the Taxation Laws (Amendment) Act, 1984, clarified that an assessment made for the first time under section 147 should be regarded as a regular assessment for the purposes of sections 215, 216, 217, and 273.

This provision was deemed clarificatory and retrospective, aligning with the Supreme Court's decision in K. Govindan and Sons v. CIT [2001] 247 ITR 192 (SC), which also held that an assessment made for the first time under section 147 is a regular assessment. Consequently, the Tribunal's view that penalty under section 273(b) could not be initiated in reassessment proceedings was incorrect. The reassessment completed under section 144 was treated as a regular assessment, allowing for the initiation of penalty proceedings under section 273(b).

Conclusion:

The court answered the first question in the affirmative, supporting the Tribunal's decision to cancel the penalties, and the second question in the negative, allowing for penalty proceedings under section 273(b) in reassessment cases. The parties were left to bear their own costs due to the divided success.