2025 (2) TMI 238 - HC - Income Tax

Penalty u/s 271D and 271E - mandation of recording satisfaction to be recorded in the reassessment proceedings by the concerned AO - HELD THAT - In Jai Laxmi Rice Mills 2015 (11) TMI 1453 - SUPREME COURT the Supreme Court was dealing with the issue as to whether the penalty proceedings under section 271D are independent of the assessment proceedings. In that case in the assessment order passed in pursuance to the remand no satisfaction was recorded for initiating the proceedings u/s 271E. Though the AO stated for initiation of proceedings u/s 271(1)(c). The penalty proceeding was quashed on the ground that in absence of satisfaction recorded by the AO the penalty can not be imposed. In the case in hand the DCIT had only recorded satisfaction for proceedings u/s 271(1)(c) and no satisfaction was recorded to initiate penalty proceedings u/s 271D. The notice issued u/s 271E and the proceedings in pursuance thereto are quashed. Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the imposition of penalties under Sections 271D and 271E of the Income Tax Act, 1961, is valid without the recording of satisfaction by the Assessing Officer (AO) during the reassessment proceedings.

2. Whether the satisfaction recorded by the Additional Commissioner of Income Tax (ACIT) after the conclusion of reassessment proceedings is sufficient for initiating penalty proceedings under Sections 271D and 271E.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Penalties under Sections 271D and 271E without AO's Satisfaction

- Relevant Legal Framework and Precedents: Sections 271D and 271E of the Income Tax Act, 1961, pertain to penalties for certain transactions. The Supreme Court in Commissioner of Income Tax Vs. Jai Laxmi Rice Mills established that penalty proceedings under these sections require satisfaction to be recorded by the AO during the assessment or reassessment proceedings.

- Court's Interpretation and Reasoning: The Court emphasized that the absence of recorded satisfaction by the AO during reassessment proceedings renders the penalty proceedings invalid. The Court relied heavily on the precedent set by the Supreme Court in Jai Laxmi Rice Mills, which mandates that such satisfaction must be a part of the assessment process.

- Key Evidence and Findings: The reassessment order dated 12.03.2024 did not record any satisfaction for initiating penalty proceedings under Section 271E. The reference by the Deputy Commissioner of Income Tax (DCIT) to the ACIT and the subsequent satisfaction recorded on 24.09.2024 were deemed insufficient as they occurred post-reassessment.

- Application of Law to Facts: The Court applied the legal principle that satisfaction must be recorded during the assessment process. The lack of such satisfaction in the reassessment order meant that the penalty notices issued under Section 271E were invalid.

- Treatment of Competing Arguments: The respondent's argument that there is no requirement for the AO to record satisfaction under Section 271E was not supported by the Court. The Court found the reliance on subsequent satisfaction by the ACIT unconvincing, as it did not align with the Supreme Court's requirements.

- Conclusions: The Court concluded that the penalty proceedings under Section 271E were invalid due to the absence of recorded satisfaction by the AO during the reassessment process.

2. Sufficiency of ACIT's Satisfaction Post-Reassessment

- Relevant Legal Framework and Precedents: The legal requirement, as interpreted by the Supreme Court, is that satisfaction for penalty proceedings must be recorded by the AO at the time of assessment or reassessment.

- Court's Interpretation and Reasoning: The Court held that the satisfaction recorded by the ACIT after the reassessment proceedings could not substitute the requirement for the AO's satisfaction during the assessment. The Court reiterated the principle that penalty proceedings are not independent of the assessment process.

- Key Evidence and Findings: The ACIT recorded satisfaction on 24.09.2024, which was after the reassessment order dated 12.03.2024. This timing was critical in the Court's decision to invalidate the penalty proceedings.

- Application of Law to Facts: The Court applied the precedent that requires satisfaction to be contemporaneous with the assessment process. The post-reassessment satisfaction was therefore deemed inadequate.

- Treatment of Competing Arguments: The argument that the ACIT's satisfaction was sufficient was dismissed based on the Supreme Court's clear stance on the timing and source of the required satisfaction.

- Conclusions: The Court concluded that the ACIT's satisfaction recorded post-reassessment was insufficient to validate the penalty proceedings under Section 271E.

SIGNIFICANT HOLDINGS

- The Court held that the penalty proceedings under Section 271E of the Income Tax Act, 1961, were invalid due to the absence of recorded satisfaction by the AO during the reassessment proceedings.

- The Court reinforced the principle established by the Supreme Court in Jai Laxmi Rice Mills, emphasizing the necessity of AO's satisfaction during the assessment process for valid penalty proceedings.

- The Court quashed the notices issued under Section 271E and allowed the writ petitions, thereby invalidating the penalty proceedings initiated based on those notices.