2017 (3) TMI 475 - AT - Income Tax

Revision u/s 263 - Penalty proceedings u/s 271(1)(c) - assessment/reassessment proceedings in respect of deduction under S.10B - revision u/s 263 - Held that - In the instant case, there is no order in so far as penalty proceedings are concerned. The proceedings in respect of assessment and penalty are different and distinct notwithstanding the precondition that later has to be initiated in the course of former proceedings. Though expression assessment is used in the Act with different meanings in different context, in so far as Section 263 is concerned, it refers to that particular proceeding which is being considered by the Commissioner. It is not possible to expand the scope of assessment proceeding and assessment, which is subject matter of revision, for the purposes of initiating a new and distinct penalty proceedings of onerous nature. Failure of AO to initiate or impose penalty cannot be a factor capable of vitiating the assessment order in any respect. An assessment, in our considered view, cannot be said to be erroneous or prejudicial to the interest of revenue owing to such failure with respect to initiate a distinct proceedings with a view to evaluate imposition of penalty therein. In view of the forgoing discussion, the Pr. CIT/ CIT is not competent to direct the AO to redo the assessment with a view to initiate and levy penalty in respect of erroneous claim of deduction under S. 10B. No perceptible enquiry was shown to have been made by AO in discharge of quasi judicial function which may reveal any application of mind on the sustainability of claims made arising out of addition to fixed assets, salary expenses, nature of consultancy expenses and proof of services rendered, allowability of donation etc. The quasi- judicial view of the AO on the subject claims are sorely missing. The course charted by the CIT is founded upon the premise that basic evidence to support the claims are not discernible in records and thus cannot be faulted. The assessment order has been demonstrated by the CIT to be marred by flippancy and non application of mind in relation to these claim under revisional scrutiny. Suffice to say, the CIT has assigned prima facie reasons to cause enquiry into claim of each of such expenses and deduction under dispute. Thus, exercise of power under S. 263 cannot be discredited. It will be expedient at this juncture to note that the action of the CIT is based on record present before it. The CIT has merely set aside the disputed claims for de novo assessment. The Assessee is at liberty to assist the Assessing officer in taking the matter to logical conclusion in accordance with law. Mere set aside of the assessment under S. 263 on demonstrable grounds does not cause prejudice to the assessee per se so long as the return of income filed is in accordance with law. The Assessee continues to enjoy fair opportunity to seek fresh assessment in accordance with law. We do not find any thing repugnant in the action of CIT in setting aside the assessment on the points of concerns in relation to various items of expenses and deductions etc. and consequently for causing appropriate enquiry to be made in this regard. The action of the CIT is amenable to S.263 of the Act and thus does not call for any interference. The plea on behalf of the assessee on this score thus requires to be discarded.

Issues Involved:
1. Legality and jurisdiction of the order passed under Section 263.
2. Failure to conduct inquiries on specific expenditures and deductions.
3. Non-initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Legality and Jurisdiction of the Order Passed Under Section 263:

The Assessee contended that the order passed under Section 263 for AY 2010-11 and AY 2008-09 by the Commissioner of Income Tax-II, Ahmedabad (CIT) was wholly illegal, unlawful, and against the principles of natural justice. The Assessee argued that the CIT has no jurisdiction to direct the AO to initiate and impose penalty under Section 271(1)(c) of the Act. The Tribunal noted that Section 263 empowers the Commissioner to review the records of any proceedings and pass orders if the assessment is erroneous and prejudicial to the interests of the Revenue. However, the Tribunal emphasized that the CIT cannot direct the AO to initiate penalty proceedings post-assessment as penalty proceedings are distinct and separate from assessment proceedings. The Tribunal relied on the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Parmanand M. Patel, which held that the CIT cannot exercise powers under Section 263 to direct the AO to initiate penalty proceedings.

2. Failure to Conduct Inquiries on Specific Expenditures and Deductions:

The CIT observed that the AO failed to conduct inquiries on various items of expenditure and deductions, such as office building repairs, high-pitched salary expenses, consultancy expenses, and donation expenses. The Tribunal noted that the AO did not make any perceptible inquiry into the correctness of these claims, which rendered the assessment order erroneous and prejudicial to the interests of the Revenue. The Tribunal upheld the CIT's action under Section 263, directing the AO to reframe the assessment after proper inquiries into these expenditures and deductions. The Tribunal emphasized that the AO is not only an adjudicator but also an investigator, and failure to make basic inquiries would render the assessment order erroneous.

3. Non-initiation of Penalty Proceedings Under Section 271(1)(c):

The CIT held that the AO's failure to initiate penalty proceedings under Section 271(1)(c) for wrongful claim of deduction under Section 10B was erroneous and prejudicial to the interests of the Revenue. The Assessee argued that the claim for deduction was based on the advice of their Chartered Accountant and was withdrawn suo motu during the assessment proceedings. The Tribunal noted that non-initiation of penalty proceedings by the AO is not a justifiable ground for invoking revisionary power under Section 263. The Tribunal held that the CIT cannot direct the AO to initiate penalty proceedings post-assessment, as the satisfaction for default under Section 271(1)(c) must be formed during the assessment proceedings. The Tribunal relied on the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Parmanand M. Patel, which held that the CIT cannot direct the AO to initiate penalty proceedings under Section 271(1)(c).

Conclusion:

The Tribunal partly allowed the appeal for AY 2010-11, holding that the CIT's action under Section 263 was justified regarding the failure to conduct inquiries on specific expenditures and deductions. However, the Tribunal held that the CIT cannot direct the AO to initiate penalty proceedings under Section 271(1)(c). For AY 2008-09, the Tribunal allowed the appeal, holding that the CIT's action under Section 263 for non-initiation of penalty proceedings was not justified. The Tribunal emphasized that penalty proceedings are distinct from assessment proceedings, and the CIT cannot direct the AO to initiate penalty proceedings post-assessment.

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