Chartered Accountant Finance: [aaykarbhavan] Judgments in Bunches,

ch[2012] 26 taxmann.com 45 (Article)

Limitation period for levy of Penalty

S. KRISHNAN

INTRODUCTION

1. The author in this article has analyzed the decision of the Delhi High Court in the case of CIT v. Mohair Investment & Trading Co. (P.) Ltd. [2012] 18 taxmann.com 239, wherein it has been held that proviso to section 275(1)( a ) of the Income-tax Act (the Act) does not nullify availability to Assessing Officer of period of limitation of six months from end of month when order of Tribunal is received by Assessing Officer and, therefore, penalty can be imposed within six months from the end of month of Tribunal's order. The author has also referred to a few case laws dealing with provisions of section 275(1)( c ) of the Act and concludes that the basis of calculating the period of limitation in respect of cases falling under this clause is different from cases falling under clause ( a ) of section 275(1) of the Act in the sense that in the absence of similar proviso to clause ( c ) of section 275(1) of the Act [like in clause ( a )] the extreme period for levy of penalty is expiry of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed or six months from the end of the month in which action for imposition of penalty has been initiated, whichever period expires later.

FACTS OF THE CASE AND DECISION OF AUTHORITIES INCLUDING THE TRIBUNAL

2. The assessee-company in this case was doing business in shares and securities and the assessment year concerned was 2001-02. The assessee filed its return of income on 29th October, 2001 declaring certain income which included income from dividends which was exempt under section 10( 38 ) of the Act. The assessee had claimed interest as expenditure, being interest on loans raised for acquiring shares of various companies. Therefore, while framing the assessment on 28th February, 2003 the Assessing Officer disallowed proportionate amount out of interest claimed and added the same to the income. Consequent to the addition, the Assessing Officer initiated penal proceedings under section 271(1)( c ) of the Act. The addition made in the assessment, on appeal, was confirmed by the Commissioner of Income-tax (Appeals) vide an order dated 23rd December, 2005. The second appeal filed by the assessee was dismissed by the Tribunal vide its order dated 11th August, 2008. The Assessing Officer levied penalty on 26th February, 2009 under section 271(1)( c ) of the Act for furnishing inaccurate particulars of income. The penalty levied by the Assessing Officer was confirmed by the Commissioner of Income-tax (Appeals) vide an order dated 12th October, 2009. The Tribunal, on second appeal filed by the assessee, without going into the merits of the issue, vide an order dated 30th April, 2010 allowed the appeal of the assessee, by quashing the penalty imposed on the assessee on the ground that the penalty order had not been passed within period of limitation, as prescribed under section 275(1) (a) of the Act.

The Revenue filed an appeal before the High Court.

ARGUMENTS PUT FORTH ON BEHALF OF REVENUE

3. The arguments put forth on behalf of Revenue were three-fold and to the following effect -

( a ) Firstly, that the proviso to section 275(1) (a) had been introduced by way of an amendment; while amending the section it could not be the intention of the Legislature to obliterate the main provision. Consequently, the proviso could not be interpreted so as to render the main provision nugatory.

( b ) Secondly, that the proviso had to be interpreted giving due regard to the scheme of the Act which provides for three stages of appeal, namely, appeal from the assessment order before the CIT(A), appeal from the order of the CIT(A) to the ITAT and a further appeal to the High Court from the order of the ITAT. Therefore, it was logical to interpret that the period of six months provided for imposition of penalties had to start after the successive appeals from an assessment order had been finally decided by the CIT(A) or, as the case may be, the ITAT.

( c ) Thirdly, it was argued that the proviso extended the period of imposing penalty from six months to one year within the receipt of the order by the Commissioner, if the CIT(A) had passed the order after 1st June, 2003. Consequently, the said proviso only deals with the orders passed by the CIT(A) and does not provide for an order passed by the ITAT deciding the appeal from the order of the CIT(A) and, therefore, the Assessing Officer had choice either to implement penalty after the order of the CIT(A) or the ITAT, as the case may be. Resultantly, in case the Assessing Officer imposed penalty after the CIT's order passed after 1st June, 2003 then period of one year had to be reckoned from the date of receipt of the order by the Commissioner and in case the Assessing Officer imposed penalty after order passed by the ITAT, then the period of six months was provided for by the main section.

Further, the Revenue also relied on the decision of the Madras High Court in the case of Rayala Corpn. (P.) Ltd. v. Union of India [2007] 161 Taxman 127 in support of its contentions.

ARGUMENTS ON BEHALF OF THE ASSESSEE

4. It was argued on behalf of the assessee that the object behind the introduction of the proviso to carve out a new set of cases with effect from 1st June, 2003 to accelerate the proceedings in cases where penalty was imposed by the Assessing Officer. It was also argued that provisions of section 275(1)( a ) of the Act had to be read with provisions of section 275(1A) of the Act introduced with effect from 13th July, 2006 by the Taxation Laws (Amendment) Act, 2006, which dealt with time-limit in case of consequential order to be passed based on the order passed by the Appellate Authorities or the High Court or the Supreme Court, as the case may be.

DECISION OF THE HIGH COURT AND ITS BASIS

5. The High Court extracted the relevant provisions of section 275(1) (a) of the Act.

The High Court then referred to the contention raised on behalf of the petitioner before the Madras High Court in the case of Rayala Corpn. (P.) Ltd. (supra) that the proviso to section 275(1) (a) of the Act was not applicable to the cases where further appeal had been preferred to the ITAT against the orders of the CIT(A) and, therefore, the limitation period for the levy of penalty would be as provided for in section 275(1) (a) , i.e ., six months from the end of the month in which the order of the ITAT was received by the Commissioner and extracted the following conclusion reached in that case as an answer to the contention raised on behalf of the assessee-petitioner:-

"A reading of the above said provision makes it clear that the interpretation placed by learned counsel for the petitioner on the said provision is acceptable. There is no dispute in this case that the petitioner has filed an appeal before the Tribunal and the same is pending. In such a case, the limitation period for the levy of penalty will be as provided for under section 275(1) (a) , i.e. , six months from the end of the month in which the order of the Appellate Tribunal is received by the Chief Commissioner. There cannot be any doubt on this aspect. Accordingly, this court is of the view that the proviso to section 275(1) (a) of the Act, does not nullify the availability to the third respondent of the period of limitation of six months from the end of the month when the order of the Income-tax Appellate Tribunal, Chennai, is received by the third respondent herein."

It is to be noted that the assessee before the Madras High Court in the case ofRayala Corpn. (P.) Ltd. (supra) , after filing an appeal before the Tribunal, requested the Assessing Officer to hold the penalty proceedings in abeyance till the appeal was finally decided by the Tribunal. The Assessing Officer declined the request as the addition was already upheld in the first appeal. The Assessing Officer also felt that he had no power to await the Tribunal's order after the insertion of the proviso to section 275(1)( a ) of the Income-tax Act, 1961. The High Court finding that the Assessing Officer was not justified in his inference, even as conceded by standing counsel, allowed the writ petition by holding that the extended time was available for the Assessing Officer.

The High Court, in the instant case, then referred to the dictum that a proviso is subsidiary to the main section and that it is a fundamental rule of construction that a proviso must be considered with relation to the principal matter to which it stands as a proviso and held as under at para 10 of its order:—

"10. From a plain reading of the relevant sections it is clear that the period of six months provided for imposition of penalty under section 275(1)( a ) starts running after the successive appeals from an assessment order has been finally decided by the CIT(A) or the ITAT as the case may be whichever period expires later. The proviso to section 275(1)( a ) has only had the effect of extending the period of imposing penalty from six months to one year within the receipt of the order of the Commissioner after 1st June, 2003. The proviso thus carves out an exception from the main section inasmuch as in cases where no appeal is filed before the ITAT the Assessing Officer must impose penalty within a period of one year to be reckoned from the date of receipt of the order by the Commissioner. To read this provision as suggested by the Counsel for the assessee would obliterate the main provision itself. In this behalf it is necessary to remember that a proviso is merely a subsidiary to main section and must be construed in the light of the section itself. It has to be construed harmoniously with the main provision. This conclusion is fortified by the decision of the learned Judge in Rayala Corpn. (P.) Ltds.' case(supra) , where it was held that in case where an appeal is pending before the Tribunal the limitation period for levy of penalty can only be as provided for under section 275(1)( a ), i.e. , six months from the end of the month in which the order of the Tribunal is received by the Commissioner. Insofar as the submission with regard to the section being read in consonance with section 275(1A) is concerned, we are of the opinion that the latter section which was introduced later on does not dilute or in any manner render nugatory the main provision, which can only be read to mean that the limitation period for levy of penalty, only in the case of order of the Tribunal, to be as provided under the main section and not otherwise."

The substantial question of law was, therefore, decided in favour of the Revenue and against the assessee. As the issue was not decided on merits by the Tribunal earlier, the matter was remitted to the Tribunal for a decision on the merits of the appeal in accordance with law.

6. CASES WHERE SIMILAR VIEWS WERE TAKEN

6.1 CIT v. John Tinson and Co. (P.) Ltd. - In the case of CIT v. John Tinson & Co. (P.) Ltd. [2010]-TMI-202495/[2011] 53 DTR (Delhi) 135 before the Delhi High Court, the original assessment passed by the Assessing Officer was set aside by the Tribunal vide its order dated 2nd August, 2004 and the matter was restored back to the Assessing Officer to decide it afresh. Accordingly, the Assessing Officer made fresh assessment on 28th February, 2005 and levied penalty videorder dated 26th August, 2005.The Tribunal held that the penalty order passed by the Assessing Officer was barred by limitation. The High Court, on an appeal by the Revenue, after noting that the order dated 28th February, 2005 passed by the Assessing Officer was a fresh and new assessment order and not a mechanical order passed to give effect to the order dated 2nd August, 2004 passed by the Tribunal, held that the penalty order passed on 26th August, 2005 was not time-barred but was passed within the period of limitation provided under section 275 of the Act. Therefore, the order dated 28th February, 2005 passed by the Assessing Officer was a fresh order and the time-limit had to be calculated from that date of the order. The following observations made by the High Court at para 15 are worth noticing:—

"The aforesaid discussion leads to one direction, namely, the answer to the question formulated depends on the issue as to whether the assessment order dated 28th February, 2005 is a fresh and new assessment order, albeit on the direction of the Tribunal after the matter was remitted back to the Assessing Officer or is a mechanical order which in essence was only giving effect to the orders dated 2nd August, 2004 passed by the Tribunal. If the case falls in the first category, then limitation is to be counted from 28th February, 2005 and the penalty order would be within limitation. Otherwise, the penalty order is time barred."

6.2 VLCC Healthcare Ltd. v. Asstt. CIT - The Delhi Bench of ITAT in the case ofVLCC Health Care Ltd. v. Asstt. CIT [2010] 3 ITR (Trib.) 51(Delhi) following the decision of the Co-ordinate Bench in the case of Pandit Vijay Kant Sharma [I. T. Appeal No. 3709 (Delhi) of 2008, dated May 29, 2009] has held that:-

"It is an admitted fact that the order was passed in time insofar as clause ( a ) [of section 275(1)] is concerned, which permits the Officer to pass the order, on the facts of the case, within six months from the end of the month in which the order of the Commissioner of Income-tax (Appeals) or the Tribunal was received. This clause contains the general rule, to which only exceptions can be provided by way of proviso to the clause. This proviso places an outer limit of one year from the end of the financial year in which the order of the Commissioner of Income-tax (Appeals) was received by the Commissioner. If we accept the plea of learned counsel, the consequence will be that this provision overrides a part of the provision contained in clause ( a ) relating to the time limit in a case where the order of assessment was made the subject-matter of appeal before the Tribunal. As mentioned earlier, a proviso is meant to carve out an exception and not to abrogate a part of the main provision. Thus, the plea of learned counsel is not acceptable in view of the aforesaid settled rule of statutory interpretation. Thus, the only meaning which can be placed on the proviso is that in a case where the assessment proceeding comes to an end with the order of the learned Commissioner of Income-tax (Appeals), then, the outer limit of passing the order will be one year from the end of the financial year in which the order of the learned Commissioner of Income-tax (Appeals) was received; and in cases where the matter is carried further in appeal to the Tribunal, the time limit shall be six months from the end of the month in which the order of the Tribunal is received by the Commissioner. Thus, it is held that the order of penalty was passed within the time prescribed by the statute under section 275(1)( a )."

6.3 Mahindra Intertrade Ltd. v. Dy. CIT - The Mumbai Bench of ITAT in the case ofMahindra Intertrade Ltd. v. Dy. CIT [2011] 16 taxmann.com 77/ 133 ITD 597 , following the decision of the Madras High Court in the case of Rayala Corpn. (P.) Ltd. (supra)has held that section 275(1)( a ) fixes time-limit of six months from date of receipt of order of the Tribunal by the Commissioner/Chief Commissioner for passing an order of penalty; so the penalty order passed on 30th January, 2009 by the Assessing Officer under section 271(1)( c ) of the Act within 6 months from the date of the receipt of the order passed by the Tribunal confirming the assessment order passed by the Assessing Officer was within time and was not barred by limitation.

7. CASES WHEREIN INTERPRETATION OF PROVISIONS OF SECTION 275(1)( c) OF THE ACT WAS INVOLVED

7.1 Subodh Kumar Bhargava v. CIT [2008] 175 Taxman 520 (Delhi) - The assessment year concerned in this case was 2000-01. Penalty proceedings in respect of a return of income filed on 22nd June, 2000 and processed under section 143(1) on 14th March, 2000, were initiated by the Assessing Officer by issue of show-cause notice under section 274, read with section 271B of the Act on July 31, 2003. The show-cause notice indicated that the assessee without reasonable cause failed to get his accounts audited or to obtain a report of such audit in accordance with the provisions of the Act and to furnish it within the stipulated time. The assessee contested the penalty proceedings by his reply dated January 19, 2004, both on the merits and on the ground of limitation. The Assessing Officer rejected the plea of the assessee and imposed a penalty by an order dated 17th February, 2004. It was contended before the Commissioner of Income-tax (Appeals) by the assessee that the show-cause notice was issued on 31st July, 2003, whereas the penalty order under section 275(1)( c ) was passed beyond the period of six months from the end of the month in which the penalty proceedings had been initiated and, therefore, the penalty order passed on 17th February, 2004 was time-barred. The Commissioner of Income-tax (Appeals), however, confirmed the order of the Assessing Officer, as he was of the view that the penalty order could be passed within six months from 31st July, 2003 or up to the end of the financial year in which such proceedings had been initiated, whichever period expired later. Since the financial year expired only on 31st March, 2004, the penalty order passed on 17th February, 2004, was within time. The Appellate Tribunal upheld the order of the Commissioner (Appeals).

The High Court, allowing the appeal filed by the assessee, held as under:—

"That the assessee's case was covered under the second part of section 275(1)( c) of the Act and the period of limitation during which an order imposing a penalty could have been passed would be a period of six months beginning from the end of the month in which the action for imposition of penalty was initiated. The show-cause notice was issued on 31st July, 2003 and since it happened to be the end of the month, the period of six months was to be reckoned from that date. The penalty order could have been passed on any date up to and including 31st January, 2004. The penalty order passed on 17th February, 2004, was hit by the bar of limitation"

7.2 CIT (TDS) v. Ikea Trading Hong Kong Ltd. [2009] 179 Taxman 309 (Delhi) - In this case the Assessing Officer issued a show-cause notice on 26th June, 1999 for alleged failure to deduct tax covered by section 271C of the Act and on 24th January, 2000 through a letter issued to the assessee granted further opportunity of being heard in respect of the penalty sought to be imposed on it. In response to the said letter, the assessee submitted that since more than six months had already elapsed from the issuance of the show-cause notice, no order of imposing penalty could be passed inasmuch as the period of limitation set down in section 275(1)( c ) of the Act had already expired. The Assessing Officer repelled the plea of the assessee on the point of limitation by holding that the penalty proceedings were initiated in the course of verification proceedings in respect of various TDS returns filed under section 206; since the verification proceedings had not been completed and the orders under section 201(1)/201(1A) had also not yet been passed, that meant that the proceedings in the course of which the penalty proceedings were initiated had not been completed and, therefore, the period of limitation, which would begin on the culmination or completion of the former proceedings had not yet begun to run. The Assessing Officer, thus, vide an order dated 16th March, 2000 levied penalty upon the assessee under section 271C of the Act. The Commissioner of Income-tax (Appeals), on first appeal, accepted the plea of the assessee on the question of limitation and set aside the penalty order. The Tribunal, on an appeal filed by the Revenue, upheld the order of the Commissioner of Income-tax (Appeals).

The High Court, on an appeal by the Revenue, referred to its earlier decision in the case of Subodh Kumar Bhargava (supra) wherein the Court after examining the provisions of section 275 contained in Chapter XXI, which deal with 'penalties imposable' observed that sub-clauses ( a ) and ( b ) of section 275(1) relate to cases where the assessment, to which the proceedings for imposition of penalty relate to, was the subject-matter of an appeal before the higher authorities or was the subject-matter of a revision under section 263, respectively, and that section 275(1)( c ) of the Act is a residuary provision and is designed to cover all cases of penalties which do not fit within sub-clause ( a ) or ( b ) of section 275(1) of the Act. The expression "whichever period expires later" has significance where two periods of limitation are triggered, one being later than the other. But that does not mean that in a situation where there is only one period of limitation under section 275(1)( c ), because two periods of limitation are not applicable and because the expression "whichever period expires later" has to be considered literally, such a situation would not be covered under section 275(1)( c ). In the residuary category of cases where the initiation of action for imposition of penalty is not in the course of some proceedings, the first part of section 275(1)( c ) would have no application and it is only the period of limitation prescribed in the second part which would apply. Since only one period of limitation would be applicable, the expression "whichever period expires later" would have to be read as that very period of limitation.

7.3 CIT v. Chhajer Packaging & Plastics (P.) Ltd. - The Bombay High Court in CITv. Chhajer Packaging and Plastics (P.) Ltd. [2007] 165 Taxman 109 , has held that penalty levied on 13th March, 2000, consequent to penal proceedings initiated on 30th March, 1999 was time-barred as section 275(1)( c ) of the Act provides time-limit for completion of penalty proceedings either in the same financial year or within six months from the date on which such proceedings are initiated.

7.4 CIT v. Tam Tam Pedda Guruva Reddy - The Karnataka High Court in the case of CIT v. Tam Tam Pedda Guruva Reddy [2006] 287 ITR 72 held that a conjoint reading of section 271B and section 275(1)( c ) of the Act would show that the six-month period of limitation is with reference to initiation of proceedings in terms of section 275(1)( c ) of the Act and, therefore, the penalty levied on 15th December,1993 based on the initiation of proceedings on 8th June, 1993 was within six-month period of limitation and was not barred by limitation.

