Possibility of initiating proceedings against an assessee cannot be kept pending over his head like a Damocle’s sword – Penalty u/s 271B quashed by High Court
In a recent judgment, the Hon’ble Kerala High Court has quashed penalty u/s 271B observing that the possibility of initiating proceedings against an assessee cannot be kept pending over his head like a Damocle’s sword. Though penalty proceeding under section 271B of the Act is independent of the assessment, as far as the time limit is concerned, it cannot be wholly extricated from the assessment order. If a case falls under the latter part of section 275(1)(c) of the Act, proceedings for imposition of penalty under section 271B of the Act must be initiated and completed within a reasonable time of the assessment order.
ABCAUS Case Law Citation:
4408 (2025) (02) abcaus.in HC
Important Case Laws relied upon by Parties:
State of Punjab and Others v. Bhatinda District Cooperative Milk Producers Union Ltd [(2007) 11 SCC 363]
Commissioner of Income-tax v. E.C.C. Project Pvt. Ltd. (2015) 374 ITR 44
Commissioner of Income Tax (TDS) v. Turner General Entertainment Networks India Pvt Ltd (2024 SCC OnLine Del 7760)
Jagadeesan Jaganathan vs. Joint Commissioner of Income Tax
In the instant case, the Petitioner/assessee had challenged the penalty imposed under section 271B of the Income Tax Act, 1961 (‘the Act’) on the ground of limitation.
The Petitioner was a firm engaged in the business of retail trade. Consequent to a survey carried out under section 133A of the Act, petitioner was assessed to income tax under section 143(3) of the Act for the relevant Assessment Year. In the assessment order, though the Assessing Officer (AO) specifically observed that proceedings for imposition of penalty under section 270A ought to be initiated, there was no reference for initiating proceedings under section 271B of the Act.
However, more than four years later, a notice was issued under section 274 of the Act proposing to impose penalty under section 271B of the Act, for not filing the audit report in the prescribed form as required under section 44AB of the Act for the said assessment year. Finally, by the impugned order, a penalty of Rs.1,50,000/- was imposed upon the petitioner under the said provision.
By way of the Writ Petition, the assessee challenged the order imposing penalty contending that it was issued beyond the time limit specified in section 275(1)(c) of the Act. The Petitioner contended that the proceeding for imposition of penalty was initiated and completed almost four and a half years after the assessment proceedings and was hence beyond the time limit stipulated in section 275(1)(c) of the Act. It was further submitted that the proceedings ought to have been initiated within a reasonable time of the assessment order and at any rate within six months from the assessment order.
It was also submitted that, even if the benefit of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 is applied, still, the respondent cannot have such an extended period. The Petitioner relied upon several judgments of the High Courts in support of its contentions.
The Revenue pleaded that, though the assessment order was passed four years before, there was no reference at all to any penalty proceedings under section 271B of the Act, while the show cause notice for imposing penalty was issued later and hence the proceedings were not barred by time. It was further pointed out that section 275(1)(c) of the Act postulates completion of proceedings only within six months from the issuance of show cause notice. It was also submitted that since the proceeding for imposing penalty was completed within six months of issuing the show cause notice, there was no merit in the challenge.
The Hon’ble High Court observed that under section 271B of the Act, it is not stipulated that it must be initiated ‘in the course of proceedings’ as in the case under sections 270A and 271(1) of the Act. The terminology used in section 271B indicates that even if it is not in the course of proceedings under the Act, a penalty under the said provision can be imposed. Therefore, it is not necessary that the proceedings under section 271B of the Act must be initiated during the course of the assessment proceeding itself. The imposition of penalty under section 271B of the Act is independent of the assessment proceedings. A recitation by the Assessing Officer in the assessment order directing initiation of penal proceedings under section 271B of the Act is not imperative and penal proceedings can be initiated without such a specific direction. The Hon’ble High Court expressed its disagreement with the judgment of the Hon’ble Allahabad High Court.
However, the Hon’ble High Court opined that the requirement of an audit report under section 44AB of the Act will generally become obvious to the Assessing Officer at the time of passing an order of assessment. Penalty proceedings under section 271B of the Act can follow the assessment order. As per section 275(1)(c) of the Act, the penalty proceedings will have to be completed either before the end of the financial year in the course of which action for imposition of penalty has been initiated or within six months of initiating proceedings for imposing penalty. The Hon’ble High Court observed that as per section 275 the legislative intention is to create a time limit within which the proceedings for initiation and completion of penalty proceedings ought to be carried out. It cannot be kept in an uncertain or indefinite manner.
