2007 (12) TMI 97 - HC - Income Tax

AO has to form his own opinion & record his satisfaction, of concealment of income or furnishing of inaccurate particulars of income, before initiating penalty proceedings u/s 271(1)(c) assessment was completed accepting the returned net income as per the revised return both assessment order & SCN are silent about such satisfaction of AO - Nothing has been placed by Revenue to show that any other material was available with AO to confirm concealment penalty set aside

Summary

Issues Involved:
1. Legality of the penalty proceedings initiated under Section 271(1)(C) of the Income-tax Act, 1961.
2. Requirement of recording satisfaction of concealment of income by the Assessing Officer.
3. Jurisdictional validity of the penalty proceedings.
4. Violation of principles of natural justice.

Detailed Analysis:

1. Legality of the penalty proceedings initiated under Section 271(1)(C) of the Income-tax Act, 1961:
The assessee company filed a return for the Assessment Year 1995-96 declaring 'Nil' income and claimed 50% depreciation on solar equipment. Subsequently, the assessee filed a revised return declaring an income of Rs.4,77,510/- and withdrew the depreciation claim due to the supplier's inability to provide evidence. The Assessing Officer accepted the revised return but initiated penalty proceedings under Section 271(1)(C) for concealment of income. The Tribunal upheld the penalty but remanded the matter for re-quantification.

2. Requirement of recording satisfaction of concealment of income by the Assessing Officer:
The core issue was whether the Assessing Officer recorded satisfaction of concealment of income before initiating penalty proceedings. The court emphasized that recording such satisfaction is a condition precedent for levying a penalty under Section 271(1)(C). The Supreme Court in D.M. Manasvi v. C.I.T. held that satisfaction must be recorded during the assessment proceedings, and the issue of notice is a consequence of such satisfaction.

3. Jurisdictional validity of the penalty proceedings:
The court referred to various precedents, including C.I.T. v. Munish Iron Store and CIT v. Vikas Promoters P. Ltd., which established that the Assessing Officer must record satisfaction in the assessment order itself. Failure to do so results in a jurisdictional defect that cannot be cured. The court found that the Assessing Officer did not record satisfaction in the assessment order dated 16.3.2001, making the penalty proceedings without jurisdiction.

4. Violation of principles of natural justice:
The assessee contended that the penalty order was based on a statement by a third party without allowing cross-examination, violating natural justice principles. The court noted that the Assessing Officer accepted the revised return without raising any objections and did not provide any other material evidence of concealment. The show-cause notice also lacked reference to any satisfaction of concealment.

Conclusion:
The court concluded that the penalty proceedings were arbitrary, illegal, and without jurisdiction due to the absence of recorded satisfaction by the Assessing Officer. The impugned proceedings were set aside, and the appeal was allowed in favor of the assessee.