closements
Introduction :
1.1 Various orders are passed by the Assessing Officer (AO)
under different provisions of the Income-tax Act, 1961 (the Act). Since the
Department has no right of appeal against such orders passed before the first
appellate authority, there is an inbuilt mechanism in the Act to supervise and
monitor the correctness of such orders to safeguard the interest of the Revenue.
Accordingly, a power of revision is vested with the Commissioner of Income-tax
(CIT) to revise, etc. such orders passed by the AO as provided in that Section.
1.2 U/s.263, if the CIT considers that the order passed by
the AO is erroneous in so far as it is prejudicial to the interest of the
Revenue, he may pass such orders thereon as the circumstances of the case
justify, including an order enhancing or modifying the assessment, or cancelling
the assessment and directing a fresh assessment, of course, after providing
opportunity of being heard to the assessee. Such order, under this Section, can
be passed within a time limit provided in the Section. Certain other relevant
terms are also defined in the Section, with which we are not concerned in this
write-up.
1.3 For the purpose of exercising jurisdiction u/s. 263, two
cumulative conditions are required to be satisfied, namely, (i) that the order
of the AO is erroneous, and (ii) that it is prejudicial to the interest of the
Revenue as held by the Apex Court in the case of Malabar Industrial Company
Limited (243 ITR 83). It is further held that the phrase ‘prejudicial to the
interest of the Revenue’ is of wide import and is not confined to loss of tax.
At the same time, the phrase has to be read in conjunction with erroneous order
passed by the AO. Every loss of revenue as a consequence of an order of the AO
cannot be termed as prejudicial to the interest of the Revenue, e.g.,
when the AO has adopted one of the courses permissible in law and it has
resulted in loss of revenue, or where two views are possible and the AO has
adopted one view with which the CIT does not agree, it cannot be treated as an
erroneous order prejudicial to the interest of the Revenue unless the view taken
by the AO is unsustainable in law.
1.4 Once penalty proceedings are initiated against the
assessee under the provisions of Act, in response to the same, various
explanations, etc. are filed by the assessee to show that the case is not fit
for imposing such penalty. After considering the same, the AO decides as to
whether penalty should be levied or not. When the AO decides not to levy the
penalty and passes an order dropping the penalty proceedings without mentioning
reasons for the same in the order, it was under consideration as to whether the
order passed by the AO dropping the penalty proceedings attracts and justifies
the revision by the CIT u/s.263 merely because reasons for dropping the penalty
proceedings are not mentioned in such order.
1.5 Recently the Apex Court had an occasion to consider the
issue referred to in Para 1.4 above in the case of Toyota Motor Corporation.
Though the judgment of the Court is very short, it is felt that it has
far-reaching consequences in the actual day-to-day practice and therefore, it is
thought fit to consider the same in this column.
CIT v. Toyota Motor Corporation, 218 CTR 628 (Del.) :
2.1 In the above case, the financial years involved were
1988-89 to 1997-98. The facts are not available in the judgment. It seems that
the penalty proceedings u/s.271C for non-deduction of tax were initiated. It
also seems that the matter of liability to deduct tax and the fact of
non-deduction of tax were not in dispute at that stage. It also seems that the
assessee had explained his case and had shown his bona fides for the same
and after considering the same, the AO had decided not to levy the penalty and
the following order dated 9-7-1999 was passed :
“The penalty proceedings initiated in this case u/s.271C
r/w S. 274 of the IT Act, 1961 are hereby dropped.”
2.2 The CIT initiated the proceedings u/s.263 to revise the
above order passed by the AO and after hearing the assessee, took the view that
the AO did not verify several issues and facts as mentioned in the order passed
by him, nor did the AO carry out necessary investigations to come to the
conclusion that penalty is not leviable. Based on this, the CIT treated the
order of the AO as erroneous and prejudicial to the interest of the Revenue and
set aside the same with a direction to pass fresh order after making necessary
enquiries, etc. and after giving opportunity of hearing to the assessee.
2.3 When the order of the CIT passed u/s.263 came up for
consideration before the Tribunal, it was held that the AO had carried out due
verification of relevant facts and the assessee has also shown its bona fides
and its reasonable belief in not deducting tax at the appropriate stage. The
penalty proceedings were not dropped casually by the AO, but the same was done
after verification of full facts disclosed by the assessee in reply.
Accordingly, the order passed u/s.263 was set aside.
