2011 (4) TMI 363 - HC - Income Tax

Penalty u/s 271(1)(c) - Recording of satisfaction was a matter of substance and not mere of form and if satisfaction was reflected in the order, format of recording of satisfaction was not enough to invalidate the action - Reference was also made to statutory amendment clarifying this position under explanation to Section 271(1B) of the Act added by the Finance Act, 2008 w.e.f.1.4.1989 -As per the judgment of Madras High Court in M. Sajjanraj Nahar v. CIT 2006 -TMI - 9613 - MADRAS High Court and judgment of this Court in CIT v. Pearey Lal and Sons (EP) Ltd.,the impugned order is set aside and the matter is remanded to the Tribunal for fresh decision in accordance with law - Appeal is allowed in favour of the revenue .

Summary

Issues:
1. Whether the deletion of penalty by the ITAT was correct when penalty proceedings were initiated by the Assessing Officer under Section 271(1)(c) of the Income Tax Act, 1961?
2. Whether the recording of satisfaction by the Assessing Officer in the assessment order is necessary for invoking penalty jurisdiction under Section 271(1)(c) of the Act?

Analysis:
1. The appeal before the High Court was filed by the revenue challenging the order of the Income Tax Appellate Tribunal (ITAT) regarding the deletion of penalty under Section 271(1)(c) for the assessment year 2001-02. The Assessing Officer had initiated penalty proceedings due to unexplained income by the assessee. The Tribunal held that without a positive and categorical satisfaction recorded by the AO in the assessment order, the jurisdiction to levy penalty could not be invoked. The High Court considered the argument that satisfaction being reflected in the order was essential, citing statutory amendments and relevant case laws. The Court referred to the judgment of the Madras High Court and another judgment by the same Court to support the position that satisfaction must be explicitly recorded. Consequently, the High Court ruled in favor of the revenue, setting aside the previous order and remanding the matter to the Tribunal for a fresh decision on merits.

2. The second issue revolved around whether the recording of satisfaction by the Assessing Officer in the assessment order is a prerequisite for imposing a penalty under Section 271(1)(c) of the Act. The appellant contended that the recording of satisfaction was a substantive requirement, not merely a procedural formality. The appellant argued that even if the format of recording satisfaction was present, it was insufficient to validate the action without explicit satisfaction being recorded. Reference was made to a statutory amendment and relevant case laws to support this argument. The High Court, after considering the submissions, held that the absence of a positive and categorical satisfaction in the assessment order rendered the penalty proceedings invalid. The Court emphasized the importance of explicit recording of satisfaction for invoking penalty jurisdiction under the Act. Consequently, the High Court allowed the appeal, set aside the impugned order, and remanded the matter to the Tribunal for a fresh decision in accordance with the law.