By TIOL News Service

NEW DELHI, JULY 29, 2009: PENALTY is one of the most litigated issues in the Income Tax Act. Given the widespread habit of Assessing Officers (AOs) to make a passing reference for initiation of penalty u/s 271(1)(c) in assessment orders, this issue has been fought tooth and nail at all the judicial fora. And the key plank to question such decisions of AOs has consistently been the failure to record 'satisfaction' for initiation of penalty proceedings. Revenue lost a series of cases on this ground alone. This apparently provoked the CBDT to resort to retrospective amendment vide Finance Act, 2008. And thus came the insertion of Sub-Section (1B) in Sec 271 w.e.f 1.4.1989. With this insertion, the law-makers introduced a deeming fiction which envisages that even if the AO fails to record 'satisfaction' for initiation of penalty, the assessment or the reassessment order itself will deem to be so for the purpose of this requirement under Sec 271.

The legislative intent recorded in Clause 48 of the Notes on Clauses to the Finance Bill, 2008 stated that ''such a satisfaction was required to be recorded only at the time of levy of penalty and not at the time of initiation of penalty. However, some of the judicial interpretations on this issue are favouring the view that satisfaction has to be recorded at the time of initiation of penalty proceedings also.

It is therefore proposed to insert a new sub-section (1B) in section 271 of the Income-tax Act so as to provide that where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and if such order contains a direction for initiation of penalty proceedings under sub-section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under sub-section (1). This amendment will take effect retrospectively from 01st April, 1989.''

This retrospective amendment apparently upset the legal fraternity and the assessees, and thus writ petitions were filed challenging the vires of the retrospectivity of the amendment, constitutional validity and also against the spirit of Article 14 of the Constitution.

Having heard the counsels for both the parties and also considered a plethora of judicial pronouncements the Delhi High Court Division Bench has finally held that,

++ Section 271(1B) of the Act is not violative of Article 14 of the Constitution.

++ The position of law both pre and post amendment is similar, in as much, the Assessing Officer will have to arrive at a prima facie satisfaction during the course of proceedings with regard to the assessee having concealed particulars of income or furnished inaccurate particulars, before he initiates penalty proceedings.

++ Prima facie 'satisfaction' of the Assessing Officer that the case may deserve the imposition of penalty should be discernible from the order passed during the course of the proceedings. Obviously, the Assessing Officer would arrive at a decision, i.e., a final conclusion only after hearing the assessee.

++ At the stage of initiation of penalty proceeding the order passed by the Assessing Officer need not reflect satisfaction vis-a-vis each and every item of addition or disallowance if overall sense gathered from the order is that a further prognosis is called for.

++ However, this would not debar an assessee from furnishing evidence to rebut the prima facie‘ satisfaction of the Assessing Officer; since penalty proceeding are not a continuation of assessment proceedings.

++ Due compliance would be required to be made in respect of the provisions of Section 274 and 275 of the Act.

++ the proceedings for initiation of penalty proceeding cannot be set aside only on the ground that the assessment order states penalty proceedings are initiated separately if otherwise, it conforms to the parameters set out earlier.

And finally the Bench rejected the writ petitions.

(See 2009-TIOL-371-HC-DEL-IT in 'Income Tax')