Penalty u/s 271(1)(c) imposed by CIT without recording satisfaction in order u/s 263 invalid

No Penalty u/s 271(1)(c) can be imposed by CIT without recording satisfaction in revision order 263.  Provision of Section 271(1B) not applicable as CIT is not AO u/s 2(7) of Income Tax Act, 1961.

ABCAUS Case Law Citation:
ABCAUS 2732 (2019) (01) ITAT

Important Case Laws Cited/relied upon:
National Thermal Power Company Limited Vs. CIT (1998) 229 ITR 383 (SC)
Pradeep Publications Vs The Asstt. CIT
ACIT Vs. Pradeep Publications
CIT Vs. Munish Iron Store (2003) 263 ITR 484 (P&H)
CIT Vs. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 (Del).

The assessee had filed the instant appeal against the penalty order passed by the Principal Commissioner of Income Tax (PrCIT) under Sec. 271(1)(c) of the Income Tax Act, 1961 (the Act).

The assessee was a HUF had filed its return of income declaring inter alia income from House property. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act.

Subsequently, the case of the assessee was reopened, vide notice issued u/s 148 on the ground that as per the information received the assessee had received lease rentals for land, but such rental income as observed by the A.O was shown by the assessee in its return of income under the head “Income from House property” after claiming 30% deduction under Section 24(a) of the Act.

Subsequently, the AO framed assessment under Sec. 143(3) r.w.s. 147 adding the lease rent under the head “Income from Other sources”.

Aggrieved, the assessee challenged the assessment in appeal before the CIT(A) but unsuccessfully.

The ITAT remitted the matter to the file of the AO for deciding the same afresh.

In set aside proceedings, the AO did find favour with the claim of the assessee that a building existed on the piece of land that was leased by the assessee and the same was being used by the lessee, though there was no mention of the same in the ‘Agreement of lease’.

In the backdrop of this finding, the AO concluded that the lease rent had rightly been shown by the assessee under the head “Income from House property” and accepted the returned income of the assessee.

However, the assessment so framed by the AO was revised by the PrCIT under Sec. 263 of the Act by holding the same as erroneous, to the extent prejudicial to the interest of the revenue.

The PrCIT, vide his order passed under Sec. 263, concluded that the AO by accepting the claim of the assessee that the lease rent was rightly shown by it under the head “Income from House property”, had allowed excess claim of deduction under Sec. 24(a)of the Act.

The PrCIT directed the AO to reframe the assessment by assessing the lease rent under the head “Income from Other sources” and disallow the claim of deduction under Sec. 24(a).

The PrCIT while passing the order u/s  263 also initiated penalty proceedings u/s  271(1)(c) for furnishing of inaccurate particulars of income by the assessee. Finally, being of the view that the assessee had furnished inaccurate particulars of its income, PrCIT imposed the impugned penalty u/s 271(1)(c) of the Act.

Before the Tribunal, the assessee raised additional grounds that no “satisfaction note” was recorded by the PrCIT with regard to the imposition of penalty on the assessee u/s 271(1)(c) of the Act before passing order u/s 263. And also that the provision of Section 271(1B) would not be applicable as CIT is not AO as per section 2(7) Income Tax Act, 1961.

The Tribunal observed that recording of any satisfaction on the part of the PrCIT that the assessee had furnished any inaccurate particulars of income was not discernible from the order passed under Section 263.

The Tribunal observed that the legislature in all its wisdom by incorporating Section 271(1B) has provided that where an order of assessment or reassessment contains a direction for initiation of penalty proceedings under clause (c) of Subsection (1) of Sec. 271, such an order of assessment or reassessment shall be deemed to constitute satisfaction of the assessing officer for initiation of the penalty proceedings under Sec. 271(1)(c) of the Act.

However as contended by the assessee, the Tribunal concurred that the cushion provided by Section 271(1B) is only in respect of the penalty proceedings initiated by an “Assessing officer”, and the same would not be applicable to those initiated by a Principal Commissioner of Income Tax as PrCIT does not fall within the realm of the definition of “Assessing officer” as envisaged in Sec. 2(7A) of the Act.

The Tribunal observed that PrCIT had merely initiated penalty proceedings for furnishing of inaccurate particulars of income, but had nowhere recorded his satisfaction as to furnishing of inaccurate particulars of income by the assessee, therefore, the same suffered from a jurisdictional defect, which rendered the penalty imposed by him under Sec. 271(1)(c) as invalid in the eyes of law.

Thus, the Tribunal held that the PrCIT had wrongly assumed jurisdiction and imposed penalty u/s 271(1)(c) in the hands of the assessee therefore, the same could not be sustained and accordingly quashed

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