7.5 Shanbhag Restaurant v. Dy. CIT - In Shanbhag Restaurant v. Dy. CIT [2004] 134 Taxman 495 (Kar.) an important question as to the jurisdiction of the penalty proceedings was considered. Where an assessment order was passed on 25th February, 1994, and the penalty notice under sections 271D and 271E for default in respect of acceptance of loan or deposit and return of deposit was issued on 8th June, 1994, the question arose whether such notice would be valid in the eye of law and whether such penalty imposed in pursuance of the same could be sustained? The penalty order was passed on 28th March, 1995. The High Court agreed with the law as understood by the Commissioner of Income-tax (Appeals), that the order was barred by limitation, because it was passed beyond six months.

7.6 Dewan Chand Amritlal v. Dy. CIT, Hissar Range - The ITAT Chandigarh Special Bench in the case of Dewan Chand Amrit Lal v. Dy. CIT [2006] 98 ITD 200 (CHD.) (SB) has held as under-

"The authority to impose the penalty under the provisions of sections 271D and 271E is the Dy. Commissioner (now Joint Commissioner). When the Assessing Officer does not have jurisdiction either to initiate or impose penalty under section 271D or 271E, a notice issued by him for making inquiries relating to the contravention of section 269SS or section 269T cannot be construed to be initiation of penalty proceedings by the competent authority. Even if a show-cause notice is issued by the Assessing Officer for imposition of penalty under section 271D or 271E, that notice would be without any jurisdiction, as the Assessing Officer has no authority under law either to initiate or impose the penalty under section 271D or under section 271E. Therefore, in the instant appeals, at the relevant point of time, the Dy. Commissioner had the jurisdiction to initiate and impose the penalty under section 271D and, therefore, the limitation under section 275(1)( c ) had got to be computed only from the date of initiation by the Dy. Commissioner."

7.7 Bharat Construction Co. v. ITO - In the case which arose before the Madhya Pradesh High Court in Bharat Construction Co. v. ITO [1999] 106 Taxman 460 , penal proceedings were initiated against the assessee-firm for failure to maintain books of account as per direction in assessment order dated 30th May, 1986 and penalty was levied on 28th December, 1988. The Assessing Officer issued another notice dated 11th September, 1989 for the same assessment year for failure to get accounts audited and the issue which arose was whether the period of limitation would start from second notice? It is to be noted that assessee's failure to get accounts audited was not mentioned in the assessment order dated 30th May, 1986. The High Court observed that "the defaults contemplated by section 271A and section 271B are separate and distinct" and held that for penalty notice issued for assessee's failure to get accounts audited the period limitation would run only from that notice, if even it happened to be the second notice for the same assessment year but issued for a different cause. This decision was followed by the Allahabad High Court in the case of Bhola Nath Carpets (P.) Ltd. v.CIT [2008] 170 Taxman 59 .

CONCLUSION

8. In the light of the detailed discussion set out above it has to be ascertained in each case whether the issue is covered under section 275(1( a ) or 275(1)( c ) of the Act and, accordingly, the period of limitation has to be determined as the basis of calculating the period of limitation in respect of cases falling under clause ( c ), which is different from those falling under clause ( a ) of section 275(1) of the Act in the sense that in the absence of similar proviso to clause ( c ) of section 275(1) of the Act [like in clause ( a )] the extreme period for levy of penalty is expiry of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed or six months from the end of the month in which action for imposition of penalty has been initiated, whichever period expires later.

PENAL PROVISIONS

Concealment - penalty imposition must wait

t he author concentrates in this short but forceful article on the proposed amendment in section 275 of the Income-tax Act, 1961 by the Finance Act, 2003, which directs the Assessing Officer to impose penalty within a period of one year from the end of financial year in which the order of the Commissioner (Appeals) is^* received. The author raises an important question of imposition of penalty even before the assessment proceedings are complete. The author opines that penalty imposition must wait until such time as the order of the Tribunal is received by the Commissioner's Office.

INTRODUCTION

1. By the Finance Act, 2003, section 275 of the Income-tax Act, 1961 has received a proviso, which directs the Assessing Officer to impose penalty within a period of one year from the end of the financial year in which the order of the Commissioner (Appeals) is received. Mind you, this is so even if the assessee challenges the order of the Commissioner (Appeals) before the Tribunal.

AMENDMENT IN SECTION 275

2. To be precise, section 275 sets out the time-limit within which the penalty proceedings must be completed. Section 275 requires completing the penalty proceedings before the expiry of the financial year in which the proceedings in the course of which the action for imposition of penalty has been initiated, are completed or within one year from the end of the financial year in which the order of the Commissioner (Appeals) is received, whichever date is later. Section 275 more precisely reads as under :

" Bar of limitation for imposing penalties. —(1) No order imposing a penalty under this Chapter shall be passed—

( a )in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals) under section 246 or section 246A or an appeal to the Appellate Tribunal under section 253, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which the order of the Commissioner (Appeals) or, as the case may be, the Appellate Tribunal is received by the Chief Commissioner or Commissioner, whichever period expires later :

Provided that in a case where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals) under section 246 or section 246A, and the Commissioner (Appeals) passes the order on or after the 1st day of June, 2003 disposing of such appeal, an order imposing penalty shall be passed before the expiry of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed, or within one year from the end of the financial year in which the order of the Commissioner (Appeals) is received by the Chief Commissioner or Commissioner, whichever is later;"

Section 275, therefore, primarily divides the cases into two categories. In the first category are cases where the appellate order is made before June 1, 2003. The limitation for the cases falling under this category, is before the end of the financial year in which the proceedings, in the course of which the action for imposition of penalty has been initiated, were completed; or six months from the end of the month in which the order of the Commissioner (Appeals) or the Tribunal was received by the Commissioner, whichever period expires later. The second category covers a case where the order of the Commissioner (Appeals) is passed after June 1, 2003 in which case the limitation is before the expiry of the end of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed or one year from the end of the financial year in which the order of the Commissioner (Appeals) is received. The words "in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed" used in section 275 indicate that the penalty imposition must take place after the assessment proceedings are completed.

WHEN DO THE ASSESSMENT PROCEEDINGS ARE COMPLETE ?

Given below are the Gujarat and Patna High Court views on as to when assessment proceedings are complete.

l GUJARAT HIGH COURT'S VIEWS

3. The Gujarat High Court in CIT v. Mayur Foundation [2005] 274 ITR 562 held that assessment proceedings cannot be said to be complete but are pending till the appeal is heard and disposed of by the Tribunal and the order of the Tribunal is given effect to by the Assessing Authority by computing the correct tax liability of an assessee. If this be so, it then follows that the Assessing Officer must wait until the passing of the order by the Tribunal when the matter will reach its finality. In such a scenario, the right course for him is to keep the penalty action in abeyance.

l PATNA HIGH COURT'S VIEWS

The Patna High Court in CIT v. Jhaverbhai Biharilal & Co. [1988] 171 ITR 362/ 37 Taxman 292held that where the assessment was still open, it could not be said that there was any difference between the assessed income and the returned income, the question of levying penalty did not arise. The question of levy of any penalty would arise only after the Tribunal has decided the quantum matter.

The word 'proceedings' must be read as referring to assessment proceedings and till such time as they are open, no penalty imposition is warranted under the law even after such amendment made in section 275 by the Finance Act, 2003. One would, therefore, expect that a necessary instruction be issued in this regard by the CBDT to prevent the Assessing Officer from imposing penalty before the receipt of the order of the Tribunal.

SECTION 275/INCOME-TAX ACT

[2008] 175 TAXMAN 520 (DELHI)

HIGH COURT OF DELHI

Subodh Kumar Bhargava

Commissioner of Income-tax ^*

BADAR DURREZ AHMED AND RAJIV SHAKDHER, JJ.

IT APPEAL NO. 243 OF 2008^†

NOVEMBER 26, 2008

Section 275 of the Income-tax Act, 1961 - Penalty - Bar of limitation for imposition of - Assessment year 2000-01 - Whether there may be two categories of cases which fall under section 275(1)(c); in first category of cases, action for imposition of penalty is initiated in course of some proceedings, while in other category of cases, action for imposition of penalty is initiated but not in course of some other proceedings; in former category of cases, two periods of limitation may be applicable, one would be reckoned from date on which other proceedings have been completed upto and including end of financial year in which that date occurs and other period of limitation would be six months from end of month in which action for imposition of penalty has been initiated, whereas in latter category, only second period of limitation of six months from end of month in which action for imposition of penalty has been initiated, would apply - Held, yes

FACTS

The assessee was subjected to penalty under section 271B for failure to get his accounts audited and to submit audit report within stipulated period of time. A show-cause notice was issued to the assessee on 31-7-2003 and after considering his reply, penalty was imposed on him by an order dated 17-2-2004. The assessee challenged the penalty order contending that said order having been passed beyond period of six months from end of the month in which the penalty proceedings had been initiated, was time-barred. The Commissioner (Appeals) as well as the Tribunal rejected contention of the assessee holding that as per section 275(1)(c) penalty order could be passed upto end of financial year in which proceedings were initiated or within six months from end of the month in which action for imposition of the penalty was initiated, whichever period expired later and since in the instant case, show-cause notice was issued on 31-7-2003, penalty order passed on 17-2-2004, i.e., before end of financial year on 31-3-2004, was within time.

On appeal :

HELD

The instant case fell under section 275(1)(c ) and, therefore, the period of limitation prescribed in clause (c) would apply and no other period. [Para 10]

Section 275(1)(c) is a residuary clause and, therefore, is supposed to cover all cases not falling under clause (a) or (b) of section 275(1). There are two periods of limitation prescribed under clause (c ); the first period relates to those category of cases where action for the imposition of penalty has been initiated in the course of some proceedings. In such a situation, the period of limitation prescribed is upto the end of six months from the end of month in which penalty proceedings have been initiated and includes the financial year in which such proceedings are completed. [Para 11]

There may be cases which fall under section 275(1)(c ) in which action for the imposition of penalty is initiated in the course of some other proceedings. There may also be cases under section 275(1)(c ) in which the action for imposition of penalty has been initiated, but not in the course of some other proceedings. In the former category of cases, both the periods of limitation may be applicable, whereas in the latter category, only the second period of limitation of six months from the end of the month in which action for imposition of penalty has been initiated, would apply. To illustrate this, let one take the first category of cases. This is that category where the action for imposition of penalty is initiated in the course of some other proceeding. In such a situation, it is obvious that both the periods of limitation would come into play. One would be reckoned from the date on which the other proceedings have been completed upto and including the end of the financial year in which that date occurs. The other period of limitation would be that which applies irrespective of the date of completion of the 'other proceedings' and which is relatable simply to the date on which action for imposition of penalty has been initiated. The period of limitation in such a case would be six months from the end of the month in which the action for imposition of penalty has been initiated. It is clear that where penalty proceedings are initiated in the course of some other proceedings, the Legislature has provided for two different periods of limitation. However, the Legislature has added the expression 'whichever period expires later' at the end, so that there is no confusion with regard to which of the two would apply. But there is a residuary category of cases where the initiation of action for imposition of penalty is not in the course of some proceeding. In such cases, the first part of section 275(1)(c) would have no application and it is only the period of limitation prescribed in the second part, which would apply. Since only one period of limitation would be applicable, the expression 'whichever period expires later' would have to be read as 'that very period of limitation'. The instant case undoubtedly fell under section 275(1)(c ), and that too under the second part thereof. Therefore, on a plain reading and on a logical analysis of the relevant provisions of the Act, the period of limitation, during which an order imposing a penalty could have been passed in the instant case, would be a period of six months beginning from the end of the month in which the action for imposition of penalty had been initiated. In instant case, show-cause notice under section 274, read with section 271B, was issued on 31-7-2003. Since that happened to be the end of the relevant month also, the period of six months would have to be reckoned from that date. Thus, the penalty order could have been passed on any date upto and including 31-1-2004. The penalty order came to be passed on 17-2-2004, which would be hit by the bar of limitation. [Para 14]

The revenue had raised a new argument that since section 275(1)(c) contains the expression 'whichever period expires later', the said provision would only apply to cases where a choice has to be made with regard to two periods of limitation, one relatable to the completion of the proceedings and another relatable to the date on which the penalty proceedings have been initiated. It was submitted that because in the instant case, the first part of section 275(1)(c) would not apply, it would be a case where there would be only one period of limitation and, therefore, the expression 'whichever period expires later' would be rendered meaningless. From that, the revenue had deduced that the instant case would not at all fall under section 275(1)(c) and it would be a case where no period of limitation has been prescribed under the said Act and, therefore, the penalty order could be made under general principles of limitation, within a reasonable period of time. Such an argument had only to be stated to be rejected. Section 275(1)(c) is a residuary provision and is designed to cover all cases of penalties which do not fit within clause (a) or (b) of section 275(1). Once that fact had been recognized, there was no scope for excluding the instant case from the provisions of section 275(1)(c). The expression 'whichever period expires later' has to be read in context and has to be given a meaningful interpretation. The said expression has significance where two periods of limitation are triggered, one being later than the other; but that does not mean that in a situation where there is only one period of limitation under section 275(1)(c) because two periods of limitation are not applicable and because the expression 'whichever period expires later' has to be considered literally, such a situation would not be covered under section 275(1)(c). [Para 15]

Hence, having regard to the facts and circumstances of the case, the Tribunal was not right in its interpretation of the provisions of section 275(1)(c) and was wrong in holding that the penalty order passed on 17-2-2004 under section 271B was within the period of limitation prescribed under the Act. The impugned order was to be set aside and the penalty was to be cancelled. [Para 20]

CASE REVIEW

Shanbhag Restaurant v. Dy. CIT [2004] 266 ITR 393/ 134 Taxman 495 (Kar.) [Para 16]; CIT v.Hissaria Bros. [2007] 291 ITR 244 (Raj.) [Para 17]; and CIT v. Chhajer Packaging & Plastics (P.) Ltd. [2008] 300 ITR 180/[2007] 165 Taxman 109 (Bom.) [Para 18] distinguished.

CASES REFERRED TO

Shanbhag Restaurant v. Dy. CIT [2004] 266 ITR 393/ 134 Taxman 495 (Kar.) [Para 5], CIT v.Hissaria Bros. [2007] 291 ITR 244 (Raj.) [Para 6] and CIT v. Chhajer Packaging & Plastics (P.) Ltd. [2008] 300 ITR 180/[2007] 165 Taxman 109 (Bom.) [Para 6].

Dr. Rakesh Gupta, Ms. Poonam Ahuja and Ms. Aarti Saini for the Appellant. Ms. Prem Lata Bansal for the Respondent.

JUDGMENT

Badar Durrez Ahmed, J. - In this appeal under section 260A of the Income-tax Act, 1961 (hereinafter referred to as 'the said Act'), the following substantial question of law had been framed for our consideration:—

"That having regard to the facts and circumstances of the case, whether the Tribunal was right in law in interpreting the provisions of section 275(1)(c) of the Income-tax Act, 1961 correctly and holding that the penalty order passed under section 271B was within the limitation period."

2. This appeal is directed against the order dated 28-9-2007 passed by the Income-tax Appellate Tribunal in ITA No. 2952/Delhi/2005 pertaining to the assessment year 2000-01. By virtue of section 44AB of the said Act, the assessee was liable to get his accounts of the relevant previous year audited by an accountant as also to furnish the report of such audit in the prescribed form duly signed and verified by such an accountant before the specified date indicated in the said provision, which, at the relevant point of time, meant the 31st day of October of the assessment year. It is an admitted position that the assessee neither got his accounts audited nor did he file the audited report before the Assessing Officer as stipulated under section 44AB.

3. The assessee filed his return of income on 22-6-2000. The said return was processed under section 143(1) on 14-3-2002. It was not subjected to assessment under section 143(3) of the said Act. Subsequently, on 31-7-2003, the Assistant Commissioner of Income-tax, Circle 23(1), New Delhi issued a show-cause notice under section 274 of the said Act read with section 271B thereof. The said show-cause notice indicated that the assessee had filed the return of income for the assessment year 2000-01 on 22-6-2000 and that, from the return it was apparent that the assessee had, without reasonable cause, failed to get his accounts audited or to obtain a report of such audit as per the provisions of section 44AB of the said Act and to furnish the same within the stipulated period of time. Consequently, by virtue of the said notice, the assessee was asked to show cause as to why an order imposing penalty on him should not be made under section 271B of the said Act. A reply was filed by the assessee on 19-1-2004 whereby the assessee contested the penalty proceedings both on merits as well as on the ground of limitation. In this appeal, we are not concerned with the findings returned by the authorities below on merits which have gone against the assessee. We are only concerned with the point of limitation which has been raised by the assessee.

4. By the order dated 17-2-2004, the said Assistant Commissioner of Income-tax rejected the pleas taken by the assessee and imposed a penalty of Rs. 27,835 on the assessee under section 271B of the said Act. Being aggrieved by this order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The said appeal was disposed of by an order dated 28-3-2005 dismissing the assessee's appeal. Before the Commissioner of Income-tax (Appeals), the assessee had contended that the show-cause notice was issued on 31-7-2003, whereas the penalty order under section 275(1)(c) was passed on 17-2-2004. It was contended that this was beyond the period of six months from the end of the month in which the penalty proceedings had been initiated. Since the penalty proceedings had been initiated on 31-7-2003, the penalty order, according to the assessee, could have been passed within six months thereof, i.e., by 31-1-2004. The order was passed later on 17-2-2004 and, therefore, was time-barred. This plea of the assessee did not find favour with the Commissioner of Income-tax (Appeals) who, interpreted the provisions of section 275(1)(c) in the manner that the proceedings had been initiated on 31-7-2003 and, therefore, the penalty order could be passed within six months thereof or upto the end of the financial year in which such proceedings had been initiated, whichever period expired later. According to the Commissioner of Income-tax (Appeals), since the financial year would expire on 31-3-2004, the penalty order passed on 17-2-2004 was within time. The Commissioner of Income-tax (Appeals) confirmed the order passed by the Assistant Commissioner of Income-tax both on the point of limitation as well as on merits.

5. The assessee, still being aggrieved, preferred an appeal before the Income-tax Appellate Tribunal which was also dismissed by virtue of the impugned order both on merits as well as on the point of limitation. However, as noted above, the present appeal is only concerned with the pleas with regard to limitation and the question framed for our consideration is also in respect of this plea of limitation. The Tribunal was also of the view that since the penalty proceedings were initiated on 31-7-2003, as per the provisions of section 275(1)(c) of the said Act, the penalty order could be passed upto the end of the financial year (in this case, upto 31-3-2004), in which proceedings were initiated, or within six months from the end of the month in which the action for imposition of the penalty was initiated, whichever period expired later. The Tribunal held that since the Assessing Officer had imposed the penalty on 17-2-2004, inasmuch as the end of the financial year fell later than the six month period stipulated in section 275(1)(c), the order of penalty was within time. The Tribunal held that in terms of the provisions of section 275(1)(c), in the facts of the present case, the Assessing Officer could have passed the penalty order before the close of the financial year, i.e., on 31-3-2004. Since the penalty order was passed on 17-2-2004, the Tribunal held that the same cannot be said to be time-barred. The decision in the case of Shanbhag Restaurant v. Dy. CIT [2004] 266 ITR 393¹ (Kar.) cited by the learned counsel for the assessee was sought to be distinguished on facts by the Tribunal on the ground that the proceedings in that case were under sections 271D and 271E of the said Act which were different from the provisions of section 271B of the said Act which was applicable in the present case. The present appeal arises from this order of the Tribunal.

