2018 (2) TMI 1533 - HC - Income Tax

Penalty u/s 271(1)(c) - period of limitation - Held that - The dependence of the period of the limitation upon whether an order becomes final at the instance of one party i.e. that filing and prosecution or withdrawal of an appeal (by one party or the other) would be in the opinion of the Court one such event which leaves the legal position inchoate and unsatisfactory. Instead an interpretation that permits certainty should be adopted. CIT s order provided a fixed date from which to reckon the end of the period of limitation some time in early July 1994. The absence of an appeal by the assessee (against the CIT(A) s appellate adjudicatory order) meant that at least with respect to the amount that it had accepted in the adjudicatory order as an addition the penalty proceedings survived. As far as the other issue was concerned perhaps there was no occasion for a further penalty proceeding given that the issue might have been rendered debatable even in the eventuality of an order favouring the revenue. As far as deletion was concerned the assessee definitely was not aggrieved. It was incumbent upon the revenue to complete the penalty proceedings and pass order within the six months period. It did not. Its reliance upon the crutches of a non-appeal which is what its effort at appeal to the ITAT eventually became in the present case could not have been legitimately upheld as was done by the impugned order. - Decided in favour of the assessee

Summary

Issues Involved:
1. Interpretation of Section 275(1)(a) read with Section 254(1) of the Income Tax Act, 1961.
2. Validity of the penalty order under Section 271(1)(c) considering the limitation period.
3. Impact of the withdrawal of the revenue's appeal on the limitation period for penalty proceedings.

Detailed Analysis:

1. Interpretation of Section 275(1)(a) read with Section 254(1) of the Income Tax Act, 1961:

The core issue was whether the ITAT was correct in holding that the penalty order passed by the Assessing Officer (AO) under Section 271(1)(c) was within the limitation period prescribed by Section 275(1)(a). The relevant sections were analyzed to determine the correct interpretation. Section 275(1)(a) states that no penalty order shall be passed after the expiry of six months from the end of the month in which the order of the Commissioner (Appeals) or the Appellate Tribunal is received by the Chief Commissioner or Commissioner, whichever period expires later.

2. Validity of the penalty order under Section 271(1)(c) considering the limitation period:

The assessee argued that the penalty proceedings were barred by limitation as they should have been completed within six months from the end of the month in which the CIT(A)’s order was received, i.e., by 31.07.1994. Since the penalty order was passed on 25.11.1997, it was contended to be beyond the prescribed period. The AO had issued a notice under Section 271(1)(c) on 12.08.1997, which the assessee claimed was without jurisdiction due to the lapse of the limitation period.

3. Impact of the withdrawal of the revenue's appeal on the limitation period for penalty proceedings:

The revenue contended that it had filed an appeal against the CIT(A)’s order to the ITAT, which was later withdrawn. The ITAT permitted the withdrawal on 31.03.1997. The revenue argued that this appeal process negated the assessee’s contention regarding the limitation period. The ITAT held that the withdrawal of the appeal by the department did not mean that no appeal was filed, and thus the limitation period should be counted from the date of the ITAT’s order permitting the withdrawal.

Judgment Analysis:

1. Interpretation of Sections 275(1)(a) and 254(1):

The court noted that Section 275(1)(a) prescribes a limitation period for passing penalty orders. The interpretation of "order" under Section 254(1) was crucial. The court observed that an effective appeal means more than just filing; it must be effectively pursued. The Supreme Court’s judgment in CIT v. B.N. Bhattacharjee was cited, which held that an appeal withdrawn is as good as not having been filed.

2. Validity of the Penalty Order:

The court found that the penalty proceedings should have been completed within six months from the end of the month in which the CIT(A)’s order was received. Since the CIT(A)’s order was received in January 1994, the limitation period expired in July 1994. The penalty order passed on 25.11.1997 was beyond this period, making it invalid.

3. Withdrawal of Appeal and Limitation Period:

The court held that the ITAT’s acceptance of the withdrawal of the revenue’s appeal did not constitute an effective appeal. The mere filing and subsequent withdrawal of the appeal did not extend the limitation period. The court emphasized that the law abhors uncertainty, and the limitation period should be clear and certain. The revenue's reliance on the appeal process, which was ultimately withdrawn, could not extend the limitation period for penalty proceedings.

Conclusion:

The court concluded that the penalty order was time-barred and invalid. The question of law was answered in favor of the assessee and against the revenue. The appeal was consequently allowed, setting aside the penalty imposed by the AO. The court emphasized the importance of adhering to the prescribed limitation periods to ensure certainty and finality in legal proceedings.