TMI Blog2010 (7) TMI 479X X X X Extracts X X X X X X X X Extracts X X X X ..... assed by CIT is not sustainable in law. - ITA NO. 506 (COCH.) OF 2009 & S.P. NO. 84/2009 - - - Dated:- 14-7-2010 - DR. O.K. NARAYANAN, VICE-PRESIDENT (AS THIRD MEMBER) J, N. VIJAYAKUMARAN, JUDICIAL MEMBER J, AND SANJAY ARORA, ACCOUNTANT MEMBER J, R. Krishna Iyer for the Appellant. A.K. Thatai for the Respondent. ORDER Per N.Vijayakumaran, Judicial Member. This appeal filed by the assessee is directed against the order passed under section 263 by the Commissioner of Income-tax, Central,Kochi, dated18-8-2009. 2. The facts relevant are that the assessee, an individual, filed his return of income declaring an income of Rs. 6,86,025, deriving income from business, house property and other sources. The return was initially accepted under section 143(1). Then during the scrutiny, on examination of the records, the Assessing Officer noticed that the assessee has declared capital gain, which was claimed that these proceeds were out of sale of shares of Federal Bank Ltd. However, no evidence on sale of shares to the tune of Rs. 11,25,955 was filed. Ultimately, this was added and in appeal this was confirmed. In other words, the quantum attained final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itiate section 263 proceedings to set right the mistake of the Assessing Officer, who dropped the penalty proceedings, which is erroneous and prejudicial to the interest of the revenue. 5. We have heard rival submissions and find that the contention of the ld. DR is quite justified insofar as the assumption of jurisdiction under section 263 by the Commissioner of Income-tax is concerned. The decisions of the Apex Court is directly on the issue and which relates to section 271C penalty, wherein the Hon ble Supreme Court held that section 263 can be invoked under the given set of facts. Therefore, respectfully following the decisions of the Supreme Court, cited supra , we are of the view that the assumption of jurisdiction under section 263 by the Commissioner of Income-tax is quite justified. 6. Now coming to the merits, in the regular assessment, the Assessing Officer initiated the penalty proceedings and passed an order for the issue of demand notice, challan, penalty notice under section 271(1)( c ) along with the copy of assessment order to the assessee. Clause (1B) to section 271 inserted by the Finance Act, 2008 with retrospective effect from1-4-1989 reads as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Act and the expression prejudicial to revenue which has not been defined in the Income-tax Act as well as the Sales-tax Act. It must have been that the order sought to be revised is such that it is not in accordance with law, in consequence whereof lawful revenue due to the State has not been realized, or cannot be realized, or has not been levied. Following the findings of the Jurisdictional High Court, the expression prejudicial to the revenue has been explained and applying the above ratio to the present case before us, here the ld. Assessing Officer has only kept the penalty proceedings in abeyance and he has not deleted the penalty as a whole. Therefore, there is no prejudice to the interest of the revenue. 11. As laid down by the Apex Court in the case of Malabar Industrial Co. Ltd. ( supra ), for invoking section 263, there must be satisfaction of both the conditions. If any of the conditions is absent, section 263 cannot be invoked. Under the above facts and circumstances respectfully following the ratio laid down by the Hon ble Supreme Court as well as by the Hon ble Kerala High Court, we are of the view that section 263 action by the Commissioner of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resort to section 275(1A) of the Act, dropping the penalty proceedings, and which view found favour with my ld. brother (refer para No. 10 of his order). The ld. CIT, however, is of the view that such a course of action does not have the sanction of law, and is inconsistent with the provision of section 275(1A); his findings being relevant are as reproduced hereunder : A plain reading of the provisions of section 275(1A) shows that the order of penalty passed in a case can be revised on the basis of assessment revised by giving effect to the order of the High Court or the Supreme Court as per the provisions of the said section if the assessment order is subject matter of further appeal before the High Court or the Supreme Court. But if no order imposing penalty on merits is passed, the question of modification of the order under section 275(1A) does not arise. Hence, the view taken by the Assessing Officer that the order of penalty can later be passed when order of the High Court is received is erroneous and prejudicial to the interest of revenue. Analysis/Findings I have gone through the entire provision of section 275 of the Act. The same does not sanction the keepi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s subjected to further appeal, there may be justification for keeping the proceedings for imposing penalty pending until the final outcome of the appeal and then to make an order to accord with the taxable income as determined. In such a case the limitation prescribed under section 275 will be with effect from the receipt of such order by the Commissioner. It is to remedy this existing state