TPO had no power to impose penalty u/s 271G before 01.10.2014 – High Court

TPO had no power to impose penalty u/s 271G before 01.10.2014. Law operating on the date on which the wrongful act is committed determines the penalty

ABCAUS Case Law Citation:
ABCAUS 2564 (2018) (10) HC

Important Case Laws Cited/relied upon by the parties:
Brij Mohan vs. Commissioner of Income Tax, (1979) 120 ITR 1 SC
Varkey Chacko vs. Commissioner of Income Tax, (1993) 203 ITR 885 (SC)
Securities and Exchange Board of India vs. Classic Credit Ltd., JT 2017 (9) SC 558

The petitioner’s grievance was that the penalty imposed under Section 271G of the Income Tax Act, 1961 (the Act) was illegal because the Transfer Pricing Officer (TPO) did not possess the requisite jurisdiction, when he issued first show-cause notice requiring the petitioner/assessee to produce the relevant documents under Section 92D(3) of the Act.

For the Assessment Year (AY) 2011-12, the assessee had filed its returns. This included a transfer pricing report. The TPO apparently took cognizance of reports and desired the assessee to produce some documents in support of its case; a notice was issued on 18.02.2014, giving time up-to 25.03.2014.

The assessee did not comply with the notice. On 05.12.2014, second notice was issued by the TPO alleging default and proposing penalty under Section 271G of the Act. The draft assessment order based upon the TPO’s report, was issued on 22.06.2015.

The assessee contested the notice and it eventually culminated in the impugned order whereby, the TPO imposed a penalty upon the assessee, for non complying with the notice and furnishing requisite documents.

The assessee contended that the penalty event could not be postponed or varied. That event of default or at the most the event of recording reasons constitutes the defining point of jurisdiction. In the present case, so called default, noticed by the AO, was acted upon on 25.03.2014. The mere circumstance that the AO did not choose to act upon, it did not mean that the cause for imposing penalty was postponed within the period when the power was expanded under amendment to Section 271G of the Act.

The Revenue’s contention was that the first notice was not proceeded with. The TPO deemed it appropriate to give a second chance and issued fresh notice to the assessee on 05.12.2014 – after the amendment was brought into force w.e.f 01.10.2014. Thus when the TPO issued the second notice, he possessed the power.

The Hon’ble High Court observed that till 01.10.2014, the jurisdiction and authority to impose penalty under Section 271G was with the Assessing Officer (AO) – defined in Section 2(7A) to mean the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income-tax Officer. However with the enactment of Finance Act 2014 expanded the jurisdiction of the TPO, who was for the first time authorized to impose penalty for non-compliance with the notice requirements under Section 271G of the Act.  The TPO had issued the notice in pursuance of the amended provisions (which was subject matter of the previous notice dated 18.02.2014) afresh on 05.12.2014.

The Hon’ble High Court observed that the Supreme Court articulated the correct position in the case of assessments and the law applicable with respect to jurisdiction and other substantive proposition on one hand and the correct position in respect of penalty on the other hand by holding that a penalty is imposed on account of the commission of a wrongful act, and plainly it is the law operating on the date on which the wrongful act is committed which determines the penalty. Where penalty is imposed for concealment of particulars of income, it is the law ruling on the date when the act of concealment takes place which is relevant.

The Hon’ble High Court allowed the writ petition and the impugned order was quashed.

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