2005 (1) TMI 58 - HC - Income Tax

Whether the Tribunal was right in holding that CIT cannot revise under section 263 the order under section 271(1)(c) passed by the Income-tax Officer because he had dropped the penalty proceedings? Whether the Income-tax Appellate Tribunal was justified in holding that penalty under section 271(1)(c) to be passed as a result of the impugned order under section 263 will be barred by time? Held that Tribunal was justified in holding that the penalty order passed as a result of the order passed under section 263 of the Act would be barred by limitation. Therefore, we answer the first question referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee. We answer the second question referred to us in the negative, i.e., in favour of the assessee and against the Revenue

Summary

Issues involved:
1. Whether the Commissioner of Income-tax can revise an order under section 271(1)(c) if the penalty proceedings were dropped?
2. Whether the penalty under section 271(1)(c) passed as a result of the order under section 263 will be barred by time?

Analysis:

*Issue 1: Revision of order under section 271(1)(c) when penalty proceedings were dropped*

The case involved a scenario where the assessing authority dropped penalty proceedings under section 271(1)(c) due to nil tax payable by the assessee. The Commissioner of Income-tax found this decision erroneous and prejudicial to revenue, leading to a revision under section 263. The High Court noted that the assessing authority failed to consider relevant provisions of the Act while dropping the penalty proceedings. The court cited the case of Malabar Industrial Co. Ltd. v. CIT, emphasizing that incorrect application of law or facts can render an order erroneous and prejudicial to revenue. Therefore, the Tribunal's decision that dropping the penalty proceedings was not against revenue interests was deemed unjustified.

*Issue 2: Limitation on penalty order under section 271(1)(c) post-revision under section 263*

Regarding the question of limitation for imposing a penalty post-revision under section 263, the High Court analyzed the relevant provisions of section 275 of the Income-tax Act. The court highlighted that the amendment in 1987 extended the limitation period for passing penalties post-revision. However, in this case, the penalty proceedings initiated in 1980 and dropped in 1984 had already exceeded the limitation before the amendment came into effect in 1989. The court concluded that the penalty order, if passed post-revision, would be barred by limitation based on the timeline of events. Therefore, the Tribunal's decision on the limitation of the penalty order was upheld.

In conclusion, the High Court ruled in favor of the Revenue on the first issue, stating that the Commissioner of Income-tax can revise an order under section 271(1)(c) if penalty proceedings were dropped. On the second issue, the court sided with the assessee, stating that the penalty order passed post-revision under section 263 would be barred by limitation. As there was divided success, no costs were awarded in the case.