6. Before us, the learned counsel for the assessee/appellant submitted that the Tribunal completely misconstrued the provisions of section 275(1)(c) of the said Act in holding that the penalty order passed in the present case was within the period of limitation. The learned counsel submitted that section 275(1)(c) contemplates two time limits for different sets of circumstances. He submitted that if one set of circumstances does not exist, then the time limit prescribed for that set of circumstances is to be ignored as being not applicable. In such a situation, the time limit prescribed for the other set of circumstances, which exists, alone has to be applied. It was also submitted that, in the present case, since the penalty proceedings had not been initiated in the course of any proceedings, the limit with regard to the expiry of the financial year in which such proceedings are completed, would have no applicability. It is only the second part of section 275(1)(c) of the said Act which would apply in the present case and the stipulation of limitation in such a case is very clear, i.e., six months from the end of the month in which action for imposition of penalty is initiated. In the present case, the penalty proceeding was initiated by virtue of the issuance of the show-cause notice on 31-7-2003 and, therefore, the period of six months from the end of July, 2003 would expire on 31-1-2004. The learned counsel submitted that a penalty order in these circumstances could have been made on or before 31-1-2004. Since the penalty order was passed on 17-2-2004, it was barred by time and, therefore, had to be set aside. In making these submissions, the learned counsel for the appellant/assessee also placed reliance on the following decisions:—

(1)Shanbhag Restaurant's case (supra);

(2)CIT v. Hissaria Bros. [2007] 291 ITR 244 (Raj.);

(3)CIT v. Chhajer Packaging & Plastics (P.) Ltd. [2008] 300 ITR 180¹ (Bom.).

7. Mrs. Prem Lata Bansal, the learned counsel appearing on behalf of the respondent/revenue, submitted that the Tribunal as well as the other authorities below had correctly interpreted the provisions of section 275(1)(c) and had arrived at the correct conclusion that the penalty order was not barred by limitation. She supported the impugned order on the basis of the reasoning adopted by the Tribunal. However, before us, she also advanced a new argument. She submitted that section 275(1)(c) prescribes two periods of limitation and it stipulates that the one that expires later would be the relevant period before which a penalty order can be passed. In this context, she submitted that the present case is one of penalty under section 271B of the said Act. Such penalty proceedings have not been initiated in the course of any proceeding. She further submitted that it is also not a prescription of the Act that penalty proceedings under section 271B are to be initiated in the course of any other proceeding. Consequently, according to her, the first period of limitation as stipulated under section 275(1)(c) of the said Act which pertains to initiation of penalty proceedings in the course of some other proceedings would not be applicable. From this, she wants us to conclude that, because there are two periods of limitation prescribed in section 275(1)(c) and the expression 'whichever period expires later' is used therein, the later of the two periods would be relevant and that, if, in a case, falling under section 275(1)(c), only one of the two periods of limitation is applicable, then it ought to be construed as if there is no period of limitation prescribed. She submitted that in the present case, none of the clauses of section 275(1) are applicable and since there is no time limit prescribed, the general principles ought to be followed which entail that the penalty order can be passed within a reasonable period of time. She submitted that the penalty proceeding had been initiated on 31-7-2003 and the penalty order was passed on 17-2-2004 and, therefore, it cannot be said that the order had been passed beyond a reasonable period of time. For this reason also, she submitted, that the levy of the penalty was not barred by limitation.

8. Mrs. Bansal also submitted that the three decisions cited by the learned counsel for the appellant/assessee were distinguishable inasmuch as in all those cases the penalty proceedings arose in the course of assessment proceedings. Whereas, in the present case, the penalty proceedings did not arise in the course of any other proceeding, but was pursuant to the show-cause notice dated 31-7-2003 which had been issued independent of other proceedings. She, therefore, submitted that those decisions would not be applicable and that the question be decided in favour of the revenue and the appeal be dismissed.

9. Section 275(1)(c) reads as under:—

"275. Bar of limitation for imposing penalties.—(1) No order imposing a penalty under this Chapter shall be passed—

(a)& (b) ******

(c )in any other case, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later."

10. Section 275 falls within Chapter XXI which deals with 'Penalties Imposable'. Clauses (a) and (b) of section 275(1), which have not been extracted above and are not attracted in the present case, relate to cases where the assessment to which the proceedings for imposition of penalty relate are the subject-matter of an appeal before higher authorities or are the subject-matter of a revision under section 263 of the said Act, respectively. Sub-clause (c) of section 275(1) covers all other cases not falling within sub-clause (a) or (b). In this sense, section 275(1)(c) is a residuary provision. In the present case, sub-clauses (a) and (b) are not at all attracted and, therefore, the case squarely falls within clause (c). It is also necessary to point out that in respect of each of the clauses (a) to (c), specific periods of limitation have been prescribed. Thus, in the first instance, it is to be seen as to under which sub-clause the case falls and then to apply the period of limitation prescribed in respect of that sub-clause. The present case falls under section 275(1)(c) and, therefore, the period of limitation prescribed in clause (c) would apply and no other.

11. Section 275(1)(c) is a residuary clause and, therefore, is supposed to cover all cases not falling under clause (a) or (b) of section 275(1). Since the present case falls under this residuary clause (c), we need to examine the period of limitation prescribed in respect thereof. As noted earlier in this judgment, there are two periods of limitation prescribed under clause (c), the first period relates to those category of cases where action for the imposition of penalty has been initiated in the course of some proceedings. In such a situation, the period of limitation prescribed is upto the end and including the financial year in which such proceedings are completed.

12. The second part of section 275(1)(c) pertains to all cases falling under clause (c). This is so because the action for imposition of penalty is contemplated in both parts. Penalty can only be imposed under Chapter XXI by following the procedure prescribed in section 274 of the said Act which stipulates that no order imposing a penalty can be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. Thus, in any eventuality, before an order imposing a penalty can be passed, the assessee has to be heard or has to be given a reasonable opportunity of being heard. This can only happen when action for imposition of penalty is initiated and the assessee is put to notice with regard to such action so that he may present his point of view in opposition to such action. The only difference between the first part and the second part is that while in the first part, the action for imposition of penalty is initiated in the course of some other proceedings, under the second part, the other proceedings are of no relevance and the only thing to be considered is the point of time as to when the action for imposition of penalty is initiated.

13. There may be cases which fall under section 275(1)(c) in which action for the imposition of penalty is initiated in the course of some other proceedings. There may also be cases under section 275(1)(c) in which the action for imposition of penalty is initiated, but not in the course of some proceedings. In the former category of cases, both the periods of limitation may be applicable, whereas in the latter category, only the second period of limitation of six months from the end of the month in which action for imposition of penalty is initiated, would apply. To illustrate this, let us take the first category of cases. This is that category where the action for imposition of penalty is initiated in the course of some other proceeding. In such a situation, it is obvious that both the periods of limitation would come into play. One would be reckoned from the date on which the other proceedings are completed upto and including the end of the financial year in which that date occurs. The other period of limitation would be that which applies irrespective of the date of completion of the 'other proceedings' and which is relatable simply to the date on which action for imposition of penalty is initiated. The period of limitation in such a case would be six months from the end of the month in which the action for imposition of penalty is initiated. It is clear that where penalty proceedings are initiated in the course of some other proceedings, the Legislature has provided for two different periods of limitation. However, so that there is no confusion with regard to which of the two would apply, the Legislature has added the expression 'whichever period expires later' at the end. To explain this, let us take two examples :

Example 1:

Assume that the action for imposition of penalty is initiated on 15-3-2007 in the course of some proceedings which are completed on 25-3-2007. On the basis of the first part of section 275(1)(c), the period of limitation would end on 31-3-2007 being the end of the financial year in which the proceedings in the course of which action for the imposition of penalty was initiated, is completed. However, taking recourse to the provisions of the second part of section 275(1)(c), the end point of the period of limitation would be 30-9-2007. This would be so because the action for imposition of penalty was initiated on 15-3-2007, implying thereby that the end of the month would be on 31-3-2007. The period of six months from such date would end on 30-9-2007. Thus, in this example, we are faced with two dates on which limitation would end. But, because of the expression 'whichever period expires later', the period of limitation would have to be taken as 30-9-2007 which is relatable to the date on which action for imposition of penalty was initiated and not to the date on which the proceedings, in the course of which such action was initiated, are completed.

Example 2:

Let us assume that action for imposition of penalty is initiated on 15-4-2007 in the course of proceedings which are completed on 25-5-2007. Under the first part of section 275(1)(c), the period of limitation for passing an order imposing penalty would end on 31-3-2008 being the end of the financial year in which the proceedings, in the course of which action for imposition of the penalty had been initiated, are completed. However, in terms of the second part of section 275(1)(c), the period of limitation would end on 31-10-2007. This is because, the period of six months would have to be reckoned from the end of the month in which action for imposition of penalty was initiated. Action for penalty in this example was initiated on 15-4-2007. The end of the month would be 30-4-2007. Consequently, the period of six months from this date would end on 31-10-2007. Thus, in this example, we are once again faced with two periods of limitation; the period ending on 31-3-2008 being the end of the financial year relatable to 25-5-2007, the date on which the proceedings were completed and 31-10-2007 being the date relatable to the initiation of the penalty proceedings. Once again, applying the expression 'whichever period expires later', the period of limitation for this example would be 31-3-2008.

14. The above two examples illustrate cases where the applicable period of limitation would be relatable either to the date of initiation of the penalty proceedings or to the date of completion of the proceedings in the course of which action for the imposition of penalty has been initiated. But there is a third/residuary category of cases where the initiation of action for imposition of penalty is not in the course of some proceedings. In such cases, the first part of section 275(1)(c) would have no application and it is only the period of limitation prescribed in the second part which would apply. Since only one period of limitation would be applicable, the expression 'whichever period expires later' would have to be read as that very period of limitation. The present case undoubtedly falls under section 275(1)(c) and, that too, under the second part thereof. Therefore, on a plain reading and on a logical analysis of the relevant provisions of the said Act, the period of limitation during which an order imposing a penalty could have been passed in the present case would be a period of six months beginning from the end of the month in which the action for imposition of penalty was initiated. We have already noticed above that the show-cause notice under section 274 read with section 271B of the said Act was issued on 31-7-2003. Since that happened to be the end of the month also, the period of six months would have to be reckoned from that date. That would take us to 31-1-2004. Thus, the penalty order could have been passed on any date upto and including 31-1-2004. The penalty order came to be passed on 17-2-2004, which would be hit by the bar of limitation.

15. This would be the appropriate stage to discuss the new argument raised by the learned counsel for the revenue before this Court to which we have already made a reference in the earlier part of this decision. Her argument is that since section 275(1)(c) contains the expression 'whichever period expires later', the said provision only applies to cases where a choice has to be made with regard to two periods of limitation, one relatable to the completion of the proceedings and one relatable to the date on which the penalty proceedings are initiated. She submitted that because in the present case, the first part of section 275(1)(c) would not apply, it would be a case where there is only one period of limitation and, therefore, the expression 'whichever period expires later' would be rendered meaningless. From this, she deduces that the present case would not at all fall under section 275(1)(c) and it would be a case where no period of limitation is prescribed under the said Act and, therefore, the penalty order could be made, under general principles of limitation, within a reasonable period of time. Such an argument has only to be stated to be rejected. Section 275(1)(c) is a residuary provision and is designed to cover all cases of penalties which do not fit within clause (a) or (b) of section 275(1). Once we recognise this fact, there is no scope for excluding the present case from the provisions of section 275(1)(c). The expression 'whichever period expires later' has to be read in context and has to be given a meaningful interpretation. This is exactly what we have done. The said expression has significance where two periods of limitation are triggered, one being later than the other. But that does not mean that in a situation where there is only one period of limitation under section 275(1)(c), because two periods of limitation are not applicable and because the expression 'whichever period expires later' has to be considered literally such a situation would not be covered under section 275(1)(c). The argument advanced by Mrs. Bansal can be easily countered by an example. Let us assume that the action for imposition of penalty was initiated on 15-9-2007 in the course of proceedings which were completed on 11-11-2007. Going by the first part of section 275(1)(c), the limitation for passing a penalty order would end on 31-3-2008, being the end of the financial year in which the proceedings, in the course of which action for imposition of penalty had been initiated, are completed. But, we find that even going by the second part of section 275(1)(c), in this example, the end point of limitation would be 31-3-2008. This is so because the action for imposition of penalty was initiated on 15-9-2007. The end of the month would be 30-9-2007 and six months therefrom would end on 31-3-2008. Thus, we have a case where both the parts of section 275(1)(c) are triggered, but the end point of limitation in either case is identical. Here too, the expression 'whichever period expires later' would, if the argument of Mrs. Bansal is to be accepted, be rendered otiose and, therefore, carrying her argument further, the case as illustrated by this example, would not fall within section 275(1)(c) and would have to be governed by the general principles of limitation rather than the specific provisions indicated in section 275(1)(c). This clearly indicates that if the argument of Mrs. Bansal now sought to be raised before us is to be accepted, it would lead to absurd results.

16. We have arrived at the aforesaid conclusion without a reference to the decisions relied upon by the learned counsel for the appellant/assessee. We may now refer to them. The decision of the High Court of Karnataka in Shanbhag Restaurant's case (supra) is on a different footing. In that case, there was a regular assessment and in the course of assessment, the decision to initiate penalty proceedings under sections 271D and 271E was taken. The assessment having been completed on 25-2-1994, in that case, the end of the 'financial year' was construed to be 31-3-1994. The show-cause notice was issued on 8-6-1994 and the court held that the penalty order ought to have been passed by 31-12-1994 (six months from the end of the month in which the notice was issued). It is clear, that the facts of that decision are different. The said decision is not relevant in the context of the arguments and factual background of the present case. However, the decision in Shanbhag Restaurant's case (supra) does not militate against our conclusions.

17. The decision of the Rajasthan High Court in Hissaria Bros.' case (supra) is also not of much relevance although the same was relied upon by the learned counsel for the appellant. This is so because the prime issue before the Rajasthan High Court was whether the case before them fell within clause (a) or clause ( c) of section 275(1). Such an issue does not arise for our consideration in the present case. For, we are only concerned with section 275(1)(c). Therefore, not much help can be taken from the said decision of the Rajasthan High Court for the purposes of this appeal.

18. In Chhajer Packaging & Plastics (P.) Ltd.'s case (supra ), the penalty proceedings arose out of the assessment proceedings relating to the assessment year 1996-97. The assessment order was passed on 30-3-1999. Consequently, considering the first part of section 275(1)(c), the penalty order could have been passed latest by 31-3-1999 being the end of the financial year in which the assessment proceedings were completed. The Bombay High Court noted that under the second mode of computation of limitation under the latter half of clause (c) of section 275(1), since the penalty proceedings were initiated by a notice dated 6-4-1999, the period of limitation of six months to be computed from the last date of the month in which the penalty proceedings were initiated would end on 29-10-1999, though in our view, it should have been 31-10-1999 because we are considering calendar months. Since the order imposing penalty was passed on 13-3-2000, the Bombay High Court was of the view that, computing limitation in both permissible ways, the order was beyond the period of limitation. In the first case, the period expired on 31-3-1999 and in the second case, it expired, according to the Bombay High Court, on 29-10-1999. Considering the opening words of section 275(1) which read "'no order imposing penalty' shall be passed" the Bombay High Court held that once the period of limitation prescribed by either of the clauses (a) to (c) has expired, the departmental authorities had no powers to impose penalty.

19. It is clear that the three decisions referred to by the learned counsel for the appellant/assessee do not really fit in, as it were, in the context of the present case. At the same time, though, there is nothing in them which would contradict what we have concluded.

20. We hold that having regard to the facts and circumstances of the case, the Tribunal was not right in law in its interpretation of the provisions of section 275(1)(c) and was wrong in holding that the penalty order passed on 17-2-2004 under section 271B was within the period of limitation prescribed under the Act. The question of law is, therefore, answered in favour of the appellant and against the revenue. Consequently, the appeal is allowed. The impugned order is set aside and the penalty of Rs. 27,835 imposed by the Assessing Officer, confirmed by the Commissioner of Income-tax (Appeals) and upheld by the Tribunal, is cancelled. The parties shall bear their own costs.

SECTION 275/INCOME-TAX ACT

[2009] 179 TAXMAN 309 (DELHI)

HIGH COURT OF DELHI

Commissioner of Income-tax (TDS)

IKEA Trading Hong Kong Ltd. ^*

BADAR DURREZ AHMED AND RAJIV SHAKDHER, JJ.

IT APPEAL NOS. 130, 135, 138, 140, 143, 150 & 152 OF 2006^†

JANUARY 16, 2009

Section 275, read with section 271C, of the Income-tax Act, 1961 - Penalty - Bar of limitation for imposition - Assessment years 1988-89 to 1994-95 - Whether where penalty proceedings are initiated in course of 'some other proceedings', two periods of limitation would be available under section 275(1)(c) : one starting from completion of 'other proceeding' and ending with end of financial year and second from end of month in which penalty proceedings are initiated and ending six months therefrom and in such a situation, later of two end-points of limitation would apply - Held, yes - Whether, however, where penalty proceeding does not emanate from any other proceeding, then only six months period of limitation from end of month of initiation of penalty proceedings would be available - Held, yes - Whether 'other proceeding' mentioned in section 275(1)(c) must be a legitimate proceeding having due recognition under Act, such as an assessment proceeding - Held, yes - Whether though in course of some proceedings such as assessment proceedings, Assessing Officer may undertake verification of certain facts, yet there is no provision for an independent and formalized verification proceeding under Act which can be considered as 'other proceeding' within meaning of section 275(1)(c) - Held, yes

Section 271C of the Income-tax Act, 1961 - Penalty - For failure to deduct tax at source - Whether penalty proceeding under section 271C is independent of any other proceeding and if there is a failure to deduct or pay tax deducted at source, penalty proceeding can be initiated irrespective of any order being passed under section 201(1)/201(1A) - Held, yes

FACTS

The assessee-company was incorporated in Japan and had a liaison office in India. During a survey carried out in its premises, statements of various expatriates working for it were recorded wherein they admitted that a part of their salary was being paid to them in India and some part was being received by them in their native country. Thereafter, the assessee sent a letter dated 18-1-1999 to the Assessing Officer and enclosed therewith a summary statement of the total amount which was required to be deposited towards tax and interest thereon in respect of the financial years 1987-88 to 1993-94.

