2019 (7) TMI 1574 - HC - Income Tax

Deletion of penalty by the ITAT invoking the power of rectification u/s 254 - purpose of initiating penalty proceedings under Section 271(1)(c) - recover the penalty amount from one of the directors of the Assessee the business of which was closed - HELD THAT - Karnataka High Court in CIT v. Manjunatha Cotton and Ginning Factory 2013 (7) TMI 620 - KARNATAKA HIGH COURT which in turn followed the judgment of this Court in Madhushree Gupta v. Union of India 2009 (7) TMI 38 - DELHI HIGH COURT where this Court considered the challenge to the constitutional validity of Section 271(1B) of the Act which had been inserted with retrospective effect from 1st April 1989 on the issue of the recording by the Assessing Officer (AO) of his satisfaction for the purpose of initiating penalty proceedings under Section 271(1)(c) of the Act. It is contended by the Revenue that in exercise of the power under Section 254(2) of the Act, the ITAT could not have reviewed its earlier order as the judgment on the basis of which the earlier decision was reversed was not of the jurisdictional High Court (i.e. this Court) but of the Karnataka High Court. While the Court is conscious that the question that has been raised by the Revenue merits consideration, in the facts of the present case where the business of the Respondent Assessee has closed way back in 2001 and the proceedings pertain to AY 1998-1999 which is more than two decades ago, the Court is not inclined to interfere with the impugned order of the ITAT.

Summary

Issues:
1. Entertaining application under Section 254(2) of the Income Tax Act, 1961 by the ITAT.
2. Reversing earlier decision based on a non-jurisdictional High Court judgment.
3. Interference with the impugned order of the ITAT.

Analysis:

1. The Respondent Assessee faced continuous losses and eventually shut down its business in 2001 after filing a return showing a loss for AY 1998-99. The Income Tax Department sought to recover a penalty amount from one of the directors, leading to an application under Section 254(2) of the Act filed in the ITAT after the dismissal of the Assessee's appeal in July 2017.

2. The main issue raised by the Revenue was whether the ITAT had the authority to entertain the Assessee's application under Section 254(2) and reverse its previous decision solely based on a judgment from the Karnataka High Court, which followed a decision from the Delhi High Court. The Revenue argued that the ITAT overstepped its power under Section 254(2) by considering a non-jurisdictional High Court's judgment to reverse its earlier order.

3. Despite acknowledging the merit in the Revenue's question, the Court declined to interfere with the ITAT's order in this case. Given the closure of the Assessee's business in 2001 and the proceedings dating back to AY 1998-99, which was more than two decades ago, the Court found no reason to disturb the impugned order of the ITAT. The appeal was disposed of, but the questions of law raised by the Revenue were left open for future consideration in a suitable case.