TMI Blog1996 (2) TMI 176X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.8.88 25.8.88 7.10.88 (c) Date on which return of income filed 3.8.88 26.8.88 11.10.88 (d) Date of completion of assessment 31.1.89 31.1.89 31.1.89 (e) Date of initiation of penalty proceedings 25.8.92 25.8.92 25.8.92 (f) Date on which penalty was imposed under s. 271B, 26.2.93 26.2.93 26.2.93 (g) Amount of penalty levied 63,682 75,934 82,442 3. In response to the show-cause notice issued by the AO under s. 271B of the Act, the assessee explained that the returns of income were filed along with the audit report, tax dues were paid in advance and it co-operated with the Department. It was further submitted that the initiation of penalty proceedings, as per s. 275 of the Act is invalid in law, inasmuch as, the penalty proceedings under s. 271B/275 of the Act have to be initiated "in the course of any proceeding" which necessarily implies that the penalty proceedings should be initiated in the course of the assessment proceedings. In the present case, no penalty proceedings were initiated in the course of assessment proceedings w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd further held that alleged illness of one of the partners having not affected the business of the firm, cannot be accepted as a reasonable cause for the delay in obtaining the audit report. 6. Further aggrieved, the assessee has come up in appeal before us. The learned counsel for the assessee submitted before us that the levy of penalty under s. 271B of the Act is illegal. He submitted that as per the provisions of s. 275, as it stood prior the amendment by the Taxation Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989, the penalty proceedings are necessarily to be initiated during the course of the assessment proceedings and in the absence of the same, the penalties levied are invalid and without any jurisdiction. Alternatively, he submitted that even as per the amended provisions of s. 275, which comes into operation from 1st April, 1989, initiation of penalty proceedings cannot be deferred unendingly and by taking the spirit of the section as a whole, the initiation of the penalty proceedings should take place within a reasonable period of time. The learned counsel for the assessee placed before us a copy of the judgment of the Orissa High Court in the case of Bata alias ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." The learned counsel submitted that the intention of introducing s. 44AB is to ensure that the books of accounts are properly maintained. No penalty is leviable merely because of a technical default in obtaining the audit report beyond the specified date, if the assessee has filed the return voluntarily and the audit report is obtained and available on record before the assessment is completed. He has drawn our attention to the provisions of s. 271B of the Act. In support of his contention that the AO has discretion not to levy penalty even if there is a failure to obtain audit report within the stipulated time and particularly to the words "Assessing Officer may direct that such person shall pay, by way of penalty". He has submitted before us that the illness of the partner, who is looking after the accounts and taxation matter, is the reason for the delay in obtaining the audit report, and thus requested us to delete the penalties levied under s. 271B of the Act. 7. On the other hand, learned senior Departmental Representative very vehemently contended before us that the penalty proceedings under s. 271B are distinct from the penalties leviable under s. 271(1)(a), 271(1)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plain reading of the provisions of ss. 275/271B of the Act shows that the penalty proceedings have to be initiated in the course of any proceeding which, by necessary implication, must be initiated in the course of assessment proceedings. Admittedly, in the present case, the assessment proceedings were completed on 31st Jan., 1989. In the first paragraph of the assessment orders for all the years it was mentioned that auditors report in Form No. 3CB and 3CD were filed. It may not be out of place to mention that at the bottom of the assessment orders, the AO has clearly mentioned that penalty proceedings under s. 271(1)(a) and 271(1)(c) have been initiated. Admittedly, penalty proceedings under s. 271(1)(a), 271(1)(b) and 271(1)(c) have to be initiated in the course of the assessment proceedings but it is not a necessary precondition that a mention be made in the assessment order itself. Nevertheless, the AO has mentioned the same in the assessment order. This indicates that the then incumbent AO has never intended to initiate penalty proceedings under s. 271B of the Act though having mentioned about the filing of the audit reports as prescribed under s. 44AB in the opening paragrap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended by applying the amended provisions. In the present case, as on 31st Jan., 1989, penalty proceedings have not been initiated. As we have already held that under the unamended provisions of s. 275 the AO is required to initiate penalty proceedings in the course of the assessment proceedings. The non-initiation thereof would take away the jurisdiction of the AO to initiate proceedings subsequently. Thus, before the amendment of s. 275, i.e., 1st April, 1989, the AO ceased to have jurisdiction to levy penalty and thus the amended provisions cannot be applied to disturb the vested right of the assessee. We, therefore, hold that the amended provisions of s. 275 of the Act are not applicable to the given facts. 10. For the sake of argument, we proceed on the presumption that the provisions of the amended s. 275 are applicable to the facts of the case. The Notes on Clauses, appended to the Direct Tax Laws (Amendment) Bill, 1987 [(1988) 67 CTR (St) 98 at 127 : (1988) 168 ITR (St) 301 at 352] reads as under: "Clause (c) incorporates the provisions of the existing cl. (b). However, the limitation for passing penalty order where no appeal is filed is reduced from two years from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pradesh High Court in the case of K.P. Narayanappa Setty Co. vs. CIT (1975) 100 ITR 17 (AP) wherein their Lordships have held that though no specific period was prescribed within which penalty may be levied, there should not be inordinate delay and the penalty should be levied within reasonable time. We may further observe that the intention of the legislature cannot be otherwise, in as much as, Democles Sword cannot be allowed to hang on the head of the assessee perennially giving discretion to the AO before whom the audit report is submitted and the successor AO, to initiate the penalty proceedings at any time. The other fact that only 6 months is provided for completion of assessment proceedings from the date of initiation indicates that the initiation itself should be within a reasonable time. 12. Even on merits, one has to bear in mind the intention of the legislature for considering the reasonableness of the explanation given by the assessee. As is evident from the Speech of the Hon'ble Finance Minister while introducing the provisions of s. 44AB, tax audit report is intended to ensure that the books of account and other records are properly maintained and fully reflect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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