On 26-6-1999, a common show-cause notice was issued to the assessee for imposition of penalty under section 271C. On 24-1-2000, the Assessing Officer issued a letter to the assessee granting a further opportunity of being heard in respect of the penalty sought to be imposed on it. In response to the said letter, the assessee submitted that since more than six months had already elapsed from the issuance of the show-cause notice, no order of imposing penalty could be passed inasmuch as the period of limitation set down in section 275(1)(c) had already been expired.

The Assessing Officer repelled the plea of the assessee on the point of limitation by holding that the penalty proceedings were initiated in the course of verification proceedings in respect of various TDS returns filed under section 206; and that since the verification proceedings had not been completed and the orders under section 201(1)/201(1A) had also not yet been passed, that meant that the proceedings in the course of which the penalty proceedings were initiated had not been completed and, therefore, the period of limitation, which would begin on the culmination or completion of the former proceedings had not yet begin to run.

He, vide order dated 16-3-2000, imposed the penalty upon the assessee under section 271C. On appeal, the Commissioner (Appeals) accepted the plea of the assessee on the point of limitation and set aside the penalty order. On further appeal, the Tribunal upheld the order of the Commissioner (Appeals).

On the revenue's appeal to the High Court :

HELD

Recently, the Delhi High Court, in the case of Subodh Kumar Bhargava v. CIT [2008] 175 Taxman 520 , had examined the provisions of section 275 contained in Chapter XXI, which deal with 'Penalties imposable' and observed that sub-clauses (a) and (b) of section 275(1) related to cases where the assessment, to which the proceedings for imposition of penalty relate, was the subject-matter of an appeal before the higher authorities or was the subject-matter of a revision under section 263 respectively. It was further held that sub-clause (c) of section 275(1) covers all other cases not falling within sub-clause (a) or (b) and, in that sense, section 275(1)(c) is a residuary provision. [Para 11]

There are two periods of limitation prescribed under sub-clause (c) of section 275(1); the first period relates to those cases where action for the imposition of penalty has been initiated in the course of 'some' proceedings. In such a situation, the period of limitation prescribed is up to the end and including the financial year in which such proceedings are completed. [Para 12]

The second part of section 275(1)(c ) pertains to all cases falling under clause (c). This is so because the action for imposition of penalty is contemplated in both parts. Penalty can only be imposed under Chapter XXI by following the procedure prescribed in section 274, which stipulates that no order imposing a penalty can be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. Thus, in any eventuality, before an order imposing penalty can be passed, the assessee has to be heard or has to be given a reasonable opportunity of being heard. This can only happen when action for imposition of penalty is initiated and the assessee is put to notice with regard to such action so that he may present his point of view in opposition to such action. The only difference between the first part and the second part is that while in the first part, the action for imposition of penalty is initiated in the course of some other proceedings, under the second part, the 'other' proceedings are of no relevance and the only thing to be considered is the point of time as to when the action for imposition of penalty is initiated. Hence, it is clear that every penalty order covered under section 275(1)(c) emanates from a notice/show-cause notice. However, such notice may or may not arise in the course of some other proceeding. Where it does arise in the course of some other proceeding, two periods of limitation would be available; one starting from the completion of the other proceeding and ending with the end of the financial year and the second starting from the end of the month in which the penalty proceedings are initiated and ending six months therefrom. In such a situation, the later of the two end-points of limitation would apply. But where the penalty proceeding does not emanate from any other proceeding, then only the six months period from the end of the month of initiation of the penalty proceeding would be available. [Para 13]

In the instant case, the show-cause notice dated 26-6-1999 did not mention any pending proceeding in the course of which it was issued. In fact, the show-cause notice was based entirely upon the assessee's letter dated 18-1-1999. The amounts were also identical. The argument that verification was underway also did not stand to reason. The show-cause notice issued on 26-6-1999 was definitive of the stand of the department that the assessee had failed to deduct the taxes as per the provisions laid down under section 192 on the various amounts paid as detailed in the assessee's letter dated 18-1-1993 and as listed in the said notice. On its part, the department was sure of the exact amount of default. The sending of the letter dated 12-7-1999 enclosing the reconciliation statement of the entire group of the assessee would not enable the revenue to submit that it was only then, that they came to know of the exact extent of the default. Such a stand on the part of the revenue was belied by the issuance of the show-cause notice itself prior to the receipt of the said letter of 12-7-1999. So, the penalty proceeding, which was initiated by the issuance of the show-cause notice on 26-6-1999, was not in the course of any other proceeding, but was independent of any proceeding. [Para 14]

Further, the penalty proceeding under section 271C is independent of any other proceeding. If there is a failure to deduct or pay the tax deducted at source, penalty proceedings can be initiated. This is irrespective of any order being passed under section 201(1)/201(1A). In fact, this is easily demonstrated by instant case. In the instant case,though no order under section 201(1)/201(1A) had been passed, yet the penalty order under section 271C had been passed. Moreover, the 'other' proceeding mentioned in section 275(1)(c) must be a legitimate proceeding having due recognition under the Act, such as an assessment proceeding. If it was accepted that the survey proceeding was pending, it would be contrary to the scope and ambit of the provisions of section 133A. The survey operation commenced and concluded on 4-12-1998. As regards the submission that verification proceedings were pending, it was to be noted that under the Act, there is no proceeding which goes by the name of verification proceeding. It is true that in the course of some proceedings such as assessment proceedings, the Assessing Officer may undertake verification of certain facts, but there is no provision for an independent and formalized verification proceeding under the Act. Thus, apart from the fact that no verification was underway when the show-cause notice was issued, the plea of pendency of verification proceedings could not be accepted even in law. [Para 15]

Clearly, the instant case would fall in the third category of cases where the initiation of action for imposition of penalty is not in the course of some proceedings. Thus, the first part of section 275(1)(c) would have no application and it was only the period of limitation prescribed in the second part which would apply and since only one period of limitation would be applicable, the expression 'whichever period expires later' would have to be read as that very period of limitation. That being the position, the period of limitation for passing the penalty order expired on 31-12-1999 being six months from the end of the month in which the penalty proceeding was initiated by issuance of the show-cause notice dated 26-6-1999. The penalty order was passed on 16-3-2000. That was clearly beyond the time prescribed under section 275(1)(c). [Para 16]

Therefore, the Tribunal was correct in law in deleting the penalty imposed by the Assessing Officer under section 271C. The appeals filed by the revenue were liable to be dismissed. [Para 17]

CASE REVIEW

Subodh Kumar Bhargava v. CIT [2008] 175 Taxman 520 (Delhi) [Para 11] , followed.

CASES REFERRED TO

Mitsui & Co. v. Dy. CIT [1999] 107 Taxman 46 (Delhi) (Mag.) [Para 7] and Subodh Kumar Bhargava v. CIT [2008] 175 Taxman 520 (Delhi) [Para 11].

Ms. Prem Lata Bansal, Sanjeev Rajpal and Ms. Anshul Sharma for the Appellant.M.S. Syali, Aseem Mowar and Ms. Mahua C. Kalra for the Respondent.

JUDGMENT

Badar Durrez Ahmed, J. - These seven appeals arise out of the common order passed by the Income-tax Appellate Tribunal (hereinafter referred to as 'the Tribunal' on 24-4-2005 in ITA Nos. 35 to 41/Delhi/2003 pertaining to the financial years 1987-88 to 1993-94. The substantial question of law which arises for our consideration is as follows :—

"Whether, in the facts and circumstances of the present appeals, the Income-tax Appellate Tribunal was correct in law in deleting the penalty imposed by the Assessing Officer under section 271C of the Income-tax Act, 1961, on the ground that the penalty order dated 16-3-2000 was passed beyond the time prescribed by section 275(1)(c), the same having been passed more than six months from the end of the month in which the show-cause notices were issued?"

2. The assessee/respondent is a company incorporated in Japan and has a liaison office in India. A survey operation under section 133A of the Income-tax Act, 1961 (hereinafter referred to as 'the said Act' was carried out in the assessee's premises at 8, Balaji Estate, Guru Ravidas Marg, Kalkaji, New Delhi, on 4-12-1998. In the course of the survey, statements of various expatriates working for the assessee were recorded and they admitted that a part of their salary was being paid to them in India and some part was being received by them in their native country. Consequent upon the said survey, the assessee sent a letter dated 18-1-1999 to the Income-tax Officer and enclosed therewith in respect of each of the individual expatriates the following documents :—

1.Income-tax computations for the financial years 1987-88 to 1993-94;

2.Salary certificates from the employer, stating the salary paid to the individual employees;

3.Form-16's issued to the individual employees by the employers in India.

A summary statement of the total amount which was required to be deposited towards tax and interest thereon in respect of the financial years 1987-88 to 1993-94 was, as indicated in the letter, enclosed therewith. The total additional tax liability was indicated at Rs. 49,91,290. The amount towards interest was indicated at Rs. 49,93,957. Thus the total additional liability towards tax and interest was shown as Rs. 99,85,247. It is pertinent to note that earlier, on 8-1-1999, the assessee had, on estimate basis, deposited a total sum of Rs. 1,52,00,000 towards tax and interest. This amount was deposited through seven separate challans for each of the financial years 1988-89 to 1994-95. The estimated amount of Rs. 1,52,00,000 was far in excess of the amount payable by the assessee towards tax and interest as indicated in the letter dated 18-1-1999. Consequently, the assessee claimed a refund of Rs. 52,14,753 from the Department.

3. On 26-6-1999 the Additional Commissioner of Income-tax issued a common show-cause notice for imposition of penalty under section 271C of the said Act. The relevant portion of the said show-cause notice is as under :—

"Sir,

Sub: Show-cause notice for imposition of penalty under section 271C of the Income-tax Act.

Whereas it is seen that you had failed to deduct the taxes as per provisions laid down under section 192 of the Income-tax Act on the various amounts paid as detailed in your letter dated 18-12-1991 and as listed below :—

	Financial year	Amount of additional tax deposited
	1987-88	15,65,552
	1988-89	2,26,970
	1989-90	3,91,254
	1990-91	4,51,510
	1991-92	11,99,364
	1992-93	14,08,121
	1993-94	11,54,515

The above-mentioned amount had not been disclosed in the original return by you. In view of above, you are hereby given an opportunity to explain as to why a penalty under section 271C of the Income-tax Act be not levied on you, as described therein, on your such failure to deduct the tax. You can appear personally or through your authorised representative or file written submission in this regard at 11.00 a.m. on 22-7-1999. Your failure to represent the case will lead to the presumption that you have nothing to state in the matter and the case will be decided on merits."

4. Apparently, the Joint Commissioner of Income-tax had in the meanwhile requested the assessee to file a statement indicating the reconciliation of additional tax and interest deposited by it and the other companies of the IKEA group on account of their expatriate employees. Consequent upon such a request, the chartered accountants of the assessee sent a letter dated 12-7-1999 to the Joint Commissioner of Income-tax enclosing therewith the reconciliation statement in respect of the additional tax and interest deposited by the IKEA group on account of their expatriate employees. Insofar as the assessee was concerned, the additional tax liability was shown as Rs. 49,91,289, which was the same as indicated in the earlier letter dated 18-1-1999 and as mentioned in the said show-cause notice. The said reconciliation statement also indicated the interest liability to be Rs. 49,93,958. Consequently, inasmuch as an additional amount of Rs. 1,52,00,000 had been deposited on 8-1-1999, the amount of refund due from the tax department was shown as Rs. 52,14,753.

5. In response to the show-cause notice, the assessee sent a written reply on 26-7-1999 to the Additional Commissioner of Income-tax. In the said reply, the assessee took the position that the assessee had been under a genuine belief that as the payments were made outside India by a company incorporated outside India and located outside India, the provisions of the Income-tax Act, 1961 relating to deduction of tax at source on payment of such salaries were not applicable. However, we need not go into the question of merits inasmuch as we are only concerned with the question of limitation.

6. On 24-1-2000 the Joint Commissioner of Income-tax issued a letter to the assessee granting the assessee a further opportunity of being heard in respect of the penalty sought to be imposed on the assessee. In response to the said letter dated 24-1-2000, the assessee submitted its reply by a letter dated 9-2-2000 wherein the assessee took the plea that more than six months had already elapsed since the issuance of the show-cause notice and consequently no order imposing a penalty could now be passed inasmuch as the period of limitation set down in section 275(1)(c) of the said Act had already expired. However, the Joint Commissioner of Income-tax went ahead and passed the order dated 16-3-2000 imposing a penalty of Rs. 49,91,289 under section 271C of the said Act, in respect of the financial years 1987-88 to 1993-94 being the sum equal to the total amount of short deduction of tax which the assessee had failed to deduct and pay to the credit of the Central Government in time as per the provisions of Chapter XVII-B of the said Act. The Joint Commissioner of Income-tax repelled the plea of the assessee on the point of limitation by holding that the penalty proceedings were initiated in the course of verification proceedings in respect of various TDS returns filed under section 206 of the said Act. The Joint Commissioner observed that the verification proceedings had not yet been completed and that the orders under section 201(1)/201(1A) had also not yet been passed. According to the Joint Commissioner, this meant that the proceedings in the course of which the penalty proceedings were initiated had not yet been completed and, therefore, the period of limitation which would begin on the culmination or completion of the former proceedings had not yet begin to run. After rejecting the plea of limitation raised by the assessee, the Joint Commissioner of Income-tax by virtue of the penalty order dated 16-3-2000 held against the assessee on merits and imposed the said amount of penalty.

7. Being aggrieved by the penalty order dated 16-3-2000 passed by the Joint Commissioner of Income-tax, the assessee preferred appeals before the Commissioner of Income-tax (Appeals), who, by an order dated 4-12-2002 accepted the plea of the petitioner on the point of limitation and set aside the penalty order dated 16-3-2000. Since the Commissioner of Income-tax (Appeals) had accepted the plea of limitation, he did not examine the question of penalty on merits inasmuch as it had become academic. The Commissioner of Income-tax (Appeals) followed the decision of the Tribunal in the case of Lurgi India Company Ltd. wherein the Tribunal had observed that for the purpose of section 271C, the time available for passing an order imposing penalty is six months from the end of the month in which action for imposition of penalties initiated. The Commissioner of Income-tax (Appeals) also referred to the decision of the Tribunal in the case of Mitsui & Co. Ltd. v. Dy. CIT [1999] 107 Taxman 46 (Delhi) (Mag.) in order to emphasize the distinction between the provisions of section 271C and the provisions of section 271(1)(c) where the penalty proceedings have to be initiated during the course of assessment proceedings. He held that penalty proceedings under section 271C were independent of verification proceedings. He also took note of the fact that in several cases the department had taken the stand that proceedings under section 271C could not be linked with verification proceedings.

8. The revenue's appeals before the Tribunal were dismissed by virtue of the impugned order dated 24-4-2005. The Tribunal upheld the order passed by the Commissioner of Income-tax (Appeals). Aggrieved by the impugned order, the revenue has preferred the present appeals. It was contended on behalf of the revenue/appellant that both the Commissioner of Income-tax (Appeals) and the Tribunal had erred in law in accepting the plea of limitation raised by the assessee/respondent. The learned counsel appearing on behalf of the revenue/appellant submitted that since the penalty proceedings, which had been initiated by the issuance of the show-cause notice dated 26-6-1999, had been so initiated in the course of verification proceedings, there was no question of the period of limitation having expired in view of the provisions of section 275(1)(c) of the said Act. It was contended that the verification proceedings began with the survey on 4-12-1998 and ended on 12-7-1999 when the assessee sent the information regarding the additional tax liability of the assessee on account of the short deduction/short payment of tax deducted at source. Therefore, according to the learned counsel for the revenue/appellant, the period of limitation would run out only after the end of the financial year, that is, on 31-3-2000. The learned counsel submitted that the period of six months from the end of the month in which the show-cause notice dated 26-6-1999 would undoubtedly expire on 31-12-1999 but, as the financial year in which the verification proceedings were completed would end on 31-3-2000 and as that would expire later, the end-point of limitation would be 31-3-2000. It was submitted that the penalty order, having been passed on 16-3-2000, was clearly within time.

9. The learned counsel for the respondent/assessee supported the im-pugned order passed by the Tribunal and urged that the same does not call for any interference. He made two-fold submissions. In the first place, it was contended that penalty proceedings under section 271C are independent of any other proceeding and do not arise out of any other proceeding. The existence of, continuation, or culmination of any other proceeding is not a requirement for initiating penalty proceedings under section 271C of the said Act, and no such pre-condition ought to be read into the statute. Secondly, it was contended, even if it be assumed that penalty proceedings were initiated in the course of verification proceedings, the said proceedings stood completed on 18-1-1999 when the assessee submitted all the details of additional tax and interest payable after having paid the same and that, too, in excess on 8-1-1999. The show-cause notice dated 26-6-1999 itself only referred to the letter dated 18-1-1999 (wrongly mentioned as 18-12-1999). There is no mention of any pending proceeding. It was, therefore, submitted that the revenue's reliance on the letter of 12-7-1999 is a mere pretence of showing that some verification proceeding was pending and that the same was completed only on 12-7-1999. The learned counsel for the respondent submitted that the information given in the letter of 12-7-1999 was nothing but a repetition of the information already supplied through the letter dated 18-1-1999. Moreover, the letter of 12-7-1999 was more for the purposes of the refund claim of the assessee than for the purposes of indicating the extent of the default. The deficient tax and interest stood paid in excess on 8-1-1999 itself. It was submitted that the order dated 16-3-2000 was clearly beyond time and that the Commissioner of Income-tax (Appeals) as well as the Tribunal had correctly accepted the assessee's plea of time bar and had cancelled the penalty.

10. Before we proceed further, we need to notice the relevant provisions of the said Act. Sections 271C and 275(1)(c), so much as are relevant, read as under :—

"271C. Penalty for failure to deduct tax at source.—(1) If any person fails to—

(a )deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B; or

(b )pay the whole or any part of the tax as required by or under—

(i )sub-section (2) of section 115-O; or

(ii )the second proviso to section 194B,

then, such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid.

(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner."

"275. Bar of limitation for imposing penalties.—(1) No order imposing a penalty under this Chapter shall be passed—

(a) and (b)******

(c)In any other case, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later."

11. Recently, in Subodh Kumar Bhargava v. CIT [2008] 175 Taxman 520 (Delhi), we had examined the provisions of section 275. We had noted that section 275 fell within Chapter XXI which dealt with 'Penalties Imposable'. We had observed that sub-clauses (a) and (b) of section 275(1), which have not been extracted above and are not attracted in the present case, related to cases where the assessment to which the proceedings for imposition of penalty relate were the subject-matter of an appeal before higher authorities or were the subject-matter of a revision under section 263 of the said Act, respectively. It was noticed that sub-clause (c) of section 275(1) covers all other cases not falling within sub-clause (a) or (b) and, in that sense, section 275(1)(c) is a residuary provision.

