2003 (5) TMI 207 - AT - Income Tax

Summary

Issues Involved:
1. Whether the CIT was justified in setting aside the assessment order for the limited issue of considering the provisions of section 271(1)(c) of the Income-tax Act.
2. Whether the CIT can invoke powers under section 263(1) of the Income-tax Act to direct initiation of penalty proceedings when the Assessing Officer did not initiate such proceedings.

Issue-Wise Detailed Analysis:

1. Justification of CIT in Setting Aside the Assessment Order:
The CIT set aside the assessment order on the ground that the Assessing Officer (AO) did not initiate penalty proceedings under section 271(1)(c) despite having concrete evidence of the assessee filing false documents to justify agricultural income. The CIT deemed the AO's action as not in accordance with the law, resulting in the state being deprived of lawful revenue due to the non-realization of penalties.

2. Invocation of Powers Under Section 263(1):
The CIT invoked section 263(1) to set aside the assessment order and directed the AO to frame a fresh assessment considering the facts attracting penal action under section 271(1)(c). The CIT relied on several Madhya Pradesh High Court decisions, which held that the Commissioner can direct the AO to initiate penalty proceedings if they were not initiated during the assessment.

Assessee's Contention:
The assessee argued that penalty proceedings are independent and separate from assessment proceedings. The failure of the AO to record satisfaction for initiating penalty proceedings does not render the assessment order erroneous or prejudicial to the interests of the revenue. The assessee cited various judgments, including J.K. D'Costa and Achal Kumar Jain, to support the contention that the CIT cannot direct initiation of penalty proceedings under section 263.

Revenue's Contention:
The revenue supported the CIT's order, arguing that the citations relied upon by the CIT were directly applicable. The CIT's invocation of revisional jurisdiction under section 263(1) was justified, and the order should be upheld.

Tribunal's Analysis:
The Tribunal examined the rival submissions, records, and relevant case laws. The key issue was whether the CIT can invoke section 263(1) to set aside the assessment order and direct the initiation of penalty proceedings. The Tribunal noted that various High Courts, including Delhi, Gauhati, Calcutta, and Rajasthan, have held that penalty proceedings are independent and not part of assessment proceedings. The failure to initiate penalty proceedings does not render the assessment order erroneous or prejudicial to the revenue.

Key Judgments Considered:
- J.K. D'Costa Case: Held that penalty proceedings are independent of assessment proceedings, and the CIT cannot direct initiation of penalty proceedings under section 263.
- Achal Kumar Jain Case: Affirmed that penalty proceedings do not form part of the assessment, and the CIT cannot direct initiation of penalty proceedings.
- Other High Courts: Similar views were held by the Gauhati, Calcutta, and Rajasthan High Courts, dissenting from the Madhya Pradesh High Court's decisions.

Conclusion:
The Tribunal concluded that the majority view of the High Courts should be followed, which holds that the CIT cannot direct initiation of penalty proceedings under section 263. The penalty proceedings are not part of the assessment proceedings, and non-initiation of penalty proceedings by the AO does not make the assessment order erroneous or prejudicial to the interests of the revenue. Consequently, the Tribunal set aside the CIT's order passed under section 263(1) and allowed the assessee's appeal.

Result:
The appeal was allowed.