2007 (8) TMI 386 - AT - Income Tax

Penalty levied u/s 27(1)(b) - Absence of recording of the satisfaction - non-compliance of notice u/s 142(1) - HELD THAT - Under cl. (a), the levy of penalty is dependent upon the findings of the appellate authorities, which is not the case under cl. (c). In this case, the default of non-attendance to notices was not the subject-matter in the quantum appeal and it in no way depended upon the outcome in the appeal. The penalty depends upon whether the default was willful or not. Therefore, we are of the view that the ratio of the case of Hissaria Bros. 2006 (7) TMI 163 - RAJASTHAN HIGH COURT will be applicable in this case also. Consequently, it is also held that the order ought to have been passed on or before 31st Sept., 2001, failing which the levy will become barred by limitation. Issue of recording of satisfaction , it may be mentioned that mere initiation of penalty does not amount to satisfaction as held in the case of CIT v. Ram Commercial Enterprises Ltd. 1998 (10) TMI 13 - DELHI HIGH COURT . In absence of recording of the satisfaction in the assessment order, mere initiation of penalty will not confer jurisdiction on the AO to levy the penalty. We also find that finally the order was passed u/s 143(3) and not u/s 144 of the Act. This means that subsequent compliance in the assessment proceedings was considered as good compliance and the defaults committed earlier were ignored by the AO. Therefore, in such circumstances, there could have been no reason to come to the conclusion that the default was willful. Thus, it is held that the learned CIT(A) was not right in upholding the levy of penalty. Thus, the appeal is allowed.

Issues:
1. Confirmation of penalty under section 271(1)(b) of the Income Tax Act.
2. Bar on limitation period for imposing penalty.
3. Distinction between penalties linked with assessment and penalties not linked with assessment.
4. Recording of satisfaction for initiation of penalty.
5. Compliance in assessment proceedings affecting penalty imposition.

Analysis:

Issue 1: Confirmation of penalty under section 271(1)(b) of the Income Tax Act
In this case, the assessee contested the penalty of Rs. 30,000 levied under section 271(1)(b) of the Act for non-compliance with notices issued during assessment proceedings. The AO held that the default was deliberate, justifying the penalty. The CIT (A) upheld the penalty, citing that the order was within the limitation period. However, the appellant argued that the penalty was time-barred, relying on a Rajasthan High Court decision. The ITAT noted that the penalty was not linked to the assessment appeal, and hence, the penalty order was time-barred, as it should have been passed by 31st Sept., 2001.

Issue 2: Bar on limitation period for imposing penalty
The ITAT referred to the distinction between clauses (a) and (c) of section 275(1) of the Act, emphasizing that penalties not linked to assessment proceedings fall under clause (c). The tribunal held that the penalty in this case was not dependent on the appeal's outcome, making it time-barred as it was imposed after the prescribed date. The ITAT's decision aligned with the Hissaria Bros. case, highlighting the importance of the limitation period in penalty imposition.

Issue 3: Distinction between penalties linked with assessment and penalties not linked with assessment
The ITAT clarified that penalties unrelated to assessment proceedings are subject to different limitation rules. The tribunal emphasized that penalties for non-compliance with notices are not contingent on the appeal's findings, thus falling under a separate limitation provision. This distinction played a crucial role in determining the penalty's validity in this case.

Issue 4: Recording of satisfaction for initiation of penalty
The ITAT reiterated that the mere initiation of a penalty does not constitute satisfaction, as per a Delhi High Court ruling. Without explicit satisfaction recorded in the assessment order, the AO lacks jurisdiction to levy the penalty. This requirement underscores the importance of proper documentation and procedural compliance in penalty imposition.

Issue 5: Compliance in assessment proceedings affecting penalty imposition
The ITAT noted that subsequent compliance in the assessment proceedings, leading to the order under section 143(3) instead of section 144, indicated good compliance. The AO's consideration of later compliance and ignorance of earlier defaults implied that the defaults were not willful. This factor further supported the ITAT's decision to disallow the penalty.

In conclusion, the ITAT allowed the appeals, emphasizing the importance of adherence to limitation periods, proper recording of satisfaction, and the impact of compliance on penalty imposition in income tax cases.

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