12. There are two periods of limitation prescribed under sub-clause (c), the first period relates to those category of cases where action for the imposition of penalty has been initiated in the course of 'some' proceedings. In such a situation, the period of limitation prescribed is up to the end and including the financial year in which such proceedings are completed.

13. The second part of section 275(1)(c) pertains to all cases falling under clause (c). This is so because the action for imposition of penalty is contemplated in both parts. Penalty can only be imposed under Chapter XXI by following the procedure prescribed in section 274 of the said Act which stipulates that no order imposing a penalty can be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. Thus, in any eventuality, before an order imposing a penalty can be passed, the assessee has to be heard or has to be given a reasonable opportunity of being heard. This can only happen when action for imposition of penalty is initiated and the assessee is put to notice with regard to such action so that he may present his point of view in opposition to such action. The only difference between the first part and the second part is that while in the first part, the action for imposition of penalty is initiated in the course of some other proceedings, under the second part, the 'other' proceedings are of no relevance and the only thing to be considered is the point of time as to when the action for imposition of penalty was initiated. In this background, in Subodh Kumar Bhargava's case (supra) we had observed that :—

"13. There may be cases which fall under section 275(1)(c) in which action for the imposition of penalty is initiated in the course of some other proceedings. There may also be cases under section 275(1)(c) in which the action for imposition of penalty is initiated, but not in the course of some proceedings. In the former category of cases, both the periods of limitation may be applicable, whereas in the latter category, only the second period of limitation of six months from the end of the month in which action for imposition of penalty is initiated, would apply. To illustrate this, let us take the first category of cases. This is that category where the action for imposition of penalty is initiated in the course of some other proceeding. In such a situation, it is obvious that both the periods of limitation would come into play. One would be reckoned from the date on which the other proceedings are completed up to and including the end of the financial year in which that date occurs. The other period of limitation would be that which applies irrespective of the date of completion of the 'other proceedings' and which is relatable simply to the date on which action for imposition of penalty is initiated. The period of limitation in such a case would be six months from the end of the month in which the action for imposition of penalty is initiated. It is clear that where penalty proceedings are initiated in the course of some other proceedings, the Legislature has provided for two different periods of limitation. However, so that there is no confusion with regard to which of the two would apply, the Legislature has added the expression 'whichever period expires later' at the end. . . ." (p. 528)

". . .But there is a third/residuary category of cases where the initiation of action for imposition of penalty is not in the course of some proceedings. In such cases, the first part of section 275(1)(c) would have no application and it is only the period of limitation prescribed in the second part which would apply. Since only one period of limitation would be applicable, the expression 'whichever period expires later' would have to be read as that very period of limitation. . . ." (p. 529)

From the above observations in Subodh Kumar Bhargava's case (supra), it is clear that that every penalty order under section 275(1)(c) emanates from a notice/show-cause notice. However, such notice may or may not arise in the course of some other proceeding. Where it does arise in the course of some other proceeding, two periods of limitation would be available. One starting from the completion of the other proceeding and ending with the end of the financial year. The second, starting from the end of the month in which the penalty proceeding is initiated and ending six months therefrom. In such a situation, the later of the two end-points of limitation would apply. But, where the penalty proceeding does not emanate from any other proceeding, then only the six month period from the end of the month of initiation of the penalty proceeding would be available. We have to examine as to in which category the present case falls.

14. The show-cause notice dated 26-6-1999 provides us with the clues to this question. The show-cause notice does not mention any pending proceeding in the course of which it was issued. In fact, the show-cause notice is based entirely upon the assessee's letter dated 18-1-1999. The amounts are also identical (except for the typographical error where the amount in respect of the financial year 1987-88 has been wrongly indicated as Rs. 1,56,555 instead of the correct figure of Rs. 1,59,555). The argument that verification was under way also does not stand to reason. The show-cause notice issued on 26-6-1999 is definitive of the stand of the department that the assessee had failed to deduct the taxes as per the provisions laid down under section 192 of the Income-tax Act, on the various amounts paid as detailed in the assessee's letter dated 18-1-1999 and as listed in the said notice. On their part, the department was sure of the exact amount of default. The sending of the letter dated 12-7-1999 enclosing the reconciliation statement of the entire IKEA group would not enable the revenue to submit that it was only then that they came to know of the exact extent of the default. Such a stand on the part of the revenue is belied by the issuance of the show-cause notice itself prior to the receipt of the said letter of 12-7-1999. So, the penalty proceeding which was initiated by the issuance of the show-cause notice on 26-6-1999 was not in the course of any other proceeding but, was independent of any proceeding.

15. We may also make it clear that the penalty proceeding under section 271C is independent of any other proceeding. If there is a failure to deduct or pay the tax deducted at source, penalty proceedings can be initiated. This is irrespective of any order being passed under section 201(1)/201(1A) of the said Act. In fact, this is easily demonstrated by the very case at hand. No order under section 201(1)/201(1A) has been passed, yet the penalty order under section 271C has been passed all the same. Moreover, the 'other' proceeding mentioned in section 271(1)(c) must be a legitimate proceeding having due recognition under the said Act, such as an assessment proceeding. If it were to be contended that the survey proceeding was pending, it would be contrary to the scope and ambit of the provisions of section 133A of the Act. The survey operation commenced and concluded on 4-12-1998. As regards the submission that verification proceedings were pending, we note that under the said Act there is no proceeding which goes by the name of verification proceedings. It is true that in the course of some proceedings such as assessment proceedings, the Assessing Officer may undertake verification of certain facts but, there is no provision for an independent and formalized verification proceeding under the said Act. Thus, apart from the fact that no verification was underway when the show-cause notice was issued, the plea of pendency of verification proceedings cannot be accepted even in law.

16. Clearly, the present case falls in the third category of cases referred to in Subodh Kumar Bhargava's case (supra) where the initiation of action for imposition of penalty is not in the course of some proceedings. Thus, the first part of section 275(1)(c) would have no application and it is only the period of limitation prescribed in the second part which would apply. And, as held in Subodh Kumar Bhargava's case (supra), since only one period of limitation would be applicable, the expression 'whichever period expires later' would have to be read as that very period of limitation. This being the position, the period of limitation for passing the penalty order expired on 31-12-1999 being six months from the end of the month in which the penalty proceeding was initiated by issuance of the show-cause notice dated 26-6-1999. The penalty order was passed on 16-3-2000. This was clearly beyond the time prescribed under section 275(1)(c) of the said Act.

17. Consequently, we answer the question against the revenue/appellant and in favour of the assessee by holding that, in the facts and circumstances of the present appeals, the Income-tax Appellate Tribunal was correct in law in deleting the penalty imposed by the Assessing Officer under section 271C of the Income-tax Act, 1961, on the ground that the penalty order dated 16-3-2000 was passed beyond the time prescribed by section 275(1)(c), the same having been passed after the lapse of six months from the end of the month in which the show-cause notices were issued. The appeals are dismissed. The parties are left to bear their own costs.

SECTION 275/INCOME-TAX ACT

[2007] 165 TAXMAN 109 (BOM.)

HIGH COURT OF BOMBAY

Commissioner of Income-tax-II

Chhajer Packaging and Plastics (P.) Ltd.^*

N.V. DABHOLKAR AND M.G. GAIKWAD, JJ.

TAX APPEAL NO. 22 OF 2004

SEPTEMBER 28, 2007

Section 275, read with section 271D, of the Income-tax Act, 1961 - Penalty - Bar of limitation for imposition - Assessment year 1996-97 - Assessee's assessment was concluded on 30-3-1999 - Thereafter, Assessing Officer issued notice dated 6-4-1999 initiating penalty proceedings under section 271D and imposed penalty on 13-3-2000 - Assessee relying upon section 275(1)(c) contended that penalty levied was time-barred - Tribunal accepting assessee's case cancelled penalty - By computing limitation in both permissible ways as mentioned in section 275(1)(c), period of limitation for imposing penalty was either 31-3-1999 or 29-10-1999 - Whether since order of penalty was passed on 13-3-2000, Tribunal was justified in its decision of cancelling order of penalty - Held, yes

FACTS

During assessment for the assessment year 1996-97, the Assessing Officer found that the assessee had accepted loans/deposits exceeding Rs. 20,000 by modes other than account-payee cheques/demand drafts and, thus, there was the contravention of section 269SS and completed the assessment on 30-3-1999. Subsequently, after issuing notice dated 6-4-1999, penalty under section 271D was imposed upon the assessee on 13-3-2000. The assessee filed appeal raising issue of limitation relying upon section 275(1)(c). The Commissioner (Appeals) rejected the appeal. The Tribunal, however, upheld the plea of limitation and cancelled the order of penalty made under section 271D.

HELD

The first method of computing period of limitation as mentioned in section 275(1)(c) is that the last date for imposition of penalty is the last day of the financial year and which is the financial year, is given in parenthetical clause within the first half of clause (c) itself, i.e., 'in the course of which action for imposition of penalty has been initiated'. Thus, it is apparent that the law presumes the penalty proceedings to be germinating from some other proceedings already in progress. The date of termination of those proceedings is important and the last date of financial year in which those proceedings were completed, is the outer limit for conclusion of penalty proceedings. In the instant case, the penalty proceedings arose out of assessment of income of the assessee for the financial year 1995-96 (assessment year 1996-97). It had come in the order of the Commissioner (Appeals) that the assessment order was dated 30-3-1999. Thus, the assessment proceedings were concluded on 30-3-1999, i.e., within the financial year 1998-99, corresponding assessment year being 1999-2000. Consequently, penalty could have been imposed latest by 31-3-1999, since the assessment proceedings, out of which penalty proceedings took birth, were completed on 30-3-1999. [Para 6]

Sofaras second mode of computation of limitation is concerned, the later half of clause (c) of section 275(1) is not that difficult to be understood. The penalty proceedings in the instant case were initiated by notice dated 6-4-1999 and the period of limitation of six months was to be computed from the last date of the month in which the penalty proceedings were initiated. Thus, 30-4-1999 would be starting point of limitation of six months and, consequently, 29-10-1999 would be the last date of period of limitation, computed in accordance with second half of clause (c ) of section 275(1). [Para 6]

Thus, in the instant case, by computing limitation in both permissible ways, the period of limitation was either 31-3-1999 or 29-10-1999. 29-10-1999 being later in time, that was the available outer limit for the department to impose penalty. The order imposing penalty was passed on 13-3-2000. [Para 6]

Thus, once the period of limitation prescribed by either of clauses (a) to (c) has expired, the departmental authorities have no powers to impose penalty. The opening part rules out any possibility of taking initiation of the proceedings as 'sufficient compliance' or as keeping the proceedings within limitation. Language is so couched that the penalty proceedings are expected to be concluded before expiry of period of limitation. [Para 7]

Thus, there was no fault in order passed by the Tribunal.

CASE REFERRED TO

CIT v. Pithwa Engg. Works [2005] 276 ITR 519 (Bom.) [Para 4].

Alok Sharma for the Appellant. S.H. Tripathi for the Respondent.

JUDGMENT

N.V. Dabholkar, J. - This is an appeal under section 260A of the Income-tax Act, 1961 ("the Act"), challenging the judgment and order passed by the Income-tax Appellate Tribunal, Pune Bench, Pune ("the ITAT") in Income-tax Appeal No. 1343/PN/01, on 22-3-2004.

2. The following factual details are necessary for the purpose of decision of present appeal :

Assessment of taxable income of respondent for the assessment year 1996-97 (financial year 1995-96) was carried out by the departmental authorities and concluded with assessment order dated 30-3-1999. The Assessing Officer-DCIT (Investigation), Circle-II, Jalgaon, during the course of assessment, noticed that the assessee had accepted loans/deposits exceeding Rs. 20,000, by modes otherwise than account payee cheques/demand drafts and had thus contravened section 269SS of the Act. By his letter dated 30-3-1999, he referred the matter to Additional CIT, Range-II, Jalgaon, for levy of penalty under section 271D of the Act.

The assessee had contested the penalty proceedings before the Additional CIT, Range-II, Jalgaon and the contentions raised by the assessee were rejected. In the appeal before the CIT (Appeals)-I, Nagpur, the assessee raised issue of limitation, by relying upon section 275(1)(c) of the Act and the said contention was not upheld by the learned Commissioner, with following observations :

"I find that, some of the pleadings like penalty being time-barred or no deposits having been taken, were not put before the Addl. CIT by the appellant Co. I do not agree with the appellant that the action has become time-barred as the proceedings under section 271D are independent of the assessment and the same could not be taken as commencing along with the assessment order."

The assessee approached the ITAT, Pune and learned Members of the Tribunal have upheld the plea of limitation raised by the assessee and cancelled the order imposing penalty under section 271D, as on the date on which the said order was passed, the authorities could not have passed such an order, as the action was time-barred.

3. Heard learned counsel for the respective parties.

4. Learned Advocate Shri Tripathi for the respondent has filed affidavit-cum-notes of arguments, wherein he has raised preliminary objections, by relying upon instruction Circular No. 2 of 2005, dated 24-10-2005 and has pleaded that since the limit of appeal under section 260A of the Act to be preferred is raised to Rs. 4 lakhs and tax effect of present matter does not exceed Rs. 4 lakhs, the department ought not to pursue the present appeal. This submission was opposed by learned Asstt. Solicitor General, by contending that the instructions are issued on 24-10-2005 and are prospective in nature, whereas present appeal was filed by the department in August 2004. According to learned Asstt. Solicitor General, therefore, the appeal does not fall within the clutches of the instructions dated 24-10-2005.

Advocate Shri Tripathi has advanced his argument further, by relying upon the judgment of other Division Bench of this High Court at Bombay, in CIT v. Pithwa Engg. Works [2005] 276 ITR 519 . In this matter, Division Bench of this Court was dealing with the similar circular dated 27-3-2000, wherein financial limit for preferring appeals under section 260A of the Act before the High Court, was Rs. 2 lakhs. Advocate Shri Tripathi has placed reliance on following observations in penultimate paragraph :

"In our view, the Board's circular dated 27-3-2000, is very much applicable even to the old references which are still undecided."

Advocate Shri Tripathi has relied upon aforesaid observations, to claim that the circular is applicable, to some extent; retrospectively in the sense, it will be applicable to the appeals which are still pending.

5. So far as views recorded by the other Division Bench of this High Court are concerned, those are pertaining to circular dated 27-3-2000. On reference to instruction No. 2/2001, dated 24-10-2005, paragraph 2 begins thus :

"In partial modification of the above instruction, it has now been decided by the Board that appeals will henceforth be filed only in cases where the tax effect exceeds the revised monetary limits given hereunder."

Taking into consideration the portion underlined for the purpose of emphasis, we feel that the learned Asstt. Solicitor General is justified in contending that the circular is applicable only prospectively and it makes no reference to pending matters. Considering applicability of the circular dated 24-10-2005 on the basis of its text, we would not be inclined to follow the view taken by other Division Bench, regarding earlier circular.

Otherwise also, paragraph 3 of this circular itself saves certain appeals from being obstructed due to financial limits. Paragraph 3 reads :

"The Board has also decided that in cases involving substantial question of law of importance as well as in cases where the same question of law will repeatedly arise, either in the case concerned or in similar cases, should be separately considered on merits without being hindered by the monetary limits."

It is evident that, whenever there is a substantial question of law, or question of law which is likely to recur in future, the department is not prohibited from filing and pursuing appeals. We believe that the saving clause saves present appeal since it involves a question of law regarding interpretation of section 275(1)(c) of the Act, and more particularly the aspect of manner in which the limitation should be computed in the light of said provisions. We have, therefore, proceeded to hear the Advocates on merits.

6. Section 275(1)(c) of the Act reads thus :

"275. Bar of limitation for imposing penalties.—(1) No order imposing a penalty under this Chapter shall be passed—

(a )and (b)******

Coming to the first method of computing period of limitation, the last date for imposition of penalty is the last day of the financial year and which is the financial year, is given in parenthetical clause within the first half of clause (c) itself, i.e., "in the course of which action for imposition of penalty has been initiated". Thus, it is apparent that the law presumes the penalty proceedings to be germinating from some other proceedings already in progress. The date of termination of those proceedings is important and the last date of financial year in which those proceedings were completed, is the outer limit for conclusion of penalty proceedings.

In the matter at hands, the penalty proceedings arise out of assessment of income of the assessee for financial year 1995-96 (assessment year 1996-97). It has come in the order of the CIT(Appeals) that the assessment order was dated 30-3-1999. Thus, the assessment proceedings are concluded on 30-3-1999 i.e., within financial year 1998-99, corresponding assessment year being 1999-2000. Consequently, penalty could have been imposed latest by 31-3-1999, since the assessment proceedings, out of which penalty proceedings took birth, were completed on 30-3-1999.

So far as second mode of computation of limitation is concerned, the later half of the clause (c) of section 275(1) of the Act is not that difficult to be understood. The penalty proceedings in the present matter were initiated by notice dated 6-4-1999 and the period of limitation of six months is to be computed from the last date of the month in which the penalty proceedings were initiated. Thus, 30-4-1999 would be starting point of limitation of six months and consequently, 29-10-1999 would be the last date of period of limitation, computed in accordance with second half of clause (c) of section 275(1) of the Act.

Thus, in the case on hands, by computing limitation in both permissible ways, the period of limitation is either 31-3-1999, or 29-10-1999. 29-10-1999 being later in time, that was the available outer limit for the department to impose penalty. The order imposing penalty is passed on 13-3-2000.

7. Coming to the opening part of sub-section (1), it says, "no order imposing penalty.... shall be passed." Thus, once the period of limitation prescribed by either of clauses (a) to (c) has expired, the departmental authorities have no powers to impose penalty. The opening part rules out any possibility of taking initiation of the proceedings as "sufficient compliance" or as keeping the proceedings within limitation. Language is so couched that the penalty proceedings are expected to be concluded before expiry of period of limitation.

8. For the reasons discussed hereinabove, we are unable to find any fault with the judgment and order passed by the ITAT. Tax Appeal is, therefore, dismissed.

[2006] 287 ITR 72 (KAR.)

