Whether AO is entitled to levy penalty under section. 271(1)(c)/ 271(1B) on issues other than the specific issues mentioned in assessment order?

Judgment and Facts of the case

ALLAHABAD HIGH COURT

Chief Justice's Court

Case:- INCOME TAX APPEAL No. - 103 of 2014

Commissioner Of Income Tax

Appellant

Versus

M/S Triveni Engineering & Industries Ltd.

             Respondent              

Counsel for Appellant:- Dhananjay Awasthi

Counsel for Respondent:- R.S. Agarwal, Rohit Jain

Corum

Hon'ble Dr. Dhananjaya Yeshwant Chandrachud,

Chief Justice Hon'ble Dilip Gupta, J.

Judgment pronounced on : 26.05.2014

The appeal by the Revenue under section 260A of the Income Tax Act, 1961 arises from an order passed by the Income Tax Appellate Tribunal on 7 February 2013 in so far as the Tribunal deleted the levy of penalty under section 271(1)(c) of Rs.77,89,965/- towards interest on Sugar Development Fund (SDF). The assessment year to which the appeal relates is A.Y. 2000-01.

The following questions of law have been raised by the Revenue in the appeal.

“1. Whether the ITAT erred in law in interpreting the language and provisions of Section 271(1)(c) which only talks of initiation of penalty in “course of any proceedings” and there is no condition in the language of the Section which calls for recording of satisfaction before initiation of u/s 271(1)(c).

2. Whether the ITAT erred in law in not considering the provisions of Explanation 7 (1B) to section 271 which clearly indicates that where any order of assessment contains a direction for initiation of penalty under clause (c) of sub-section (1), such an order shall be deemed to constitute satisfaction of the A.O for initiation of penalty proceedings.

3. Whether the ITAT erred in law by interpreting new conditions in the language and provision of section 271(1)(c) which was not originally intended by the legislature and would amount to “casus omissus”.

The Assessing Officer made an order of assessment under section 143(3) on 31 March 2003. At this stage, it would be material to note that the Assessing Officer specifically dealt with various items which are as follows:-

(i)   Software expenses ;

(ii)  provision for gratuity ;

(iii) short charging of interest on loan/advance to sister concern ;

(iv) interest on SDF loan ;

(v)  lease adjustment charges ;

(vi) provision for cost of completion of jobs

(vii) bad debts and amounts written off ;

(viii) commission paid ;

(ix) foreign exchange fluctuation ; and

(x)  depreciation.

Under each of the aforesaid heads, where the Assessing Officer considered it necessary to initiate penalty proceedings under section 271(1) (c), there was a specific direction to that effect. Consequently, the Assessing Officer specifically directed under the head of software expenses ( (i) above) that a penalty under section 271(1)(c) is initiated for claiming excessive deduction. Proceedings under section 271(1)(c) were also directed to be issued in respect of a claim for wrong deduction on account of a provision made for gratuity (Item No.(ii) above); bad debts and amounts written off (Item No.(vii) above); commission paid (Item No.(viii) above); foreign exchange fluctuation (Item No.(ix) above); and depreciation (Item No.(x) above). Significantly, the Assessing Officer did not direct the initiation of any penalty under section 271(1)(c) in respect of the other heads including in particular on the aspect of interest on SDF loan. In the concluding part of the order, the Assessing Officer observed as follows:-

“Assessed at Business Loss of (-) Rs. (-)14,03,30,430/-. Issue necessary forms. Issue penalty notice u/s 271(1)(c) as discussed above .” (emphasis supplied)

Consequently, the Assessing Officer had directed the issuance of a penalty notice under section 271(1)(c) as discussed above. Where the Assessing Officer considered it appropriate to initiate penalty proceedings, he had made a specific direction to that effect. The Tribunal, while deleting the penalty under section 271(1)(c) on the interest on the SDF loan, observed as follows:

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