1998 (2) TMI 144 - AT - Income Tax

Summary

Issues Involved:
1. Initiation of penalty proceedings along with the assessment order.
2. Application for change of accounting year.
3. Timing of initiation of penalty proceedings post-assessment.

Detailed Analysis:

1. Initiation of Penalty Proceedings Along with the Assessment Order:
The appellant argued that the penalty proceedings were initiated due to an audit objection, relying on the decision of the Hon'ble Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT. Both the Assessing Officer and the CIT(A) categorically denied that the penalty proceedings were initiated due to an audit objection. The Supreme Court's decision in the cited case was about whether audit objections could form the basis for invoking section 147(b) of the IT Act, 1961. However, in the appellant's case, the Assessing Officer only needed to form a prima facie belief of default under section 271B. The authorities below denied that the penalty proceedings were started on an audit objection, making the Supreme Court's ratio inapplicable.

2. Application for Change of Accounting Year:
The appellant contended that the assessment year 1988-89 was a transitional period for changing the previous year to the financial year, which extended the accounting period beyond 12 months, causing the sales to exceed Rs. 40,00,000. The appellant argued that no reply was received regarding the application for changing the previous year, leading to confusion about consolidating and finalizing accounts. The Assessing Officer noted that the application for changing the previous year was filed on 29-3-1988, while the previous year ended on 15-8-1987, indicating that the appellant assumed the change was granted. The CIT(A) agreed, stating that the appellant took it for granted that the change was accepted and failed to comply with section 44AB of the Act. The appellant's argument was not considered a "reasonable cause" under section 273B of the IT Act.

3. Timing of Initiation of Penalty Proceedings Post-Assessment:
The appellant argued that the penalty was not initiated during the assessment proceedings, making it void. The appellant relied on the ITAT decision in H. Ajitbhai & Co. v. Asstt. CIT, which interpreted section 275 to mean that penalty proceedings must be initiated during the assessment proceedings. However, the Hon'ble Supreme Court in Varkey Chacko v. CIT clarified that penalty proceedings could only be initiated after an assessment order is made and that it is not essential to initiate penalty proceedings during the assessment order. The Delhi High Court in Addl. CIT v. J.K. D'Costa also held that the failure to record the initiation of penalty proceedings in the assessment order does not vitiate the assessment order. The Hon'ble Supreme Court dismissed the SLP filed by the revenue against this decision.

Section 275 of the IT Act prescribes the limitation period for completing penalty proceedings but does not require the commencement of penalty proceedings during the assessment. The Hon'ble Supreme Court in D.M. Manasvi v. CIT and other High Courts have upheld this interpretation, stating that penalty proceedings can be initiated after the completion of assessment, provided they are completed within the prescribed time limit.

Conclusion:
The appeal was dismissed, with the Tribunal finding no legal infirmity in the authorities' actions. The appellant's arguments regarding the initiation and timing of penalty proceedings, as well as the change of accounting year, were not accepted. The Tribunal upheld the penalty imposed under section 271B of the IT Act.