of affairs, provide for a mechanism for and bringing the penalty proceedings in sync with the quantum proceedings, as also with a view to avoid multiplicity of proceedings, that section 275(1A) stood legislated through the Finance Act, 2005 with effect from 1-4-2006; the Board explaining the rationale of the amendment per its Circular No. 1 of 2007 dated 27-4-2007 reported in 290 ITR (St.) 73 (at pgs. 86 to 88) which is in agreement of the interpretation as accorded by the Hon ble High Court of Gujarat, in the case, cited supra , and for which reference could be drawn to para No. 22 thereof. To consider thus that the penalty proceedings would stand revived and an order on merits can be passed depending on the outcome of the assessee s appeal by the Hon ble High Court is not warranted in l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(1) of the Income-tax Act, 1961. Later on, the file was selected for scrutiny and the assessment was completed under section 143(3) on26-12-2006. 3. In the course of assessment proceedings, the Assessing Officer noticed certain credits reflected in the bank statements filed by the assessee. On enquiry, the assessee replied that credits were sale proceeds of shares in Federal Bank held by the assessee and his family members. But the Assessing Officer treated those credits as part of the taxable income of the assessee on the ground that evidences were not produced by the assessee to establish the bona fides of the sale of shares of Federal bank as explained by the assessee. An amount of Rs. 13,99,528 was thus added as short-term capital gains. 4. This addition was confirmed in first appeal by the CIT(A). On second appeal filed by the assessee, the Income-tax Appellate Tribunal also confirmed the addition of Rs. 13,99,528. Now, the issue of addition in the quantum assessment has been taken by the assessee in appeal before the Hon ble High Court of Kerala under section 260A of the Income-tax Act, 1961. 5. As the addition to the returned income was made, the assessing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75(1A) authorised the Assessing Officer to initiate and levy penalty even after receipt of the order of the Hon ble High Court/Supreme Court. The Commissioner of Income-tax observed that the above impression made by the assessing authority is against the provisions of law contained in section 275(1A). He held that a plain reading of section 275(1A) shows that an order of penalty already passed in a case could be revised on the basis of the order of the High Court or the Supreme Court but no order imposing penalty on merits could be passed for the first time after the expiry of the limitation of six months provided in section 275(1)( a ). The Commissioner, therefore, held that as no order under section 271(1)( c ) has been passed in the present case, section 275(1A) cannot be invoked by the Assessing Officer to wait till the order is passed by the Hon ble High Court in the appeal filed by the assessee. He held that section 275(1A) comes into play only in a case where the Assessing Officer has already passed an order within the time limitation prescribed in section 275(1)( a ). He accordingly held that the order recorded by the Assessing Officer in the order sheet on25-2-2009 is erro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f is a satisfaction recorded by the assessing authority for initiation of penalty. But on the question whether the order of the Assessing Officer dropping the proposed penalty, was prejudicial to the interests of the revenue, the ld. Judicial Member held that the said order is not prejudicial to the interests of the revenue. 11. The ld. Judicial Member in para 7 of his order has held that the Assessing Officer was, in fact, keeping the issue of penalty in abeyance till the matter attained finality before the Hon ble High Court of Kerala in the appeal filed by the assessee. He found that the Assessing Officer has kept the freedom with him to initiate the penalty proceedings, if necessitated, as and when the judgment of theHon ble Court is pronounced in the appeal filed by the assessee. He, therefore, gained an impression that the order of the Assessing Officer is not prejudicial to the interests of the revenue. 12. Going further, on this matter, the ld. Judicial Member relied on a judgment of the Hon ble High Court of Kerala rendered in a Sales Tax matter in the case of KKS Khader Mohideen ( supra ). In the said case, the Court has held that the order becomes prejudicial t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the order of penalty had been made while an order determining taxable income is in existence, the remedy of the assessee is to get it set aside in appropriate proceeding. When it is brought to notice that there is no assessment of income in the hands of the assessee or the same has been set aside, the penalties too are liable to be set aside. But if no order in the penalty proceedings has been made before the order of assessment of income in respect of which such proceedings have been initiated is set aside, penalty cannot be levied thereafter. If the order setting aside assessment is subjected to further appeal, there may be justification for keeping the proceedings for imposing penalty pending until the final outcome of the appeal and then to make an order to accord with the taxable income as determined. In such a case, the limitation prescribed under section 275 will be with effect from the receipt of such order by the Commissioner. 