IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 14.11.2008
Date of decision: 27th November, 2008
ITA NOs. 211/2006, 791, 921, 1015, 1044, 1077, 1094, 1120, 1138, 1155, 1159, 1170 of
2005, 45, 79, 80, 105, 127, 167, 177, 193, 197, 213, 221, 251, 252, 306, 312, 315, 323,
326, 329, 331, 332, 339, 345, 417, 460, 490, 491, 492, 534, 548, 562, 565, 583, 590, 591,
600, 604, 635, 647, 657, 660, 664, 751, 752 and 766 of 2006
1. I.T.A. NO. 211/2006
Commissioner of Income Tax-V ....Appellant
versus
M/s Rampur Engineering Co. Ltd. .....Respondent
Advocates who appeared for the parties
For the Appellant: Mr. R.D. Jolly, Mr. Sanjeev Sabharwal, Ms. Prem Lata Bansal, Mr.
Prakash Chand Yadav, Mr. Sanjeev Rajpal, Mr. M.P. Gupta, Advs. For Respondents: Mr.
O.P. Bajpai, Adv. for respondent in ITA No. 460/2006 Mr. Gitanju Suraj, Mr. Jatin
Zaveri, Advs. for respondent in ITA 345/2006 Mr. Ajay Vohra, Ms. Kavita Jha, Advs. for
respondents in ITA Nos. 791/05, 583/2006, 590/2006, 591/2006 Mr. V.P. Gupta, Mr.
Basant Kumar, Advs. for respondents in ITA Nos. 1094/2005, 79/2006, 490/2006,
491/2006, 492/2006, 604/2006 Mr. Prakash Kumar, Adv. for respondents in ITA Nos.
193/2006, 197/2006, 315/2006, 534/2006 Mr. Satyen Sethi, Mr. Johnson Bara, Advs. for
respondents in ITA Nos. 127/2006, 323/2006
CORAM: HON'BLE THE CHIEF JUSTICE HON'BLE
MR. JUSTICE BADAR DURREZ AHMED
HON'BLE MR. JUSTICE RAJIV SHAKDHER
AJIT PRAKASH SHAH, CHIEF JUSTICE
In all these cases, the Income Tax Appellate Tribunal has either deleted or affirmed the deletion of penalty levied upon the assessee under Section 271(1)(c) of the Income Tax Act, 1961. The Tribunal has, while doing so, relied upon the decision of the Division Bench of this Court in CIT v. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 (Delhi) and held that the authority initiating the penalty proceedings had not recorded its
satisfaction regarding concealment of income or furnishing of inaccurate particulars thereof by the assessee. The Revenue has assailed the correctness of the said orders in these appeals. According to the Revenue, penalty proceedings initiated by the competent authority should be deemed to be valid so long as the satisfaction of the authority was discernible from the order made by it. The fact that the authority had not used the words “I am satisfied that the assessee has concealed his income or furnished inaccurate particulars thereof”, would be of no consequence. The true test is whether a reading of the order demonstrates application of mind by the authority to the question of concealment and whether satisfaction about such concealment or furnishing of inaccurate particulars is discernible from the order. In the light of these submissions, the Division Bench admitted the appeals for determination of the following substantial question of law: “Whether satisfaction of the officer initiating the proceedings under Section 271 of the Income Tax Act can be said to have been recorded even in cases where satisfaction is not recorded in specific terms but is otherwise discernible from the order passed by the
authority”?
2. Keeping in view the decision of this Court in CIT v. Ram Commercial Enterprises Ltd. (supra) and other cases on the subject, the Division Bench felt that it would be more appropriate if the question is authoritatively determined by a Full Bench of this Court and
accordingly the matter has been referred to the Full Bench.
3. We hasten to add that pending reference, sub-Section 1B has been inserted in Section 271 of the Income Tax Act by Finance Act, 2008. The said provision purports to create a fiction by which satisfaction of the assessing officer is deemed to have been recorded in cases where an addition or disallowance is made by the assessing officer and a direction
for initiation of penalty proceedings is issued. The said provision is made effective retrospectively with effect from 1st April, 1989. In some of the cases forming part of this
batch, the assessment orders were passed after 1st April, 1989. This reference is being answered only in respect of the cases where assessment orders were made prior to 1st
April, 1989.
4. Learned counsel appearing for the Revenue strenuously contended that the question whether the authority was or was not satisfied about any concealment or furnishing of inaccurate particulars will depend upon the facts of each case and the order which the authority has made will have to be seen as a whole and so long as a proper reading of the order demonstrates application of mind by the authority and so long as satisfaction is discernible from the finding recorded by the authority initiating the proceeding, the same should suffice. Learned counsel contended that if on the facts available on record a clear case of concealment of income was made out then the Tribunal would not be justified in deleting the penalty. According to the learned counsel all such relevant facts available on record will have to be kept in view by the Tribunal in deciding the question as to whether the assessing officer has applied his mind to the question of concealment of income or
furnishing of inaccurate particulars of any such income.
5. On the other hand, learned counsel appearing for the assessees submitted that the
satisfaction as to the assessee having concealed the particulars of his income or furnished
inaccurate particulars of such income is to be arrived at by the Assessing Officer during
the course of any proceedings under the Act, which would mean the assessment
proceedings, without which the very jurisdiction to initiate the penalty proceeding is not
conferred on the assessing officer by reference to clause (c) of sub-section (1) of Section
271 of the Income Tax Act. Learned counsel submitted that what actually prevailed with
the Tribunal is the absence of any finding recorded by the assessing officer in the order of
the assessment conferring jurisdiction for initiation of penalty proceedings. According to
the learned counsel the decision of this Court in Ram Commercial Enterprises (supra)
laid down the correct position of law.
