2000 (8) TMI 25 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Income-tax Officer could levy interest under sections 139(8) and 217(1A) in the final order if it was not mentioned in the draft order.
2. Whether the Income-tax Officer could initiate penalty proceedings under section 273 and section 271(1)(a) in the final order if it was not mentioned in the draft order.

Detailed Analysis:

Issue 1: Levy of Interest in the Final Order

The Tribunal held that the Income-tax Officer could not levy interest under sections 139(8) and 217(1A) in the final order if it was not mentioned in the draft order. The draft order, approved by the Inspecting Assistant Commissioner, did not mention any interest payable by the assessee. The Tribunal observed that this omission deprived the assessee of the opportunity to make a representation regarding the interest, thus violating the principles of natural justice.

The court examined the provisions of section 144B of the Income-tax Act, which mandates that any proposed variation in the income or loss returned by the assessee must be communicated through a draft order. The assessee is given an opportunity to object, and the Inspecting Assistant Commissioner must consider these objections before finalizing the assessment. The court emphasized that the purpose of section 144B is to ensure fair play and to allow the assessee to represent their case before the final assessment.

The court noted that the calculation of interest is part of the assessment, as held by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT. Therefore, the levy of interest in the final order constituted a variation in the draft order, which was not permissible without a direction from the Inspecting Assistant Commissioner. The court concluded that the Income-tax Officer's action of levying interest in the final order was an error and violated the mandatory provisions of section 144B.

Issue 2: Initiation of Penalty Proceedings in the Final Order

The Tribunal also held that the Income-tax Officer could not initiate penalty proceedings under section 273 and section 271(1)(a) in the final order if it was not mentioned in the draft order. The draft order did not refer to the initiation of penalty proceedings, and the Tribunal observed that this omission deprived the assessee of the opportunity to make a representation against the initiation of penalty proceedings.

The court reiterated that section 144B aims to provide the assessee with an opportunity to represent their case before the final assessment. If the Income-tax Officer had decided to initiate penalty proceedings during the course of the assessment, this intention should have been incorporated in the draft order. This would have allowed the assessee and the Inspecting Assistant Commissioner to be aware of the intention to initiate penalty proceedings and to make representations accordingly.

The court emphasized that the object of section 144B is to reduce litigation and to prevent undue hardship to the assessee. By not mentioning the initiation of penalty proceedings in the draft order, the Income-tax Officer frustrated the purpose of the section. The court concluded that the Income-tax Officer's action of initiating penalty proceedings in the final order was not permissible and violated the mandatory provisions of section 144B.

Conclusion:

The court answered both questions in the affirmative, in favor of the assessee and against the Revenue. The Income-tax Officer could not levy interest or initiate penalty proceedings in the final order if these actions were not mentioned in the draft order. The Tribunal's decision to set aside the final order regarding the levy of interest and the initiation of penalty proceedings was upheld. The reference was disposed of with no order as to costs.