Penalty u/s. 271E -When the original assessment is set aside, the satisfaction recorded therein for the purpose of initiation of penalty proceeding would not survive – Penalty imposed on the basis of original order cannot be sustained.

In respect of the assessment year 1992-93, assessment order was passed on February 26,1996, on the basis of the CIB information informing the Department that the assessee was engaged in a large scale purchase and sale of wheat but it was not filing income–tax return. Ex parte proceedings were initiated, which resulted in the aforesaid order, as per which the net taxable income of the assessee was assessed at Rs. 18,34,584. While framing the assessment, the Assessing Officer also observed that the assessee had contravened the provisions of section 269SS of the Act and because of this, the Assessing Officer was satisfied that penalty proceedings u/s. 271E of the Act were to be initiated.

The assessee carried out this order in appeal. The Commissioner of Income-tax (Appeals) allowed the appeal and set aside the assessment order with a direction to frame the assessment de novo after affording adequate opportunity to the assessee.

After remand, the Assessing Officer passed a fresh assessment order. In this assessment order, however, no satisfaction regarding initiation of penalty proceedings u/s. 271E of the Act was recorded.

It so happened that on the basis of the original assessment order dated February 26, 1996, show-cause notice was given to the assessee and it resulted in passing the penalty order dated September 23, 1996. Thus, this penalty order was passed before the appeal of the assessee against the original assessment order was heard and allowed thereby setting aside the assessment order itself. It is in this backdrop, a question arose as to whether the penalty order, which was passed on the basis of the original assessment order and when that assessment order had been set aside, could still survive.

The Tribunal as well as the High Court held that it could not be so for the simple reason that when the original assessment order itself was set aside, the satisfaction recorded therein for the purpose of initiation of the penalty proceeding u/s. 271E would also would not survive. According to Supreme Court this was the correct proposition of law stated by the High Court in the impugned order.

The Supreme Court observed that, in so far as the fresh assessment order was concerned, there was no satisfaction recorded regarding the penalty proceeding u/s. 271E of the Act though in that order the Assessing Officer wanted penalty proceeding to be initiated u/s. 271(1)(c) of the Act. The Supreme Court thus held that in so far as penalty u/s. 271E was concerned, it was without any satisfaction and, therefore, no such penalty could be levied. The Supreme Court accordingly dismissed the appeals filed by the Revenue.