6. Section 271(1)(c) of the Income Tax Act, 1961 provides:
“271 (1) If the income Tax Officer, or the Appellate Assistant Commissioner in the
course of any proceedings under this Act is satisfied that any person- (c) has concealed
the particulars of his income or deliberately furnished inaccurate particulars of such
income, he may direct that such person shall pay by way of penalty, -
......................................................”
This is the provision as it stood at the relevant time. This provision fell for consideration
of the Supreme Court in D.M. Manasvi v. Commissioner of Income Tax, Gujarat, II
Ahmedabad (1972) 86 ITR 557 (SC) wherein the Supreme Court held that what is
contemplated by sub-section (1) of Section 271 is that the Income Tax Officer or the
Appellate Assistant Commissioner should have been satisfied in the course of
proceedings under the Act regarding matters mentioned in the clauses of that sub-section.
It is, however, not essential that notice to the person proceeded against should have been
issued during the course of the assessment proceedings. Satisfaction in the very nature of
things precedes the issue of notice and it would not be correct to equate the satisfaction of
the Income Tax Officer or Appellate Assistant Commissioner with the actual issue of
notice. The issue of notice is a consequence of the satisfaction of the Income Tax Officer
or the Appellate Assistant Commissioner and it would be sufficient compliance with the
provisions of the statute if the Income Tax Officer or the Appellate Assistant
Commissioner is satisfied about the matters referred to in clauses (a) to (c) of sub-section
(1) of Section 271 during the course of proceedings under the Income Tax Act even
though notice to the person proceeded against in pursuance of that satisfaction is issued
subsequently. The Court referred to the decision of the Constitution Bench in the case of
Commissioner of Income-tax, Madras, and Anr. v. S.V. Angidi Chettiar (1962) 44 ITR
739 (SC) wherein Shah J. speaking for the Court while dealing with Section 28 of the
Indian Income Tax Act, 1922, observed:
“The power to impose penalty under Section 28 depends upon the satisfaction of the
Income Tax officer in the course of proceedings under the Act; it cannot be exercised if
he is not satisfied about the existence of conditions specified in clauses (a), (b) or (c)
before the proceedings are concluded. The proceeding to levy penalty has, however, not
to be commenced by the Income Tax Officer before the completion of the assessment
proceedings by the Income Tax Officer. Satisfaction before conclusion of the proceeding
under the Act, and not the issue of a notice or initiation of any step for imposing penalty
is a condition for the exercise of the jurisdiction.”
7. In Ram Commercial Enterprises Ltd. (supra) the argument of the Revenue was that on
the facts available on record a clear case of concealment of income was made out and,
therefore, the Tribunal was not justified in deleting the penalty. It was argued that all
such relevant facts which were available on record were not kept in view by the Tribunal
and, therefore, the findings arrived at by it are perverse and not binding on the High
Court. The Division Bench following the law laid down in the case of D.M. Manasvi
(supra) held:
“11. .... The law is clear and explicit. Merely because this court while hearing this
application may be inclined to form an opinion that the material available on record could
have enabled the initiation of penalty proceedings that cannot be a substitute for the
requisite finding which should have been recorded by the assessing authority in the order
of assessment but has not been so recorded.
12. A bare reading of the provisions of Section 271 and the law laid down by the
Supreme Court makes it clear that it is the assessing authority which has to form its own
opinion and record its satisfaction before initiating the penalty proceedings. Merely
because the penalty proceedings have been initiated, it cannot be assumed that such a
satisfaction was arrived at in the absence of the same being spelt out by the order of the
assessing authority. Even at the risk of repetition we would like to state that the
assessment order does not record the satisfaction as warranted by Section 271 for
initiating the penalty proceedings....”
8.The view taken in Ram Commercial Enterprises (supra) has been followed in Diwan
Enterprises v. Commissioner of Income Tax (2000) 246 ITR 571 (Delhi) and
Commissioner of Income Tax v. J.K. Synthetics Ltd. (1996) 219 ITR 267 (Delhi). Same
is the view taken by the Bombay High Court in Commissioner of Income-tax v. Dajibhai
Kanjibhai (1991) 189 ITR 41 (Bom).
9. In our opinion, the legal position is well settled in view of the Supreme Court decisions
in Commissioner of Income Tax, Madras. and Anr. v. S.V. Angidi Chettiar (supra) and
D.M. Manasvi v. Commissioner of Income Tax, Gujarat, II Ahmedabad (supra), that
power to impose penalty under Section 271 of the Act depends upon the satisfaction of
the Income Tax Officer in the course of the proceedings under the Act. It cannot be
exercised if he is not satisfied and has not recorded his satisfaction about the existence of
the conditions specified in clauses (a), (b) and (c) before the proceedings are concluded.
It is true that mere absence of the words “I am satisfied” may not be fatal but such a
satisfaction must be spelt out from the order of the Assessing Authority as to the
concealment of income or deliberately furnishing inaccurate particulars. In the absence of
a clear finding as to the concealment of income or deliberately furnishing inaccurate
particulars, the initiation of penalty proceedings will be without jurisdiction. In our
opinion, the law is correctly laid down in Ram Commercial Enterprises (supra) and we
are in respectful agreement with the same.
The reference is answered accordingly.
10. Let the individual cases be listed before the appropriate Bench on 4th December,
2008 for hearing and disposal.
Chief Justice Badar Durrez Ahmed, J
Rajiv Shakdher, J
27th November, 2008
