Madhushree Gupta vs. UOI (Delhi High Court)

Despite s. 271(1B), s. 271 (1)(c) penalty is not valid if AO’s satisfaction not recorded at stage of initiation

In Ram Commercial Enterprises 246 ITR 568 (Del) {affirmed in Rampur Engineering 309 ITR 143 (Del) (FB)}, the Delhi High Court held that if the AO did not record his satisfaction that the assessee had concealed particulars of his income before completion of the assessment proceedings, the initiation of penalty proceedings was bad in law and the order imposing penalty was invalid. To supersede this law, sub-sec (1B) was inserted in s. 271 by the Finance Act, 2008 with retrospective effect from 1.4.1998 to provide that if the assessment order contained a direction for initiation of penalty proceedings under 271 (1) (c) it would be deemed to constitute satisfaction of the AO. S. 271 (1B) was challenged as being constitutionally invalid on various grounds. HELD upholding the validity of s. 271 (1B) on its own reading of the provision that:

(1) There is no cogent reason why retrospectivity to s. 271 (1B) is w.e.f. 01.04.1989. However, this cut off date does not create invidious discrimination and violate Art. 14 vis-à-vis those whose case is to be considered on the basis of law obtaining prior to 01.04.1989 because if an assessee has fallen foul of the law on penalty he cannot be heard to say that rigours of law ought not to apply to him because another person similarly placed is not exposed to such a rigour. There is no equality in illegality.

(2) Ram Commercial (and other judgements) do not lay down that reasons have to be recorded. The emphasis is on recording of satisfaction and that the prima facie satisfaction reached by the AO must be reflected and/or apparent from the assessment order itself.

(3) This law is not changed by s. 271 (1B). The Revenue cannot urge that prior to s. 271 (1B), “satisfaction” both at the initiation stage and the imposition stage was required but after s. 271 (1B) it is required only at the stage of imposition and not at the stage of initiation.

(4) S. 271 (1B) merely provides that an order initiating penalty cannot be declared bad in law only because it states that penalty proceedings are initiated. However, it must still be discernible from the record that the Assessing Officer has arrived at prima facie satisfaction for initiating penalty proceedings.

(5) The Revenue’s submission that prima facie satisfaction of the AO need not be reflected at the stage of initiation is not acceptable. The presence of prima facie satisfaction for initiation of penalty proceedings was and remains a jurisdictional fact which cannot be wished away even post amendment. If an interpretation such as the one proposed by the Revenue is accepted then s. 271 (1B) will fall foul of Article 14 of the Constitution as it will then be impregnated with the vice of arbitrariness. The AO would then be in a position to pick a case for initiation of penalty merely because there is an addition or disallowance without arriving at a prima facie satisfaction with respect to infraction of s. 271 (1)(c).