15. It is to remedy the above position as explained by the Hon ble Gujarat High Court that section 275(1A) has been inserted by the Tax Laws (Amendment), 2006 whereby a penalty order already passed could survive in spite of the outcome of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessing authority. ( iii ) The issue of penalty has been decided by the Assessing Officer by dropping the proposed penalty. ( iv ) Penalty has not been levied within the period of limitation provided under section 275(1)( a ). ( v ) The Commissioner of Income-tax has no jurisdiction in revision to direct the Assessing Officer to initiate penalty proceedings. 22. The ld. Chartered Accountant has relied on a common order by the ITAT, Cochin Bench in the case of Cannanore Co-operative Hospital Society Ltd. v. Asstt. CIT [IT Appeal Nos. 441 to 461 (Coch.) of 2009, dated 13-10-2009] where the Tribunal has held that the orders of the Assessing Officer dropping the proposed penalty proceedings could not be held prejudicial to the interests of the revenue. He has relied on another order of the ITAT, Cochin Bench, in the case of Dr. T. Muraleedharan [IT Appeal No. 571 (Coch.) of 2006, dated 22-2-2007] where the Tribunal has held that the action of the Assessing Officer dropping the penalty proceedings initiated against the assessee under section 158BFA(2) cannot be said to be erroneous as well as prejudicial to the interests of the revenue. The ld. Chartered Account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed the revision order under section 263 strictly in accordance with law and the ld. Accountant Member has rightly upheld his order. 25. I heard both the sides in detail and considered the matter. 26. The Judicial Member has passed his order in two parts. In the first part, the ld. Member has examined whether the jurisdiction assumed by the Commissioner of Income-tax under section 263 was justified or not. He held it was justified. In the second part of the order, the ld. member has considered whether the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the revenue. He found that the order was not prejudicial to the interests of the revenue. He has relied on the decision in the case of Malabar Industrial Co. Ltd. ( supra ) and quashed the revision order of the CIT. 27. Therefore, it is seen that the ld. Judicial Member has upheld the legality of the revision order, but cancelled the order on the merits of the issue. 28. The ld. Accountant Member has also upheld the jurisdiction assumed by the Commissioner of Income-tax in passing the Revision order under section 263. Further he has upheld the order on merits, too. He totally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on whether the Assessing Officer was justified in relying on section 275(1A) for keeping in abeyance the penalty proceedings? This is the difference of opinion between Hon ble Members liable to be placed before the Third Member for adjudication. 34. Therefore, as the Third Member, I am constrained to reframe the question as follows : Whether in the facts and circumstances of the case, the Commissioner of Income-tax is justified on merits to set aside the Order of the Assessing Officer dropping the penalty proceedings imposed under section 271(1)( c ), even though, the Commissioner of Income-tax has rightly exercised his jurisdiction under section 263. 35. In other words, in pith and substance, the question to be considered by the Third Member is that, de hors the validity of assumption of jurisdiction under section 263, whether the Revision order passed by CIT is sustainable in law on the merits of the issue or not. Let me attempt to answer the above question. 36. Section 275(1)( a ) provides for limitation in the matter of imposing penalty where the quantum order has been the subject matter of appeal before the CIT(A) or the Appellate Tribunal. The said section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enalty is not prejudicial to the interests of the revenue. The decisions relied upon by the ld. Chartered Accountant along with the judgment of the Hon ble High Court in the case of Dr. T. Muraleedharan ( supra ) are delivered in different contexts, in those decisions considered by the Tribunal and High Court, the assessing authorities had dropped the penalty proceedings, after examining the contentions of the assessees on merits. In those cases, the assessing authorities were not keeping in abeyance the penalty proceedings in the light of the law stated in section 275(1A). Whereas in the present case, the penalty proceedings has been dropped and kept in abeyance not on merits but relying on the law stated in section 275(1A). 39. As already stated, I agree with the ld. Judicial Member in quashing the Revision order passed by the Commissioner of Income-tax. In doing so, I had to deviate from the questions framed by the Hon ble Members, for the reason that the real dispute is not reflected in the questions referred. The questions related to an issue in which there is no dispute. Knowing the limitations of jurisdiction available to the Third Member, I had to manage my way throug ..... X X X X Extracts X X X X X X X X Extracts X X X X
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