2013 (11) TMI 662 - HC - Income Tax

Penalty u/s 271(1)(c) of the Income tax Act Jurisdiction of AO to initiate penalty proceeding under section 271(1)(c) of the Income tax act, when the prior approval of Deputy Commissioner is not obtained Application of proviso of section 271(1)(iii) of the Income tax Act - Investment shown by the assessee and his brothers in the renovation of the said property on the basis of the report of the valuation officer, was found to be understated by the I.T.O. Therefore, unexplained investment was added to the assessee s total income in respect of the assessment years in question - Assessing Officer had initiated proceedings for levying penalty u/s 271(1)(c) of the Income Tax Act. Held that - ITO has initiated penalty proceedings. The quantum of concealed income was assessed at Rs.36,000/- for the year 1975-76, and Rs.37,000/- for the assessment year 1976-77. During the pendency of penalty proceedings, the assessee filed appeals against the assessment orders, which were allowed, and that the unexplained income was reduced to Rs.18,373/- for the assessment year 1975-76 and Rs.6,140/- for the assessment year 1976-77. When the order under Section 271 (1) (c) of the Income Tax Act, imposing penalty came to be passed, the quantum of income was reduced to below 25,000/-. The AO, therefore did have jurisdiction, to give directions for payment by way of penalty, without the previous approval of the Deputy Commissioner in view of proviso to clause (iii) of sub section (1) of Section 271. The restrictions placed by proviso to clause (iii) of sub-section (1) of Section 271 of the Act cannot be interpreted in a manner to curtail the jurisdiction on the ITO, not to initiate proceedings. Under the facts and circumstances of the case, imposition of penalty by the AO is not in contravention of the proviso of sub section (1) of Section 271 of the Act Decided in favor of Revenue.

Summary

Issues:
1. Justification of canceling penalty under section 271(1)(c) of the Income Tax Act.
2. Interpretation of Section 271(1)(iii) regarding the quantum of concealment of income.
3. Validity of the order of the Appellate Assistant Commissioner.

Analysis:

Issue 1:
The case involved a reference under Section 256(1) of the Income Tax Act regarding the cancellation of a penalty under section 271(1)(c). The Income Tax Appellate Tribunal had to decide whether canceling the penalty was justified. The Tribunal considered the explanation submitted by the assessee and the Assessing Officer's imposition of the penalty. The Appellate Assistant Commissioner had canceled the penalty, citing that it cannot be levied merely on an estimate of construction costs. The Tribunal reviewed relevant case laws and upheld the cancellation of the penalty.

Issue 2:
The case also revolved around the interpretation of Section 271(1)(iii) concerning the quantum of concealment of income. The Tribunal analyzed the procedure for obtaining approval for penalties exceeding a specified amount. It was highlighted that the Assessing Officer must determine the concealed income 'on assessment' and not based on later adjustments due to appellate orders. The Tribunal emphasized the mandatory nature of the procedure for obtaining approval and ruled that the Assessing Officer's failure to follow this procedure rendered the penalty orders invalid.

Issue 3:
Regarding the validity of the order of the Appellate Assistant Commissioner, it was noted that the reduction of the unexplained income during the penalty proceedings affected the jurisdiction of the Assessing Officer to impose penalties without prior approval. The Tribunal clarified that the Assessing Officer's authority to initiate penalty proceedings was not curtailed by the proviso to Section 271(1)(iii). The Tribunal disagreed with the department's argument and upheld the imposition of the penalty by the Assessing Officer in accordance with the provisions of the Income Tax Act.

In conclusion, the Tribunal answered the questions in favor of the revenue and against the assessee, emphasizing the importance of following the procedural requirements and interpreting the relevant sections of the Income Tax Act accurately to determine the validity of penalties and concealment of income.