2.4 At the instance of the Revenue, the matter came up before
the High Court, for which the following substantial question of law was framed :
“Whether AO could have passed an order u/s. 271C of the IT
Act, 1961 without giving any reasons whatsoever ?”
2.5 For deciding the above question, and after noting the
reasons given by the Tribunal for deciding the issue in favour of the assessee,
the Court observed as under (page 630) :
“We are unable to appreciate this reasoning given by the Tribunal simply because that the AO him-self did not say any such thing in his order. There is no doubt that the proceedings before the AO are quasi-judicial proceedings and a decision taken by the AO in this regard must be supported by reasons. Otherwise, every order, such as the one passed by the AO, could result in a theoretical possibility that it may be revised by the CIT u/ s.263 of the Act. Such a situation is clearly impermissible.”
2.6 The Court, then, stated that it is necessary for the parties to know the reasons for the conclusion arrived at by the authorities. The order of the AO should be self-contained order giving the relevant facts and the reasons for his conclusion. The Court finally decided the issue against the assessee and held as under (page 630) :
“We find that the order passed by the AO is cryptic, to say the least, and it cannot be sustained. The Tribunal cannot substitute its own reasoning to justify the order passed by the AO when the AO himself did not give any reason in the order passed by him.
Under the circumstances, we answer the question in the affirmative, in favour of the Revenue and against the assessee and remand the matter back to the file of the AO to decide the issue afresh in terms of the order passed by the CIT u/ s.263 of the Act.”
Toyota Motors Corporation v. CIT, 218 CTR 539 (SC) :
3.1 The above-referred judgment of the Delhi High Court came up for consideration before the Apex Court. Somehow, the Apex Court has not dealt with the issue in detail and dismissed the appeal.
3.2 While deciding the issue against the assessee, the Court observed as under :
“We are not inclined to interfere with the impugned order of the High Court. The High Court has held that the AO had disposed the proceedings stating the penalty proceedings initiated in this case u/s.271C r/w S. 274 of the IT Act, 1961 are hereby dropped. According to the High Court, there was no basis indicated for dropping the proceedings. The Tribunal referred to certain aspects and held that the initiation of proceedings u/ s. 263 of the IT Act, 1961 (in short, the ‘IT Act’) was impermissible when considered in the background of the materials purportedly placed by the assessee before the AO. What the High Court has done is to require the AO to pass a reasoned order. The High Court was of the view that the Tribunal could not have substituted its own reasoning which were required to be recorded by the AO. According to the assessee all relevant aspects were placed for consideration and if the officer did not record reasons, the assessee cannot be faulted.
We do not think it necessary to interfere at this stage. It goes without saying that when the matter be taken up by the AO on remand, it shall be his duty to take into account all the relevant aspects including the materials, if any, already placed by the assessee, and pass a reasoned order.”
Conclusion:
4.1 From the above judgment of the Apex Court, it seems that even an order passed by the AO dropping the penalty proceedings should be with reasons. The AO has to record the reasons for which penalty proceedings are dropped.
4.2 Unfortunately, the Apex Court did not appreciate the contention of the assessee that all relevant aspects were placed before the AO for consideration and if the AO did not record reasons, the assessee cannot be faulted.
4.3 In response to show-cause notice for levy of penalty, the only thing the assessee can do is to offer explanation and make out a case for non-levy of penalty. However, it is difficult to understand as to how the assessee can ensure that while dropping the penalty proceedings, the AO should incorporate reasons also in the order? It seems that it is this position which must have led the Tribunal to decide the issue in favour of the assessee after verifying the factual position that the order was passed by the AO after making necessary verifications, etc. Unfortunately, this factual position has neither been appreciated by the High Court, nor by the Apex Court. In both these judgments, there is not even a discussion on this practical as well as legal difficulty faced by the assessee.
4.4 In practice, we understand that in most cases, orders for dropping the penalty proceedings are cryptic and without reasons and the same are, more or less, on the same line as in the above case. Considering the constraints of the administration and the AO in particular, it is necessary to accept the position that if the assessee has given proper explanation and shown his bona fides to the satisfaction of the AO, penalty matters should be treated as concluded even if the reasons for such satisfactions are ‘not formally mentioned in the order passed by the AO. Therefore, the above judgment of the Apex Court, to that extent, requires reconsideration. Till this happens, perhaps, the CITs while exercising. their jurisdiction u/ s.263 should consider this in the interest of justice.
