2014 (4) TMI 1170 - AT - Income Tax

Revision u/s 263 - present assessment was made u/s 153A - assessee has surrendered the amount and has offered the surrendered amount by paying tax therefore - Penalty u/s 271AAA(1) not initiated - Held that - It is not always necessary for the Assessing officer to initiate penalty proceedings if he is satisfied that the particular case is not fit for levy of penalty then the Assessing officer has powers not to initiate penalty proceedings because legislature has used the expression may in penal provision which shows that Assessing officer has discretionary power to initiate the penalty proceedings. In other words, in any such situation of not initiating penalty proceedings the Assessing officer has adopted one of the legal possible view. Whenever one of the legal possible view is adopted by the Assessing officer then such assessment order cannot be called erroneous and prejudicial to the interest of the Revenue. See Malabar Industrial Co. Ltd. v. CIT 2003 243 ITR 83. In the case before us, the Assessing officer may be satisfied that since the assessee has surrendered the amount and has offered the surrendered amount by paying tax therefore this is not a fit case for levy of penalty and accordingly he may not have initiated penalty proceedings. Therefore such order cannot be called erroneous and prejudicial to the interest of the Revenue. - Decided in favour of assessee

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act for non-initiation of penalty proceedings.
2. Interpretation of statutory provisions related to penalty proceedings under Sections 271A and 271AAA.
3. Validity of the assessment order and its cancellation by the Commissioner.

Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act for Non-Initiation of Penalty Proceedings:
The primary issue in this case was whether the Commissioner of Income Tax (CIT) erred in assuming jurisdiction under Section 263 of the Income Tax Act for the non-initiation of penalty proceedings. The assessees argued that according to the ruling of the Hon'ble Punjab & Haryana High Court in CIT v. Subhash Kumar Jain, the CIT cannot direct the Assessing Officer (AO) to initiate penalty proceedings after examining the records of assessment under Section 263. The CIT, however, believed that the assessment order was erroneous and prejudicial to the interest of the Revenue due to the AO's failure to initiate penalty proceedings under Sections 271A and 271AAA.

2. Interpretation of Statutory Provisions Related to Penalty Proceedings under Sections 271A and 271AAA:
The assessees contended that the word "may" in Sections 271A and 271AAA gives the AO discretion to decide whether or not to initiate penalty proceedings. They argued that since the AO had exercised this discretion by not initiating penalty proceedings, the assessment order was not erroneous or prejudicial to the Revenue. The CIT, however, opined that the initiation of penalty proceedings is an integral part of the assessment process and failure to do so renders the assessment order erroneous and prejudicial to the Revenue.

3. Validity of the Assessment Order and Its Cancellation by the Commissioner:
The CIT cancelled the assessment order and directed the AO to reframe it in accordance with the provisions of the Income Tax Act. The assessees argued that the CIT's action was based on a mere change of opinion and that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue. They relied on various judicial precedents, including CIT v. Sudershan Talkies and Addl. CIT v. J.K. D'Costa, to support their contention that penalty proceedings are independent of assessment proceedings and failure to initiate them does not make the assessment order erroneous.

Tribunal's Findings:

Jurisdiction under Section 263:
The Tribunal held that the CIT cannot use Section 263 to direct the AO to initiate penalty proceedings. It relied on the decision of the Hon'ble Punjab & Haryana High Court in Subhash Kumar Jain, which followed the Delhi High Court's ruling in J.K. D'Costa, stating that penalty proceedings are separate from assessment proceedings. The Tribunal noted that the CIT's jurisdiction under Section 263 is confined to examining the assessment order and cannot extend to penalty proceedings.

Interpretation of Sections 271A and 271AAA:
The Tribunal observed that the word "may" in Sections 271A and 271AAA indicates that the AO has discretionary power to initiate penalty proceedings. The Tribunal emphasized that if the AO, after considering the facts and circumstances, decides not to initiate penalty proceedings, such a decision represents one of the possible legal views. Therefore, the assessment order cannot be considered erroneous and prejudicial to the Revenue merely because the AO chose not to initiate penalty proceedings.

Validity of the Assessment Order:
The Tribunal concluded that the assessment order was not erroneous or prejudicial to the interests of the Revenue. It noted that the AO might have been satisfied that the assessee's surrender of income and payment of taxes did not warrant penalty proceedings. The Tribunal quashed the CIT's order and restored the original assessment order, allowing the appeals of the assessees.

Conclusion:
The Tribunal allowed the appeals of the assessees, holding that the CIT erred in assuming jurisdiction under Section 263 to direct the AO to initiate penalty proceedings. The Tribunal emphasized that penalty proceedings are independent of assessment proceedings and that the AO has discretion under Sections 271A and 271AAA to decide whether to initiate penalty proceedings. The assessment orders were found to be neither erroneous nor prejudicial to the interests of the Revenue.

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