The Hon’ble High Court observed the decision of the Delhi High Court in a Division Bench interpreted the expression ‘action for imposition of penalty is initiated’ as appearing in section 275(1)(c) of the Act, to mean the date on which the first introductory step for such action is taken, which must necessarily mean the start of such an action. Further, Hon’ble Madras High Court held that though a time limit for issuance of a notice under section 275(1)(c) has not been specified, it has to be assumed that the notice ought to be issued before the end of the financial year itself.
Further, it was observed that a Division Bench of the Bombay High Court held that, though assessment proceedings were completed on 30.03.1999, the show cause notice was issued on 06.04.1999 and the period of limitation expired within six months from the show cause notice, i.e., October 29, 1999, which would be the last date for the period of limitation computed as per the second part of clause (c) of section 275(1) of the Act. Further a Division Bench of the Karnataka High Court also considered a similar issue and held that in cases where the proceedings initiated falls under the second part of section 275(1)(c) of the Act, the order of penalty must be passed within six months from the end of the month in which action for imposition of penalty is initiated.
The Hon’ble High Court further observed that section 275(1)(c) of the Act provides a time limit for initiation of proceedings for penalty. As per the said provision, two timelines are given. The first timeline is before the end of the financial year in the course of which, action for imposition of penalty has been initiated. The second timeline is within six months from the end of the month in which action for imposition of penalty is initiated. However, even within the two timelines given, the proceeding for imposition of penalty ought to be completed within a reasonable time. The latter part of section 275(1)(c) of the Act, providing for a period of six months, is clearly indicative that the Income Tax Officers cannot be given a long handle to initiate proceedings at any point of time, according to their caprice. The possibility of initiating proceedings against an assessee cannot be kept pending over his head like a Damocle’s sword, indefinitely.
The Hon’ble High Court noted that indisputably, the return filed by an assessee was verified at the time of assessment. Though penalty proceeding under section 271B of the Act is independent of the assessment, as far as the time limit is concerned, it cannot be wholly extricated from the assessment order. Once an assessment is completed, it will act as a leash, compelling the Officers to act within a reasonable time from its completion, for the purpose of imposing a penalty.
The Hon’ble High Court pointed out that if no period of time is prescribed by a statute, it must be exercised within a reasonable period which would depend upon the nature of the statute, rights and liabilities thereunder and other relevant factors. The reasonable period, must, no doubt, be found out from the scheme of the statute and in particular the tenor of the provision under consideration.
The Hon’ble High Court further observed that the penalty under section 271B is imposed for failure to attach an audit report. The absence of an audit report along with the return will become evident during the assessment proceedings. Bearing in mind the nature of violation for which penalty is imposed under section 271B of the Act, proceedings for imposing penalty cannot be too distant from the assessment order. Thus, if the case falls under the latter part of section 275(1)(c) of the Act, in respect of penalty proceedings under section 271B of the Act, the show cause notice must be issued within a reasonable time of the completion of the assessment proceedings and be completed within six months thereafter. What is a reasonable period will depend upon the facts of each case.
The Hon’ble High Court held that if a case falls under the latter part of section 275(1)(c) of the Act, proceedings for imposition of penalty under section 271B of the Act must be initiated and completed within a reasonable time of the assessment order.
The Hon’ble High Court observed that since the assessment order in the instant case had not referred to any proceeding for imposition of penalty under section 271B, the time limit cannot be said to have emanated from the assessment order. However, as the assessment proceedings itself would have revealed the absence of an audit report u/s 44AB, the show cause notice should have been issued within a reasonable time of the assessment order. Even by applying the provisions of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, the end date for passing orders was extended till 31.03.2022, and the Income Tax Department were entitled to issue a notice within a reasonable time of the expiry of the said period.
The Hon’ble High Court held that the show cause notice was issued after a period which was beyond the statutory contemplation. The show cause notice was hence time-barred under section 275(1)(c) of the Act.
Accordingly, the impugned order imposing penalty under section 271B of the Act was held invalid and set aside.
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