2008 (8) TMI 420 - AT - Income Tax

Summary

Issues Involved:
1. Sustenance of penalty under Section 271D.
2. Validity and legality of the penalty order under Section 271D.
3. Limitation period for passing the penalty order.
4. Merits of the penalty imposed under Section 271D.

Detailed Analysis:

1. Sustenance of Penalty Under Section 271D:
The primary issue in the appeal was the sustenance of penalty amounting to Rs. 2,55,000 under Section 271D of the Income Tax Act, 1961. The assessee, a partnership firm, was penalized for accepting deposits in cash from four individuals, which was deemed a contravention of Section 269SS of the Act. The Assessing Officer (AO) initiated penalty proceedings and imposed the penalty, which was subsequently upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Validity and Legality of the Penalty Order Under Section 271D:
The assessee challenged the validity of the penalty order, arguing that it was time-barred and not initiated during valid assessment proceedings. The CIT(A) held that penalty proceedings under Section 271D are independent of assessment proceedings and can be initiated at any time after the default is committed. The CIT(A) relied on several tribunal judgments to support this view, emphasizing that the legality of the penalty order is unaffected by the status of the assessment order.

3. Limitation Period for Passing the Penalty Order:
The assessee contended that the penalty order was barred by limitation as it was not passed within the prescribed time limit. The CIT(A) emphasized that the limitation period should be counted from the date of the show-cause notice issued by the competent authority, which in this case was the Additional Commissioner of Income Tax (Addl. CIT), Bikaner Range. The CIT(A) found that the penalty order was passed within the prescribed time limit.

4. Merits of the Penalty Imposed Under Section 271D:
On merits, the CIT(A) found that the cash deposits were recorded in the diaries seized during the search but were not entered in the regular books of account, indicating non-genuine and improper transactions aimed at avoiding tax. The CIT(A) upheld the penalty, citing judgments from the Bombay High Court and various tribunal orders.

Assessee's Arguments:
The assessee argued that the penalty proceedings were initiated based on unexplained cash credits added as income under Section 68 in the block assessment order. The assessee contended that the initiation of penalty proceedings under Section 271D was invalid and barred by limitation. The assessee also argued that the penalty proceedings should have been completed within six months from the end of the month in which the action for imposition of penalty was initiated.

Tribunal's Findings:
The tribunal examined the penalty order and found that the AO was satisfied that the assessee had accepted deposits in contravention of Section 269SS. The Addl. CIT, Bikaner, issued a show-cause notice within his competence and jurisdiction. The tribunal held that the limitation period for imposition of penalty should be counted from the date of the show-cause notice, which was within the prescribed time limit.

Conclusion:
The tribunal concluded that the penalty order was not barred by limitation and was validly initiated. However, on merits, the tribunal found that if the AO treated the amount of deposits as income, he could not simultaneously treat the same amount as a deposit or loan for the purpose of Section 269SS and impose a penalty under Section 271D. This view was supported by the Delhi High Court judgment in Diwan Enterprises vs. CIT. Consequently, the tribunal canceled the penalty imposed on the assessee and allowed the appeal.