HIGH COURT OF KARNATAKA

Commissioner of Income-tax

Tam Tam Pedda Guruva Reddy

R. GURURAJAN AND JAWAD RAHIM, JJ.

IT APPEAL NO. 60 OF 1999

JULY 18, 2006

Section 271B, read with section 275(1)(c) of the Income-tax Act, 1961 – Penalty – For failure to get accounts audited – Assessment year 1991-92 – Assessment order was passed under section 143(3) on 25-3-1992 – Subsequently reassessment proceedings were initiated and completed in terms of order dated 30-12-1994 – In meanwhile, noticing failure to get accounts audited under section 44AB, a notice was issued to assessee on 8-6-1993 – Penalty was also levied in 15-12-1993 – Tribunal however set aside penalty holding that it was imposed 14 months after completion of assessment and, thus, it was affected by limitation under section 271B – Whether in view of combined reading of sections 271B and 275(1)(c), six months period of limitation is with reference to initiation of proceedings in terms of section 275(1)(c) – Held, yes – Whether, since, in instant case, initiation was done on 8-6-1993, and penalty was levied on 15-12-1993, i.e. with in six months from date of initiation of penalty proceedings, Tribunal was not justified in deleting penalty on ground of limitation – Held, yes

FACTS

Assessment order for the year 1991-92 was passed under section 143(3) on 25-3-1992. Thereafter reassessment proceedings were initiated and completed in terms of order dated 30-12-1994. In the meanwhile, noticing the failure to get the accounts audited under section 44AB, a notice was issued on 8-6-1993. Penalty was also levied on 15-12-1993, by the Department. The said penalty was confirmed by the Commissioner. The Tribunal set aside the penalty on the sole ground of limitation, as according to the Tribunal, it was issued 14 months after the completion of the assessment and it was affected by limitation under section 271B.

On appeal:

HELD

A combined reading of sections 271B and 275(1)(c) would show that the six-month period of limitation is with reference to initiation of proceedings in terms of section 275(1)(c). In the case on hand, it was seen that initiation was done on 8-6-1993, and the penalty was levied on 15-12-1993. It was within six months from the date of initiation of penalty proceedings. Section 275(1)(b), if read carefully would show that it refers to proceedings by way of assessment in terms of section 271B. Those words are missing in section 275(1)(c). Therefore, the Tribunal was not justified in deleting the penalty on the ground of limitation.

Note : Decision was in favour of revenue.

M.V. Seshachala for the Appellant.

Dr. R.B. Krishna for the Respondent.

JUDGMENT

R. Gururajan, J.—This appeal is at the instance of the Revenue.

1. Assessment order for the year 1991-92 was passed under section 143(3) of the Income-tax Act, 1961 on March 25, 1992. Thereafter reassessment proceedings were initiated and completed in terms of an order dated December 30, 1994. In the meanwhile, noticing the failure to get the accounts audited under section 44AB, a notice was issued on June 8, 1993. Penalty was also levied on December 15, 1993, by the Department. The said penalty was confirmed by the Commissioner. The Tribunal has set aside the penalty on the sole ground of limitation. It is in these circumstances, the Revenue is before us. This court at the time of admission has chosen to frame the following question of law :

"Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the penalty proceedings initiated on June 8, 1993, and completed on December 15, 1993, were beyond the period of limitation ?"

3. Heard learned counsel for the parties and perused the material on record.

4. In terms of the question of law framed by this court, we are only concerned as to whether the imposition of penalty in terms of the provisions governing penalty is sustainable or not.

5. The admitted facts would reveal no audit. The same is noticed by the Tribunal. After noticing, the Tribunal was of the view that penalty could not have been levied, since according to the Tribunal, it was issued 14 months after the completion of the assessment and it is affected by limitation under section 271B of the Act. The said section provides for levy of penalty and the quantum of penalty in terms of the statute. Section 271B reads as under :

"If any person fails, to get his accounts audited in respect of any previous year or years relevant to an assessment year or obtain a report of such audit as required under section 44AB, or furnish the said report along with the return of his income filed under sub-section (1) of section 139, or along with the return of income furnished in response to a notice under clause (i) of sub-section (1) of section 142, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum equal to one-half per cent, of the total sales, turnover or gross receipts, as the case may be, in business or of the gross receipts in profession, in such previous year or years or a sum of one hundred thousand rupees, whichever is less."

6. Time limitation is prescribed in terms of section 275(1) of the Act. We are only concerned with section 275(1)(c) of the Act. The same reads as under :

"(c) in any other case, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later."

7. A combined reading of sections 271B and 275(1)(c) would show that the six-month period of limitation is with reference to initiation of proceedings in terms of section 275(1)(c) of the Act. In the case on hand, it is seen that initiation was done on June 8, 1993, and the penalty was levied on December 15, 1993. It is within six months from the date of initiation of penalty proceedings.

8. At this stage, we must also notice section 275(1)(b) of the Act. It reads as under-:

"(b) in a case, where the relevant assessment or other order is the subject matter of revision under section 263, after the expiry of six months from the end of the month in which such order of revision is passed ;"

9. Section 275(1)(b ), if read carefully would show that it refers to proceedings by way of assessment in terms of section 271B of the Act. Those words are missing in section 275(1)(c) of the Act.

10. Therefore, we are of the view that the Tribunal is not justified in deleting the penalty on the ground of limitation. We find substance in the argument of learned counsel for the Revenue.

11. On the facts and circumstances of this case, we deem it proper to answer the question of law in favour of the Revenue and against the assessee.

12. Ordered accordingly. No costs.

[2004] 134 TAXMAN 495 (KAR.)

HIGH COURT OF KARNATAKA

Shanbhag Restaurant

Deputy Commissioner of Income-tax

P. VISHWANATHA SHETTY AND AJIT J. GUNJAL, JJ.

IT APPEAL NO. 152 OF 2000

OCTOBER 23, 2003

Section 275, read with sections 271D and 271E, of the Income-tax Act, 1961 - Penalty - Bar of limitation for imposition of - Assessment year 1991- 92 - Assessee-firm filed its return of income - Assessing Officer by his assessment order dated 25-2-1994 held that assessee had received loans and deposits in cash in contravention of provisions of section 269SS - Deputy Commissioner initiated penalty proceedings by issue of notices dated 8-6-1994 - Penalty was levied by an order dated 28-3-1995 - Whether financial year in first part of section 275(1)(c) must be understood as financial year where assessment order was made in course of which proceedings for penalty could be initiated - Held, yes - Whether, therefore, when financial year in respect of assessment order made on 25-2-1994 had expired on 31-3-1994, first part of section 275(1)(c) was applicable - Held, no - Whether since order imposing penalty was not passed within six months' period from end of month in which action for imposition of penalty was initiated, order passed imposing penalty was barred by limitation - Held, yes

FACTS

When the assessment of the assessee-firm was taken up for scrutiny by the Assessing Officer, it was found that there were certain credit balances in the name of certain persons. The Assessing Officer by his assessment order dated 28-2-1994 held that the assessee had received loans and deposits in cash in contravention of the provisions of section 269SS and also it had made repayment of the loans and deposits received otherwise than by an account payee cheque or account payee bank draft drawn on the names of the persons who had advanced the loan or made the deposit with the assessee. Therefore, a penalty was required to be levied on the assessee under sections 271D and 271E. The Deputy Commissioner issued two show-cause notices dated 8-6-1994 to which the assessee gave explanation. However, the Deputy Commissioner held on 28-3-1995 that the assessee had contravened the provisions of sections 269SS and 269T and levied penalty under sections 271D and 271E. The Commissioner (Appeals) allowed the assessee's appeal and set aside the orders of the Deputy Commissioner on the ground that the proceedings were com-pleted beyond six months from the date of initiation of the proceedings. On revenue's appeal, the Tribunal set aside the order passed by the Commissioner (Appeals) on the ground that the conclusion reached by the Commissioner (Appeals) that the penalty levied both under sections 271D and 271E was barred by time, was unsustainable in law.

On appeal under section 260A :

HELD

Section 275 prescribes the period by which the order imposing the penalty is required to be passed. [Para 6]

Section 275(1)(c ) comprises of two parts. The first part provides that no order imposing penalty under Chapter XXI could be made in cases which do not fall under section 275(1)(a) and (b) after the expiry of the financial year in which the proceedings in the course of which action for imposition of penalty has been initiated are completed. The second part relates to the cases which prohibits passing of an order imposing penalty after the expiry of six months from the end of the month in which action for imposition of penalty is initiated. However, the section further provides that when proceedings for imposition of penalty is initiated, whichever period expires later, would enure to the benefit of the revenue. In the instant case, the assessment order was passed on 25-2-1994. The financial year in which the proceedings in the course of which action for imposition of penalty has been initiated is required to be understood as the proceedings relating to the assessment year. The financial year in which the proceedings, in the course of which action for imposition for penalty had been initiated, could be understood as the proceedings relating to imposition of penalty. The financial year in the first part of section 275(1)(c) must be understood as the financial year where the assessment order was made in the course of which proceedings for penalty could be initiated. In the instant case, the assessment order was made on 25-2-1994. The financial year in respect of the assessment order, as rightly found by the Commissioner (Appeals), had expired on 31-3-1994. Therefore, the first part of section 275(1)(c ) was not applicable. The only question was whether the order imposing penalty was passed within the period prescribed in the later portion of section 275(1)(c ), i.e., within six months from the end of the month in which action for imposition of penalty was initiated. [Para 8]

The conclusion reached by the Commissioner (Appeals) was unexceptionable. He had rightly come to the conclusion that as the orders imposing the penalty were not passed within six months from the end of June 1994, the same were barred by limitation. On a proper construction of section 275(1)(c) it was held that in cases where the proceedings initiated fell under second part of section 275(1)(c) the order imposing the penalty was required to be passed within six months from the end of the month in which action for imposition of penalty was initiated. In the instant case, the action for imposition of penalty was initiated by issue of notices dated 8-6-1994 by the Dy. Commissioner. In that event, the orders imposing the penalty should have been passed before 31-12-1994 as the six months' period from end of June, 1994 expired on 31-12-1994. Therefore, the conclusion reached by the Commissioner (Appeals) that the order passed imposing penalty was barred by limitation was correct. The contrary view taken by the Tribunal in the impugned order was erroneous and totally unsustainable in law.[Para 9]

In the light of the above conclusion, the order passed by the Tribunal was liable to be set aside. [Para 10]

E.R. Indra Kumar for the Respondent.

JUDGMENT

P. Vishwanatha Shetty, J. - The assessee is the appellant in this appeal. In this appeal filed under section 260A of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), the appellant has called in question the correctness of the order dated 22nd September, 2000, a copy of which has been produced as Annexure A to this Appeal made in ITA Nos. 941 and 943/Bang./1995 by the Income-tax Appellate Tribunal, Bangalore (hereinafter referred to as 'the Tribunal').

2. Facts of this case are very brief, which may be stated as hereunder :

The appellant (hereinafter referred to as 'the assessee') is a partnership firm carrying on restaurant business. For the assessment year 1991-92, i.e., the year ending 31st March, 1991, the assessee filed its return of the income on 27th August, 1991 admitting the income of Rs. 1,09,310 (Rupees one lakh nine thousand three hundred ten only). The said assessment was taken up for scrutiny by the Assessing Officer and during the course of the scrutiny it was found that there was certain credit balances in the name of certain persons as seen from the balance sheet. The Assessing Officer on verification of the accounts, by means of his assessment order dated 25th February, 1994, held that the assessee had received loans and deposits in cash in contravention of the provisions of section 269SS of the Act, and also he had made repayment of the loans and deposits received otherwise than by an account payee cheque or account payee bank draft drawn on the names of the persons who had advanced the loan or made the deposits with the assessee; and therefore a penalty is required to be levied on the assessee under sections 271D and 271E of the Act for failure to comply with the provisions of sections 269SS and 269T of the Act. However, he observed that action for contravention of sections 269SS and 269T of the Act would be taken up separately. Thereafter, the Deputy Commissioner of Income-tax, Hubli Range, Hubli, issued two notices dated 8th June, 1994, the copies of which have been produced as Annexures E and F to this Appeal, to the assessee directing it to show cause as to why action should not be taken against it for contravening the provisions contained in sections 269SS and 269T of the Act. In response to the said notices, the assessee filed its reply on 28th July, 1994 explaining the circumstances under which it took the loan and deposits otherwise than by way of account payee cheque or by way of account payee bank draft from several persons and also contending that in the circumstances explained by it, must be held that it had not contravened the provisions of section 269SS of the Act. It also explained the circumstances under which the repayment of the loan and deposits were made otherwise than by way of account payee cheque or by way of account payee bank draft drawn on the names of the persons who had advanced loan or made a deposit with the assessee and as such it had not contravened the provisions of section 269T of the Act. However, the Deputy Commissioner of Income-tax, after considering the explanation submitted by the assessee, made an order dated 28th March, 1995, a copy of which has been produced as Annexure C to this appeal, holding that the assessee had contravened the provisions of section 269SS of the Act and levying a penalty of Rs. 2,79,312 (Rupees two lakhs seventy nine thousand three hundred twelve only) in exercise of the power conferred on him under section 271D of the Act. On the same day, the Deputy Commissioner of Income-tax also made an order under section 271E of the Act, a copy of which has been produced as Annexures G to this Appeal, taking the view that the assessee also had contravened the provisions of section 269T of the Act and levying a penalty of Rs. 1,10,500 (Rupees one lakh ten thousand five hundred only). Aggrieved by the said orders Annexures C and G, the assessee filed two appeals before the Commissioner of Income-tax (Appeals) [hereinafter referred to as 'the Commissioner (Appeals)']. The Commissioner (Appeals), after hearing the assessee, by means of his common orders dated 31st August, 1995, the copies of which have been produced as Annexures H and J to this Appeal, allowed the appeal filed by the assessee setting aside the Orders Annexures C and G passed by the Deputy Commissioner of Income-tax on the ground that the proceedings were completed beyond six months from the date of initiation of the proceedings. Aggrieved by the said order, the revenue had preferred appeals in Nos. 941 and 943 of 1995 before the Tribunal. However, the Tribunal, in the impugned order set-aside the order passed by the Commissioner (Appeals) on the ground that the conclusion reached by the Commissioner (Appeals) that the order was required to be passed within six months from the end of the month in which the action for imposition of penalty initiated, is erroneous in law. The Tribunal further took the view that the order imposing penalty having been passed on 28th March, 1995 and the financial year having expired on 31st March, 1995; the conclusion reached by the Commissioner (Appeals) that the penalty levied both under sections 271D and 271E is barred by time, is unsustainable in law.

3. Shri G. Sarangan, learned senior Counsel, challenging the correctness of the impugned order passed by the Tribunal made three submissions. Firstly, he submitted that the reasons assigned by the Tribunal to take the view that the conclusion reached by the Commissioner (Appeals) that the order was required to be passed within six months from the end of month in which the action for imposition of penalty initiated, is erroneous in law. Elaborating this submission, the learned Counsel pointed out that since the proceedings for penalty were initiated by issue of Notices Annexures E and F dated 8th June, 1994, the Deputy Commissioner of Income-tax was required to pass the order within six months from the end of June 1994, i.e., before 31st December, 1994; and therefore since admittedly the Orders Annexures C and G imposing penalty were passed only on 28th March, 1995, the conclusion reached by the Commissioner (Appeals) was correct and therefore, the Tribunal was totally unjustified in interfering against the said order. Secondly, as an alternative submission, Shri Sarangan submitted that the period of six months for completion of proceedings initiated, in the facts and circumstances of the case, must be understood from he date of Orders Annexures C and G dated 28th March, 1995; and since admittedly the said orders Annexures C and G imposing penalty were not passed within six months from the said date, the said orders imposing penalty should be declared as illegal on the ground that they are passed beyond the period of limitation. Finally, he submitted, that any event of the matter, the Tribunal ought to have accepted the explanation offered by the assessee for not accepting the loan and deposits otherwise than by way of account payee cheque or by way of account payee bank draft and also for repaying the said loan or deposits otherwise than by way of account payee cheque or account payee bank draft drawn in the name of the persons from whom the loans or deposits were received by the assessee, and dropped the proceedings initiated for levy of penalty. In this connection, he drew our attention to section 273B of the Act wherein it is provided that notwithstanding anything contained in sections 271D and 271E of the Act, no penalty should be imposed on the assessee for contravention of the said sections if the assessee proves that there was a reasonable cause for the failure in contravening the said provision. He also pointed out that since his contention has not been specifically formulated as a question of law at the time of admission of the appeal, this court may, in exercise of the power conferred on it under sub-section (6) of section 260A of the Act, permit the assessee to urge the said contention.

4. However, Shri E.R. Indra Kumar, learned counsel for the respondent strongly supported the impugned order passed by the Tribunal. It is his submission that the conclusion reached by the Commissioner (Appeals) being totally erroneous in law, the Tribunal was justified in interfering against the said order.

5. The substantial question of law raised for decision which was formulated by this Court at the time of admission of this Appeal, reads as follows:

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the penalty orders under sections 271D and 271E had been passed within the period of limitation and whether the Tribunal was right in reversing the order of the Commissioner of Income-tax (Appeals), who held that the penalty orders were passed after the expiry of the period of limitation specified in section 275(1)(c ) of the Income-tax Act, 1961 ?"

6. Section 275 of the Act provides for a bar for imposing penalty as provided under Chapter XXI of the Act. In other words the said provision prescribes the period by which the order imposing the penalty is required to be passed. The section 275(1)(c) reads as follows :

"(c)in any other case, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later."

7. As it could be seen from clause (a) of section 275(1), the said provision provides for a limitation in case where the relevant assessment or other order is the subject-matter of appeal before the higher authorities. Clause (b) of said section provides for limitation for making an order imposing penalty in cases where the relevant assessment or other order is the subject-matter of revision. However, clause (c) of said section provides for contingencies in cases other than which fall under clauses (a) and (b) of section 275(1) of the Act.

8. The answer to the substantial question of law formulated in this appeal, referred to above, depends upon the interpretation we are required to place on section 275(1)(c) of the Act. The reading of section 275(1)(c) of the Act makes it clear that the said section comprises of two parts. The first part provides that no order imposing penalty under Chapter XXI could be made in cases which do not fall under section 275(1)(a) and (b) after the expiry of the financial year in which the proceedings in the course of which action for imposition of penalty has been initiated are completed. The second part relates to the cases which prohibits passing of an order imposing penalty after the expiry of six months from the end of the month in which action for imposition of penalty is initiated. However, the section further provides that when proceedings for imposition of penalty is initiated, whichever period expires later, would endure to the benefit of the revenue. In the instant case, as noticed by us earlier, the assessment order was passed on 25th February, 1994. In our considered view the financial year in which the proceedings in the course of which action for imposition of penalty has been initiated is required to be understood as the proceedings relating to the assessment year. The financial year in which the proceedings, in the course of which action for imposition for penalty has been initiated, can be understood as the proceedings relating to imposition of penalty. In our considered view, the financial year in the first part of section 275(1)(c) must be understood as the financial year where the assessment order is made in the course of which proceedings for penalty could be initiated. In the present case, the assessment order was made on 25th February, 1994. The financial year in respect of assessment order, as rightly found by the Commissioner (Appeals), had expired on 31st March, 1994. Therefore, if the first part of section 275(1)(c) is not applicable, the only question is whether the order imposing penalty was passed within the period prescribed in the later portion of section 275(1)(c), i.e., within six months from the end of the month in which action for imposition of penalty is initiated ?

