2018 (7) TMI 1992 - AT - Income Tax

Revision u/s 263 by CIT - order passed by the AO u/s 271(1)(c) dropping penalty proceedings was erroneous and prejudicial to the interest of Revenue - search and seizure action u/s 132 was carried out at the premises of assessee and assessment u/s 153A r.w.s. 143(3) was completed admiting additional income declared by assessee - as per assessee additional income declared in the statement u/s 132(4) was duly shown in the revised return filed and since there was no addition to returned income, there was no question of any concealment of income - HELD THAT - Penalty proceedings were initiated for both the limbs, then satisfaction recorded by the Assessing Officer in such circumstances was not correct and the Assessing Officer having failed to come to a finding as to which limb of section 271(1)(c) of the Act was not fulfilled, then no penalty could be levied under section 271(1)(c) Penalty proceedings initiated lacked from satisfaction and had quashed the penalty proceedings in the said case of search on the assessee. In such circumstances, where the question of law has been decided M/S MANJUNATHA COTTON AND GINNING FACTORY OTHS., M/S. V.S. LAD SONS, 2013 (7) TMI 620 - KARNATAKA HIGH COURT and on similar facts, the issue has been decided KANHAIYALAL D. JAIN VERSUS THE ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 3, NASHIK 2016 (12) TMI 1238 - ITAT PUNE then the order of Assessing Officer in recording satisfaction of violating both the limbs of section 271(1)(c) of the Act suffers from infirmity. The AO on reply of assessee had dropped penalty proceedings and such an order of dropping penalty proceedings cannot be said to be erroneous. Coming to the exercise of jurisdiction by the Commissioner u/s 263 Commissioner in the present case has though exercised his jurisdiction in respect of the order dropping penalty proceedings under section 271(1)(c) of the Act. However, where the Assessing Officer had not initiated the penalty proceedings within framework of law then, the Assessing Officer having dropped penalty proceedings by passing an order, then such an order dropping penalty proceedings cannot be said to be erroneous. In the present set of facts, the order dropping penalty proceedings, which were not validly initiated cannot be said to be erroneous order i.e. passed without application of mind by the Assessing Officer and in the absence of the same, the Commissioner is precluded from exercising his jurisdiction under section 263 - Decided in favour of assessee

Summary

Issues Involved:
1. Condonation of delay in filing appeals.
2. Exercise of jurisdiction by the Commissioner under section 263 of the Income-tax Act.
3. Validity of the order dropping penalty proceedings under section 271(1)(c) of the Income-tax Act.

Detailed Analysis:

1. Condonation of Delay in Filing Appeals:
The assessee filed appeals against the order of the Commissioner with a delay of 12 days. The delay was attributed to an error where the order of revision was received at Ratnagiri and not passed on to the partners at the Pune office promptly. The Tribunal found merit in the petition and condoned the delay, allowing the appeals to be heard.

2. Exercise of Jurisdiction by the Commissioner under Section 263 of the Income-tax Act:
The primary issue in these appeals was whether the Commissioner was justified in exercising jurisdiction under section 263 of the Act. The Commissioner held that the order passed by the Assessing Officer (AO) dropping penalty proceedings under section 271(1)(c) was erroneous and prejudicial to the interest of Revenue. The Commissioner argued that the AO did not apply Explanation 5A to section 271(1)(c) correctly, which mandates penalty in cases of undisclosed income detected during search operations.

The Tribunal noted that the Commissioner can exercise revisionary powers under section 263 only if the order in question is both erroneous and prejudicial to the interest of Revenue. The Tribunal emphasized that the AO must record satisfaction as to which limb of section 271(1)(c) (concealment of income or furnishing inaccurate particulars) was violated.

3. Validity of the Order Dropping Penalty Proceedings under Section 271(1)(c):
The Tribunal examined whether the AO's order dropping penalty proceedings was erroneous. It was noted that during the search, the assessee had declared additional income, which was accepted by the AO. The AO had initiated penalty proceedings on both limbs of section 271(1)(c) but later dropped them. The Tribunal referred to various judicial precedents, including the Hon’ble Bombay High Court and Pune Bench of Tribunal, which held that penalty proceedings must specify the exact charge against the assessee.

The Tribunal found that the AO's satisfaction recorded for both limbs was incorrect and that the penalty proceedings were not validly initiated. Therefore, the order dropping penalty proceedings could not be considered erroneous. The Tribunal concluded that the Commissioner was not justified in exercising jurisdiction under section 263 to revise the AO's order.

Conclusion:
The Tribunal allowed the appeals filed by the assessee, holding that the Commissioner was not justified in exercising jurisdiction under section 263 of the Act. The order dropping penalty proceedings under section 271(1)(c) was upheld as it was not erroneous. The Tribunal reversed the revision order passed by the Commissioner and allowed the grounds of appeal raised by the assessee. This decision applied mutatis mutandis to all related appeals.