9. The Commissioner (Appeals), at paragraph 9 of the order has observed thus :

"The instant case falls under Category-III. Thus, in accordance with the provisions of section 275(1)(c) of Income-tax Act, 1961, the period of limitation for the instant case was six months from the end of the month in which the action for imposition of penalty was initiated. The Dy. CIT initiated the action or imposition of penalty by issue of a show-cause notice under section 271D on 8-6-1994. Thus, the penalty order under section 271D should have been passed by 31-12-1994. The Dy. CIT, however passed the penalty order in this case on 28-3-1995. Thus, the penalty order passed by the Dy. CIT on 28-3-1995 became barred by limitation. Thus, the order under section 271D passed by the Dy. CIT was without jurisdiction and hence illegal and invalid. The same is accordingly cancelled."

We are of the considered view that the conclusion reached by the Commissioner (Appeals) is unexceptionable. He has rightly come to the conclusion that as the orders imposing the penalty were not passed within six months from the end of June 1994, the same are barred by limitation. On a proper construction of section 275(1)(c) of the Act, we are of the view that in cases where the proceedings initiated falls under second part of section 275(1)(c) of the Act, the order imposing the penalty is required to be passed within six months from the end of the month in which action for imposition of penalty is initiated. In the instant case, even according to Sri Indra Kumar, the action for imposition of penalty was initiated by issue of Notices Annexures E and F dated 8th June, 1994 by the Deputy Commissioner of Income-tax. In that event, the orders imposing the penalty should have been passed before 31st December, 1994 as the six months' period from end of June 1994 expires on 31st December, 1994. Therefore, as noticed by us earlier, the conclusion reached by the Commissioner (Appeals) that the order passed imposing penalty is barred by limitation is correct. The contrary view taken by the Tribunal in the impugned order is erroneous and totally unsustainable in law.

10. In the light of the above conclusion, the Order passed by the Tribunal is liable to be set aside. Therefore, we find it unnecessary to consider the other two submissions advanced by Sri Sarangan as noticed above.

11. In the light of what is stated above, the order Annexure A dated 22nd September, 2000 passed by the Tribunal is set aside and the Orders Annexures H and J dated 31st August, 1995 passed by the Commissioner (Appeals) is hereby restored.

12. In terms stated above, this appeal is disposed of.

[1999] 106 TAXMAN 460 (MP)

HIGH COURT OF MADHYA PRADESH, INDORE BENCH

Bharat Construction Co.

Income-tax Officer

B.A. KHAN, J.

M.P. NO. 1272 OF 1989

DECEMBER 1, 1998

Section 271B, read with section 275, of the Income-tax Act, 1961 – Penalty - For failure to get accounts audited - Penalty proceedings for failure to maintain account books initiated against assessee-firm as per direction in assessment order dated 30-5-1986 and penalty imposed on 28-12-1988 - Another notice was issued on 11-9-1989 for assessee's failure to get its accounts audited under section 271B - Whether, where default for non-audit of accounts was not mentioned in assessment order dated 30-5-1986, second notice under section 271B, being not covered by that order, was not barred by limitation prescribed under section 275(b) and, therefore, time-bar of section 275(b) would apply from date of issue of second notice - Held, yes

FACTS

The assessee-firm engaged in building construction returned income on estimate basis as it had not maintained any account books. The Assessing Officer in his assessment order dated 30-5-1986 stated that penalty proceedings for failure to maintain books of account under section 271A had been initiated. Final order imposing penalty was passed on 28-12-1988. However, the Assessing Officer issued another notice under section 271B on 11-9-1989 for the assessee's failure to have its accounts audited.

On writ, the assessee contended that the impugned notice was barred by limitation prescribed under section 275(b) at the material time.

HELD

Section 275(b ) lays down bar of limitation in two respects, one explicitly and the other by necessary implication. The explicit bar is that the order of penalty is to be passed within two years from the expiry of the financial year in which the proceedings, in course of which penalty proceedings were initiated, were completed. The period of limitation is, thus, to run from the end of the financial year in which such proceedings are completed. Similarly, the implied bar is that penalty proceedings are also required to be commenced and completed within such prescribed period of limitation because section 275 provides limitation period for both the commencement and completion of such proceedings. These proceedings are commenced when the Assessing Officer directs the issuance of notice under section 274(1) (before its deletion), and when such direction is given, requirement of section 275 is satisfied, although the penalty notice might be actually issued after the completion of the assessment. The commencement of such proceedings is, thus, traceable from the date of direction by the ITO and is necessarily dependent on the issuance of notice proposing penalty.

In the instant case, the Assessing Officer had initiated penalty proceedings in his assessment order dated 30-5-1986 only for non-maintenance of account books by the assessee and not for its failure to have its accounts audited under section 44AB. Consequently, his direction for initiation of proceedings contained in his assessment order, would not cover his second notice dated 11-9-1989 issued under section 271B. The second notice, accordingly, could not be held time-barred by reckoning the limitation period from 30-3-1987 and expirable on 30-8-1989.

The defaults contemplated by section 271A and section 271B are separate and distinct. Under the latter provision, if the assessee fails to get his accounts audited under section 44AB, he is liable to penalty. The object is to get a clear picture of the assessee's accounts whose turnover exceeds the prescribed limit. The rates envisaging two types of defaults are also different. Therefore, the impugned second notice could not be ascribed to the direction of the Assessing Officer for initiation of penalty proceedings in his assessment order dated 30-5-1986. Since it was not covered by that order, it should be treated as initiating penalty proceedings under section 271B from the date it was issued and this was not barred by time under section 275(b).

Hence, the petition was to be dismissed.

A.M. Mathur for the Petitioner. V.K. Dubey for the Respondent.

ORDER

Khan, J - The appellant-firm is engaged in the contract of building construction. It declared its income on estimate basis as it had not maintained any account books and was assessed by the respondent - ITO, vide the assessment order dated 30-5-1986. While doing so, the respondent also stated in the order 'penalty proceedings have also been initiated'. He thereafter issued fresh notice under section 271A of the Income-tax Act, 1961 ('the Act') on 11-11-1987, proposing levy of penalty on the assessee for not maintaining account books. He eventually passed order dated 28-12-1988 imposing a penalty of Rs. 2,500 on its head. He, however, later issued second notice dated 11-9-1989 to the assessee under section 271B of the Act for its failure to have its accounts audited.

2. The assessee has challenged this notice in the present petition, on the ground that it was barred by limitation prescribed under section 275(b) of the unamended Income-tax Act. The case set up is that under this provision, no penalty proceedings could be commenced nor penalty order passed after the expiry of two years from the end of the financial year in which proceedings, in the course of which action for imposition of penalty had been initiated, were completed.

3. In short, it is submitted that respondent, having initiated penalty proceedings vide assessment order dated 30-5-1986 was required to pass penalty orders within two years after the expiry of the assessment year, i.e., 30-3-1987 and could not have issued the impugned notice, if that was taken to be the initiation of the penalty proceedings after the expiry of two years which would be on 30-8-1989.

4. This is repelled and rebutted by the respondent by placing reliance on the provisions of section 275(b). According to him, this provision prescribes a time limitation within which penalty proceedings must be concluded and not the stage after which penalty proceedings cannot be commenced. It is, accordingly, submitted that section 275(b) does not prescribe any limitation requirement for commencement of penalty proceedings which are distinct from the assessment proceedings. It is explained that under section 271B the assessee's failure to get his accounts audited under section 44AB renders such assessee liable for penalty.

5. The relevant section on which both sides are placing their interpretation is extracted hereunder for proper appreciation :

"No order imposing a penalty under this Chapter shall be passed :

(b)in any other case, after the expiration of two years from the end of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed."

6. A perusal of the provision would show that it laid down bar of limitation in two respects, one explicitly and the other by necessary implication. The explicit bar was that the order of penalty was to be passed within two years from the expiry of the financial year in which the proceedings in course of which penalty proceedings were initiated were completed. The period of limitation was, thus, to run from the end of the financial year in which such proceedings were completed. Similarly, the implied bar was that penalty proceedings were also required to be commenced and completed within such prescribed period of limitation because section 275 provided limitation period for both the commencement and completion of such proceedings. These proceedings are commenced when the Assessing Officer directs the issuance of notice under section 274(1) of the Act (before its deletion), and where such direction is given, requirement of section 275 is satisfied, although the penalty notice may be actually issued after the completion of assessment. The commencement of such proceedings was, thus, traceable from the date of direction by the Assessing Officer and was not necessarily dependent on the issuance of notice proposing penalty.

7. Applying all this to the present case, it emerges that the Assessing Officer had initiated penalty proceedings in his assessment order dated 30-5-1986 only for non-maintenance of account books by the assessee and not for its failure to have its accounts audited under section 44AB. That is why he firstly issued notice dated 11-11-1987 under section 271A and passed the final penalty order on 28-12-1988. He did not record default of non-audit of accounts in his order and, consequently, his direction for initiation of penalty proceedings contained in his assessment order would not cover his second notice dated 11-9-1989 issued under section 271B. The second notice, accordingly, cannot be held time-barred by reckoning the limitation period from 30-3-1987 and expirable on 3-8-1989.

8. It remains to be seen whether proceedings under section 271B were necessarily required to be initiated in the assessment proceedings of the relevant assessment year. But as it is, the defaults contemplated by section 271A and section 271B are separate and distinct. Under the latter provision if the assessee fails to get his accounts audited under section 44AB, he is liable to penalty as laid down in this section. The object is to get a clear picture of the assessee's accounts whose turnover exceeds the prescribed limit. The rates envisaging two types of defaults are also different. Therefore, without dilating on the issue further we find no difficulty in holding that the impugned second notice dated 11-9-1989 cannot be ascribed to the direction of the Assessing Officer for initiation of penalty proceedings in his assessment order dated 30-5-1986. Since it is not covered by that order, it should be treated as initiating penalty proceedings under section 271B from the date it was issued and this was not barred by time under section 275B. This shall not, however, be construed to validate this impugned notice for all purposes, should it be suffering from some other infirmity. But it surely is not barred by time under section 275B.

The petition, accordingly, fails and is dismissed.

IT : In view of failure of assessee-society to maintain proper records indicating names and address of donors, voluntary contributions received by it were rightly brought to tax as anonymous donations within meaning of section 115BC

■■■

[2012] 27 taxmann.com 89 (Agra - Trib.)

IN THE ITAT AGRA BENCH

Shri Girraj Educational and Welfare Society

Income-tax Officer 3(4), Mathura*

BHAVNESH SAINI, JUDICIAL MEMBER

AND A.L. GEHLOT, ACCOUNTANT MEMBER

IT APPEAL NO. 365 (AGR.) OF 2011

[ASSESSMENT YEAR 2007-08]

SEPTEMBER 28, 2012

Section 115BBC of the Income-tax Act, 1961 - Anonymous donations to be taxed in certain cases - Maintenance of records - Assessment year 2007-08 - Assessee charitable society received voluntary contributions from various donors - Since assessee failed to submit complete list containing names and addresses of donors, Assessing Officer brought to tax voluntary contributions so received under section 115BC - Commissioner (Appeals) on basis of sample examination concluded that 46 per cent of donation was to be treated as anonymous donation - Whether in view of failure of assessee to maintain proper records indicating names and addresses of donors and, further, in absence of other alternative calculation or determination of amount of anonymous donation, impugned addition made by Commissioner (Appeals) was to be confirmed - Held, yes [Para 13] [In favour of revenue]

FACTS

• The assessee was a society registered with the Registrar of Societies. It was granted registration under section 12AA. The objects of the society were charitable in nature i.e. running school/institution for imparting of education, help the poor and orphans, protection of environment etc.

• In the return of income, the assessee had shown voluntary contributions received from 2,700 donors amounting to Rs. 68.99 lakhs. It was claimed before the Assessing Officer that the said donation was received as corpus fund for the purpose of construction of the society building. However, no confirmation of such corpus donation had been filed.

• The Assessing Officer, thus, treated the amount of donation as income of the assessee from undisclosed sources and taxed the same in the status of A.O.P.

• The Commissioner (Appeals) on the basis of sample examination concluded that 46 per cent of donation was to be treated as anonymous donation under section 115BC because the assessee had failed to provide complete list of donors along with their address.

• On second appeal:

HELD

Provisions of sections 11 and 12

• Income of wholly charitable or religious trusts or institutions as well as partly charitable or religious trusts or institutions is exempt from income-tax under sections 11 and 12, subject to the fulfilment, inter alia, of certain conditions, of application of income and investment in specified modes. Similarly, income of any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (via) or any hospital or other medical institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10, is exempt from income tax subject to the fulfilment of conditions specified in the said clause. [Para 10]

Anonymous donations not to be taxed in case of wholly religious trusts

• With a view to prevent channelisation of unaccounted money to these institutions by way of anonymous donations, a new section 115BBC has been inserted to provide that any income of a wholly charitable trust or institution by way of any anonymous donation shall be included in its total income and taxed at the rate of 30 per cent. Anonymous donation made to wholly charitable and religious trusts or institutions, or mixed purpose trusts or institutions shall be taxed only if it is for any university or other educational institution or any hospital or other medical institution run by them. Anonymous donation to wholly religious trusts or institutions will not be taxed. [Para 10.1]

Meaning of anonymous donation

• Anonymous donation has been defined in the new section to mean any voluntary contribution referred to in section 2(24)(iia), where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed. Consequential amendments have been made in section 10(23C) and section 13 to provide that any income by way of any anonymous donation which is taxable under section 115BBC shall be included in the total income of the assessee. Section 115BBC is applicable from assessment year 2007-08 onwards. [Para 10.2]

Mere filing of list of donors does not satisfy requirement of section 115BC(3)

• In the lilght of the above background and provisions of section 115BBC, if one considers the facts of the case under consideration, it is noticed that the assessee did not maintain records of the identity indicating the names and addresses of the donors. Merely filing of list of donors containing names and addresses/incomplete addresses does not satisfy the conditions laid down in section 115BBC(3). The sub-section (3) of section 115BBC has explained the meaning of anonymous donation clearly that such institution is required to maintain records of identity indicting the names and addresses of the persons making the donations or contributions.

• On a perusal of records, it is found that the assessee had not maintained such records of identity indicting names and addresses of the donors. After sample examination carried out by the revenue authorities, it was found that in some cases the assessee has proved identity indicating the names and addresses of the donors. Therefore, to that extent, it can be said that there was no anonymous donation. The burden is on the assessee to explain that it had maintained records of identity indicting names and addresses of the person of making contribution or donation. Since the assessee had failed to maintain such records, it was clearly a case covered by anonymous donation.

• On account of failure of the assessee and in the absence of other alternative calculation or determination of amount of anonymous donation, one has to agree with the Commissioner (Appeals) estimating such anonymous donation on the basis of sample examination. Such exercise is not unjust because in spite of the fact that the assessee did not maintain the records as required under sub-section (3) of section 115BBC, the benefit has been allowed by the Commissioner (Appeals) on the basis of sample examination of the total donation. As regards the contention of the assessee that the donation was with a specific direction, therefore, section 115BBC is not applicable, in this regard, in view of sub-clause (2) of that section 115BBC, it is relevant to note that the assessee has failed to produce any evidence based on which it can be said that the donation was for a specific direction particularly when the donation was found as anonymous donation. [Para 13]

• In the result, appeal filed by the assessee is dismissed. [Para 15]

CASES REFERRED TO

Asstt. CIT v. Muslim Educational Society [2010] 1 ITR (Trib.) 527 (Cochin) (para 7) and Hans Raj Samarak Society v. Asstt. DIT (Exemptions) [2011] 133 ITD 530/16 taxmann.com 103 (Delhi) (para 8).

S.K. Chaturvedi and S.N. Bansal for the Appellant. Waseem Arshad for the Respondent.

ORDER

A.L. Gehlot, Accountant Member - This is an appeal filed by the assessee against the order dated 31.03.2011 passed by the ld. CIT(A)-I, Agra for the A.Y. 2007-08.

2. The effective ground raised in the appeal is in respect of addition of Rs. 27,96,200/- sustained by the CIT(A) out of the addition of Rs. 68,99,943/- made by the Assessing Officer (A.O.) on account of anonymous donation/undisclosed income.

3. The brief facts of the case are that the assessee is a society registered with the Registrar of Societies U.P. on 01.06.2006. The society was granted registration under section 12AA of the Income Tax Act, 1961 ('the Act' hereinafter). The objects of the society is charitable purpose by running school/institution for imparting of education, help the poor and orphans, protection of environment etc. During the assessment proceedings the A.O. noticed that the assessee has shown voluntary contribution received from 2700 donors amounting to Rs. 68,99,943/-. In order to verify the genuineness of the donors, the A.O. issued summons under section 131 of the Act and letters calling information under section 133(6) of the Act. The reply of donors and relevant observation has been noted by the A.O. in paragraph no. 9 f his order. Some of the donors have refused to give the donation. During the assessment proceedings, statement of Smt. Laxmi Sharma, W/o. Shri Nand Kishore Sharma, Secretary of the society was recorded under section 131 of the Act. It was said in the statement that the donation was collected by arranging camps in nearby village. On the basis of examination, the A.O. noticed that the society is mainly controlled by Shri Nand Kishore Sharma and his family members i.e. father and wife, and relatives and the donation alleged to have received from 2700 donors within a period of 9 months were not genuine. Some of the donors admitted to have given donation. Some of the donors are not traceable on the address given by the assessee. The A.O. observed that in a small span of ten months practically it is not possible to collect huge amount of donation of Rs. 68,99,943/- in cash from a large number of donors. The A.O. noted that not a single amount of donation was received by cheque. It has also been noted by the A.O. after examination of the books of account that all receipts of donation were prepared in a single sitting as it was evident that no signature of Authorized Representative/Cashier was available on these receipts. The signatures put were illegible. The donors filed affidavits before the A.O. but the assessee could not produce any of them for examination. The A.O. observed that the affidavit filed were of cyclostyled in nature and appeared to be made on the insistence of the society or its representatives. It was claimed before the A.O. that the said donation was received as corpus fund for the purpose of construction of the society building but during the course of assessment proceedings, no confirmation of such corpus donation have been filed. The A.O. treated this amount of Rs. 68,99,943/- as income of the assessee from undisclosed sources and the same has been taxed in the status of A.O.P.

4. The CIT(A) noticed that the A.O. has made the addition on the basis of small sample verification which is not sufficient for making a decision of treating the whole amount of donation as unexplained. The CIT(A) directed the A.O. to verify all the donors who were shown to have given donations more than Rs. 4,000/- and in case of other donors shown to have given donations less than Rs. 4,000/-, the CIT(A) further suggested to the A.O. that a sample survey may be made by sending letters to them on the address given in the list provided by the assessee. In compliance to the direction of CIT(A), the A.O. submitted his report vide letter dated 23.02.2011 which has been reproduced by the CIT(A) at page nos. 11 & 12 of CIT(A)'s order. The report submitted by the A.O. was in Hindi. On the basis of the A.O.'s repot, the CIT(A) noted that the sample survey done in cases of 667 persons, the A.O. concluded that about 53% donors were found to have either refused to give the donation or they could not be traced out to verify whether they have given donation or not. The CIT(A) sent the A.O.'s report to the assessee for its comments. The assessee disputed number of donors in the category of donation more than Rs.4,000/- stating that they are 502 in number and not 530 as noted by the A.O. in the remand report. Before the CIT(A), the assessee filed confirmation from 102 more donors who have given donation more than Rs. 4,000/-stating that the A.O. refused to accept these confirmation letters. It was also stated that remaining donors could have also been produced if the A.O. had given time. Regarding those letters which were returned back unserved due to incomplete address, it was stated by the assessee that if this information would have been given to the assessee earlier, complete address of those donors could have been furnished. However, it was admitted before the CIT(A) that at the worst donation pertaining to 120 donors below Rs. 4,000/- could have been disallowed in case explanation furnished by the assessee is not accepted. The assessee also raised objection before the CIT(A) that the assessee was not given opportunity to give the full address of the donors. He also opposed estimation of 53% as unexplained donation as rough method having no proper basis and authentic details and hence this method of computation was not accepted by the assessee. The CIT(A), considering the principle of natural justice, time was allowed to the assessee to file the reply on 22.03.2011. The assessee filed reply dated 28.03.2011 which has been reproduced by the CIT(A) at page nos. 13 & 14 of his order. The assessee reiterated the submissions which are discussed as above. However, the assessee again raised objection before the CIT(A) that the assessee was not provided reasonable opportunity of hearing. In order to give opportunity to the assessee as well as to the A.O. to explain their stand before the CIT(A), a joint hearing was fixed on 29.03.2011 which was attended by the Authorized Representative as well as by the A.O. The rejoinder filed by the Authorized Representative was examined by the A.O. and agreed before the CIT(A) that wherever proof of identity is given, those confirmations can be accepted. The CIT(A) has gone through the confirmations produced by the assessee and found that in all these confirmations the assessee has attached the proof of identity in the form of identity card issued by Election Commission. The CIT(A) accepted the confirmations of 102 donors who have given donation more than Rs. 4.000/-. The CIT(A) did not accept the assessee's contention for further opportunity observing that this matter of receipt of donation is under examination since July 2007, when proceeding for providing registration to the assessee society under section 12AA was initiated and thereafter ample opportunities were given to the assessee to give full details of the donors along with their complete address. However, despite giving various opportunities, even after completion of the assessment order, the list which the assessee filed before the CIT(A) along with the written submission dated 16.03.2010, the CIT(A) found that in most of the cases, full addresses are not given. Before the CIT(A), it was also submitted by the assessee that the people of this country belie in secret donation (Gupt Dan), therefore, it not possible to give correct name and address of all the donors. The CIT(A) observed that such Gupt Dan are prevalent at least in case of religious trusts where people give donation as per their faith but the concept of Gupt Dan cannot be accepted in case of educational trust specially when it is being claimed by the assessee that these donations are received as corpus donation with specific purpose for making the building of educational institution. The CIT(A) further observed that generally in the name of Gupt Dan unaccounted money are being channelized to such institutes and, therefore, with a view to prevent channelization of unaccounted money to these institutes by way of anonymous donations, a new section 115BBC has been inserted in the Income Tax Act, 1961 by the Finance Act w.e.f. 01.04.2007.

5. The CIT(A) on the basis of verification carried out by the A.O. and after considering the assessee's submissions bifurcated donations in two parts, donations given more than Rs. 4,000/- and donations given less than Rs. 4,000/-. In respect of donors who have given donation more than Rs. 4,000/- (amounting to Rs. 21,58,700/-), the total number of donors were 502. A sample verification carried out for 359 persons (257 verified by the A.O. + 102 confirmations filed by the assessee before the CIT(A)). The CIT(A) found that the necessary verification made in case of 71.5% such donation (359/502x100) and hence about 28.5% such donors were remained unverified. The CIT(A) accordingly calculated 28.5% of Rs. 21,58,700/- of which calculation comes to Rs. 6,15,229/-. The CIT(A) found that to that extent Rs. 6,15,229/- remained unverified.

6. As regards the donation less than Rs. 4,000/- the CIT(A) noted that total amount involved was Rs. 47,41,243/- having 2197 donations. The CIT(A) was of the view that on the basis of examination it will be quite reasonable to estimate 46% of the donation shown by the assessee as being unaccounted or unexplained money because the assessee has failed to get all its donations shown to have taken from 2700 persons verified because the list of donors being with incomplete or wrong addresses and hence not fully verifiable. The CIT(A) accordingly calculated amount of disallowance out of donation less than Rs. 4,000/- of which calculation comes to Rs. 21,80,971/-. The CIT(A) accordingly held that the total amount of Rs. 27,96,200/- is liable to be taxed under section 115BBC of the Act. In this regard the relevant detailed finding of CIT(A) is reproduced as below :-

(Paragraph nos.7.1 to 7.4, page nos.17, 18 & 19)

"7.1 After considering the submission of the Ld. AR, remand report of the AO and rejoinder of the appellant filed against the remand report of the AO and all the materials available on the assessment record, it is quite clear that entire amount of donation amounting to Rs. 68,99,943/- are not verifiable. It has also been found that the list of 2700 donors so far produced by the appellant does not have complete and correct addresses of all the donors and therefore, it is not possible to make verification of the entire amount shown by the appellant as donation. It has also been found that receipt books for donation produced by the appellant during the assessment proceeding did not appear to have been made on day to day basis looking to the writing on the slip book which prima-facie was found by the AO to have been written in a single sitting. Though it was claimed that these donations were collected by arranging camps in nearby villages but details of dates and places where these camps were organized could not be furnished by the appellant. While organizing such camps, certain expenditure are required to be incurred on the persons who are sent to manage such camps and for creation of necessary logistic for organizing such camps but no such expenses are shown to have been Incurred by the appellant. On the basic of verification so far carried out by the AO in case of the persons who are claimed to have given donation more than Rs. 4000/, numbering 502, it has been found that out of 502 donors listed out by the appellant, verification could be made only from 359 persons (257 verified by the AO + 102 confirmations filed before me) and thus the appellant was able to get the necessary verification made in case of 71.5% such donation (359/502X100) and hence about 28.5% such donors remained unverified. As per the categorized list of all the donation furnished by the Ld. AR in rejoinder, which is reproduced in para 6.2, it may be seen that such donors are shown to have contributed Rs. 21,58,700/-. Therefore, I find that in case of those donations which are shown more than 4,000/- an amount of Rs. 6,15,229/- remained unverified being 28.5% of Rs. 21,58,700/-

7.2 For other donations shown less than Rs.4000/- as per the list submitted by the Ld. AR and reproduced in para 6.2, the total amount involved is Rs. 47,41,243/- having 2,197 donors. Out of these 2,197 donors, necessary verification were made from time to time, first by the Ld. CIT-I Agra, then by the AO during the assessment proceeding and also during remand proceeding and the result of such enquiries are given are as under:-

Letter issued for verification	Refused for giving donation or address is found wrong	Accepted giving donation	Not replied
548 enquired by CIT-I	7	239	302
63 enquired by the AO during assessment	23 (refused) + 8 (wrong address)	30	-
137 enquired by the AO during remand	11 (refused) + 69 (wrong address)	17	40
Total = 748	118	286	342

7.3 On the basis of above chart, it can be seen that out of total verification in the case of 748 persons, in case of 118 persons, either they have refused for giving donation or address given are not correct. In case of 342 persons, no reply was received and only 286 persons confirmed giving the donation. On the basis of these statistics, I find that over all sample survey done in 748 cases is about 34% of the total donors. Out of sample survey of 34%, it has been found that 118 persons out of 748 persons refused to have given donation or address was found to be wrong which comes to about 16%. Therefore, out of sample survey of 34% sample about 16% refused for giving donation. If this %age of sample survey is extrapolated to total number of donors, %age of the persons who can possibly refuse for giving the donation or whose address are not complete or wrong would come to about 47% (16/34X100). Therefore, considering the fact that the list of donors furnished by the appellant does not have complete and correct address of all donors, and donation receipt slips are found not to have been prepared in proper manner and also about 41 persons clearly refused to have given donation during sample survey, it would be quite reasonable to estimate 46% of the donation shown by the appellant as being unaccounted/unexplained money because the appellant has failed to get all its donations shown to have been taken from 2700 persons verified because the list of donors being with incomplete or wrong addresses and hence not fully verifiable. 46% of total amount of donation below Rs. 4000 of Rs. 47,41,243/- comes to Rs. 21,80,971/-.

Therefore, out of the donations of Rs. 47,41,243/-, shown to have been taken from donors who are claimed to have' given donation below Rs. 4000/-, amount of Rs. 21,80,971/- is found to be unaccounted money on estimate basis on the basis of sample survey done by the AO and considering the circumstances that the appellant failed to get all the donations shown by it verified.

7.4 In view of my findings about the donations above Rs. 4,000/- and below Rs. 4,000/- in para 7.1 & 7.3, total amount of donations found to be in form of unaccounted/unexplained money which could not be verified due to persons refusing to have given donation or their address were not complete or wrong or they could not be produced for verification by the appellant comes as under:-

	Donation above Rs. 4,000	6,15,229
	Donation below Rs. 4,000	21,80,971
	Total amount of donation in form of unaccounted/unexplained money	Rs. 27,96,200

In view of the above findings, the total amount of Rs. 27,96,200/- is found to be unexplained donation out of total amount of Rs. 68,99,943/- claimed by the appellant to have been received as 'corpus donation'. Such unexplained donation can be treated as anonymous donation being in form of unaccounted money and is liable to be taxed u/s 115BBC."

7. The CIT(A) has decided the issue raised by the assessee that donations are received from named persons and not from anonymous persons. Therefore, section 115BBC of the Act is not applicable to the case of the assessee. The CIT(A) distinguished the judgement in the case of Hon'ble Supreme Court in the case of Smt. P.K. Norjahan relied upon by the assessee. The CIT(A) has also rejected the assessee's contention that the assessee society is registered under section 12AA of the Act, therefore, exemption will apply both to the disclosed and undisclosed income. The assessee in support of its contention relied upon a decision of Cochin Bench in the case of Asstt. CIT v. Muslim Educational Society [2010] 1 ITR (Trib) 527 (Cochin). The CIT(A) distinguished the decision of I.T.A.T. in the case of Muslim Educational Society on the ground the in that case the issue was pertaining to section 10(23C) of the Act whereas in the case under consideration , it relates to section 11 and 12AA of the Act. As per section 11, entire income of members of societies which are registered under section 12AA are not exempted from tax and exemption are provided only for those income which are mentioned in section 11(1) after fulfilling certain conditions. The CIT(A) has also examined the provisions of section 115BBC and held that donations can be said to be from known persons only when the identity of the donors shown in the donor list is established. The CIT(A) noted that in the case under consideration, after a detailed examination including sample survey, it was found that the identity of the donors with respect to donation of Rs. 27,96,200/- could not be established by the assessee. Therefore, such amount of donation can be very well treated as anonymous donation and such donation would be liable for taxation as per the provisions of section 115BBC of the Act. The CIT(A) directed the A.O. to treat donation amount of Rs. 27,96,200/- as anonymous donation out of total amount of Rs. 68,99,643/- shown by the assessee and tax this amount of anonymous donation as per the provisions of section 115BBC of the Act.

8. The ld. Authorised Representative reiterated the submissions made before the CIT(A) and submitted that section 115BBC is applicable to anonymous donation only. Ld. Authorised Representative submitted that the assessee received donations from named persons and not from anonymous persons. Ld. Authorised Representative referred a list of donors of which copy has been placed at page nos. 6 to 53 of assessee's Paper Book. Ld. Authorised Representative referred the order of I.T.A.T., Agra Bench in assessee's case in ITA Nos. 399 & 400/Agr/2007, order dated 06.02.2009 and submitted that the I.T.A.T while giving direction to CIT to grant registration under section 12AA and 80G(5) observed that though majority of the donors confirmed having given the donations, merely because seven persons have denied having given the donations of 2700 donor, the genuineness of trust is not lost. Ld. Authorised Representative submitted that the assessee has furnished complete details of donors, therefore, it cannot be held that donation received by the assessee was anonymous. Ld. Authorised Representative in support of his contrition relied upon order of I.T.A.T. Delhi Bench in the case of Hans Raj Samarak Society v. Asstt. DIT Exemptions [2011] 133 ITD 530/16 taxmann.com 103.

9. The ld. Departmental Representative, on the other hand, relied upon the orders of the Revenue Authorities and submitted that the assessee has failed to maintain complete details regarding donors. Therefore, the case of the assessee is squarely covered by section 115BBC of the Act.

10. We have heard the ld. Representatives of the parties and records perused. The admitted facts of the case are that the assessee society has been granted registration under section 12AA of the Act. Before coming to the issue under consideration, we would like to refer and discuss the scheme of the Act. Income of wholly charitable or religious trusts or institutions as well as partly charitable or religious trusts or institutions is exempt from income tax under sections 11 & 12, subject to the fulfillment, inter alia, of certain conditions, of application of income and investment in specified modes. Similarly, income of any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (via) or any hospital or other medical institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10, is exempt from income tax subject to the fulfillment of conditions specified in the said clause.

10.1 With a view to prevent channelisation, of unaccounted money to these institutions by way of anonymous donations, a new section 115BBC has been inserted to provide that any income of a wholly charitable trust or institution by way of any anonymous donation shall be included in its total income and taxed at the rate of 30%. Anonymous donation made to wholly charitable and religious trusts or institutions, i.e. mixed purpose trusts or institutions shall be taxed only if it is for any university or other educational institution or any hospital or other medical institution run by them. Anonymous donation to wholly religious trusts or institutions will not be taxed.

10.2 Anonymous donation has been defined in the new section to mean any voluntary contribution referred to in section 2(24) (iia) of the Act, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed. Consequential amendments have been made in section 10(23C) and section 13 to provide that any income by way of any anonymous donation which is taxable under section 115 BBC shall be included in the total income of the assessee. Section 115BBC is applicable from assessment year 2007-08 onwards.

11. To appreciate the issue we would like to reproduce section 115BBC as under:-

"115BBC. (1) Where the total income of an assessee, being a person in receipt of income on behalf of any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax payable shall be the aggregate of—

[(i) the amount of income-tax calculated at the rate of thirty per cent on the aggregate of anonymous donations received in excess of the higher of the following, namely:—

(A) five per cent of the total donations received by the assessee; or

(B) one lakh rupees, and

(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of anonymous donations received.]

(2) The provisions of sub-section (1) shall not apply to any anonymous donation received by—

(a) any trust or institution created or established wholly for religious purposes;

(b) any trust or institution created or established wholly for religious and charitable purposes other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.

(3) For the purposes of this section, "anonymous donation" means any voluntary contribution referred to in sub-clause (iia) of clause (24) of section 2, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed.]"

12. On a plain reading of section 115BBC, the salient features of section noticed are as under :-

(1) Total income of an assessee, being a person in receipt of income on behalf of:-

(i) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed; or

(ii) any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purpose and not for purposes of profit, if the aggregate annual receipts of such hospital or institution do not exceed the amount of annual receipts as may be prescribed; or

(iii) any other fund or institution established for charitable purposes [which may be approved by the prescribed authority], having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States; or

(iv) any trust (including any other legal obligation) or institution wholly for public religious purposes or wholly for public religious and charitable purposes [which may be approved by the prescribed authority], having regard to the manner in which the affairs of the trust or institution are administered and supervised for ensuring that the income accruing thereto is properly applied for the objects thereof;

(v) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approve by the prescribed authority; or

(vi) any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiac) or sub-clause (iiiae) and which may be approved by the prescribed authority]

(vii) Trust or institutions referred to in section 11.

(2) Includes any income by way of any anonymous donation.

(3) Income tax payable shall be the aggregate of the amount of income tax calculation on the income by way of any anonymous donation @ 30%.

(4) Amount of income tax with which the assessee would have been chargeable had his total income been reduced by the amount of income charged to tax @ 30%.

(5) Anonymous Donation - for the purpose of anonymous donation, following conditions must be satisfied:-

(i) Anonymous donation means voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) [or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via)] of clause (23C) of section 10 [or by an electoral trust]].

(ii) Where a person receiving such contribution does not maintain record of the identity indicating the name and address of person making such contribution and such other particulars as may be prescribed.

(6) This provision of anonymous donation shall not apply to following :-

(i) any trust or institution created or established wholly for religious purpose;

(ii) any trust or institution created or established wholly for religious purpose and charitable purpose other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.

13. In the light of the above background of discussions of relevant scheme of the Act and provisions of section 115BBC, if we consider the facts of the case under consideration, we notice that the assessee did not maintain records of the identity indicating the names and addresses of the donors. Merely filing list of donors containing names and addresses/incomplete addresses does not satisfy the conditions laid down in section 115BBC(3) of the Act. The sub-section (3) of section 115BBC has explained the meaning of anonymous donation clearly that such institution is required to maintain records of identity indicting the names and addresses of the persons making the donations or contributions. On a perusal of records, we do not find that the assessee has maintained such records of identity indicting names and addresses of the donors. After sample examination carried out by the Revenue Authorities, it was found that in some cases the assessee has proved identity indicating the names and addresses of the donors. Therefore, to that extent, it can be said that the there was no anonymous donation. The burden is on the assessee to explain that the assessee has maintained records of identity indicting names and addresses of the persons of such contribution or donation. Since the assessee has failed to maintain such records, under the circumstances, it is clearly a case covered by anonymous donation. On account of failure of the assessee and in the absence of other alternative calculation or determination of amount of anonymous donation, we agree with the CIT(A) estimating such anonymous donation on the basis of sample examination. Such exercise is not unjust because inspite of the fact that the assessee did not maintain the records as required under clause (3) of section 115BBC, the benefit has been allowed by the CIT(A) on the basis of sample examination of the total donation. As regards the contention of the assessee that the donation was with a specific direction, therefore, section 115BBC is not applicable, in this regard, in view of sub-clause (2) of that section 115BBC of the Act, it is relevant to note that the assessee has failed to produce any evidence based on which it can be said that the donation was for a specific direction particularly when the donation was found as anonymous donation.

14. In the light of the above discussion, we do not find any infirmity in the order of CIT(A). Order of the CIT(A) is confirmed.

15. In the result, appeal filed by the assessee is dismissed.

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Chartered Accountant Finance

Wednesday, November 14, 2012

[aaykarbhavan] Judgments in Bunches,

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