1. These three appeals are filed by the assessee against the common order of the CIT(A), Orissa, Cuttack, dt. 30th Sept., 1994, confirming levy of penalty under s. 271B of the IT Act, 1961 for the asst. yrs.
1986-87 to 1988-89.
2. The assessee is a registered partnership firm. For the years under consideration, the gross turnover of the assessee, who is dealing in agency goods, exceeded Rs. 40 lakhs and thus the provisions of s. 44AB of the IT Act are applicable, whereby the audit report has to be obtained in the prescribed form on or before 31st day of July of the relevant assessment year. However, the audit reports for all the three years were obtained long after the due date. The details which are material for the disposal of these appeals are as under : audit report 31.7.86 31.7.87 31.7.88(b) Date on which audit report was obtained 3.8.88 25.8.88 7.10.88(c) Date on which return of income filed 3.8.88 26.8.88 11.10.88(d) Date of completion of assessment 31.1.89 31.1.89 31.1.89(e) Date of initiation of penalty proceedings 25.8.92 25.8.92 25.8.92(f) Date on which penalty was imposed under s. 271B 26.2.93 26.2.93 26.2.93(g) Amount of penalty levied 63,682 75,934 82,442 3. In response to the show-cause notice issued by the AO under s. 271B of the Act, the assessee explained that the returns of income were filed along with the audit report, tax dues were paid in advance and it co-operated with the Department. It was further submitted that the initiation of penalty proceedings, as per s. 275 of the Act is invalid in law, inasmuch as, the penalty proceedings under s. 271B/275 of the Act have to be initiated "in the course of any proceeding" which necessarily implies that the penalty proceedings should be initiated in the course of the assessment proceedings. In the present case, no penalty proceedings were initiated in the course of assessment proceedings which were completed on 31st Jan., 1989. As such the initiation of penalty proceedings in 1992 was invalid in law. The assessee has also submitted that, on merits, ill-health of the partner, who is looking after the taxation and accounts work, is the reason for the delay in obtaining the audit report and thus requested the AO to drop penalty proceedings.
4. The AO has summarily rejected the submissions of the assessee by holding that the provisions of s. 275(1)(c) as amended w.e.f. 1st April, 1989, which stood on the date of issuing penalty notices, are applicable to the present case and as per the said provisions there is no time-limit for initiating the penalty proceedings. According to the AO, the time-limit for levy of penalty starts from the initiation of the penalty proceedings, inasmuch as, s. 275(1)(c) states that no order imposing a penalty under this Chapter shall be passed after a period of six months from the end of the month in which action for imposition of penalty is initiated. On merits, he held that when the business of the firm can be carried on smoothly, ill-health of one of the partners cannot be accepted as a valid reason for the delay in getting the accounts audited.
5. Aggrieved thereby, the assessee filed an appeal before the first appellate authority, wherein the assessee reiterated the same arguments. The first appellate authority has confirmed the order of the AO by holding that the provisions of s. 275, as it stood prior to the amendment w.e.f. 1st April, 1989, are not applicable to the present case, inasmuch as, the rules of limitation are the rules of procedure and any amendment in this regard will be retrospective, in the sense that the rules applicable are the rules in force at the time when proceedings are taken. He further held that since no vested right accrues to the assessee in procedural law, the period of limitation applicable to penalty order would be governed by the law in force at the time of initiation of the penalty proceedings or on the date when the order was made. He thus held that the amended provisions of s.
275(1)(c) clearly applies to the facts of the case and further held that as per sub-cl. (c) to s. 275(1), there is no time-limit for initiation of proceedings. On merits also, he held that the illness of the partner was not supported by any evidence, such as the nature of the medical treatment, etc. and further held that alleged illness of one of the partners having not affected the business of the firm, cannot be accepted as a reasonable cause for the delay in obtaining the audit report.
6. Further aggrieved, the assessee has come up in appeal before us. The learned counsel for the assessee submitted before us that the levy of penalty under s. 271B of the Act is illegal. He submitted that as per the provisions of s. 275, as it stood prior the amendment by the Taxation Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989, the penalty proceedings are necessarily to be initiated during the course of the assessment proceedings and in the absence of the same, the penalties levied are invalid and without any jurisdiction.
Alternatively, he submitted that even as per the amended provisions of s. 275, which comes into operation from 1st April, 1989, initiation of penalty proceedings cannot be deferred unendingly and by taking the spirit of the section as a whole, the initiation of the penalty proceedings should take place within a reasonable period of time. The learned counsel for the assessee placed before us a copy of the judgment of the Orissa High Court in the case of Bata alias Batakrushna Behara & Ors. vs. Anama Behera reported in 1990 CrLJ 1110 wherein their Lordships have held that for filing an application under s. 482 Cr PC though there is no limitation, the application should be filed within reasonable time and their Lordships have further observed that the period of 90 days is reasonable for filing an application as similar time-limit is prescribed for filing a revision petition in the said Court. The learned counsel relied upon the judgment of the Hon'ble jurisdictional High Court and submitted that s. 275 of the Act applies to the penalty leviable under the Chapter and different time-limits were provided for initiation and also for completion of the penalty proceedings. By taking the limitation prescribed by the legislature in respect of other penalties as a guide, the penalty proceedings under s.
271B cannot be initiated after unreasonably long period of time, as in the present case. The audit report was obtained in all the three years in 1988 and the assessments were completed in 1989, whereas the penalty proceedings under s. 271B were initiated in 1992, i.e., after more than three years from the date of completion of the assessment proceedings and nearly 4 years from the date of filing the returns and audit reports. He, therefore, submitted that the abnormal time in initiating the proceedings shall vitiate the entire proceedings and, hence, the penalties levied under s. 271B of the Act are liable to be quashed. The learned counsel has also submitted before us that s. 44AB was introduced by the Finance Act, 1984, and while presenting the Union Budget for 1984-85, the then Finance Minister observed as under (1984) 146 ITR (St) 65 at page 66] : "With the reduction in rates and expeditious disposal of assessments, I believe there can now be no excuse for any leniency to be shown to those who abuse our laws. Such cases will necessarily have to be dealt with severely. In order to discourage tax avoidance and tax evasion, I an also introducing some further measures. In all cases where the annual turnover exceeds Rs. 20 lakhs or where the gross receipts from a profession exceeds Rs. 10 lakhs, I am providing for a compulsory audit of accounts. This is intended to ensure that the books of account and other records are properly maintained and faithfully reflect the true income of the taxpayer." The learned counsel submitted that the intention of introducing s. 44AB is to ensure that the books of accounts are properly maintained. No penalty is leviable merely because of a technical default in obtaining the audit report beyond the specified date, if the assessee has filed the return voluntarily and the audit report is obtained and available on record before the assessment is completed. He has drawn our attention to the provisions of s. 271B of the Act. In support of his contention that the AO has discretion not to levy penalty even if there is a failure to obtain audit report within the stipulated time and particularly to the words "Assessing Officer may direct that such person shall pay, by way of penalty". He has submitted before us that the illness of the partner, who is looking after the accounts and taxation matter, is the reason for the delay in obtaining the audit report, and thus requested us to delete the penalties levied under s.
271B of the Act.
7. On the other hand, learned senior Departmental Representative very vehemently contended before us that the penalty proceedings under s.
271B are distinct from the penalties leviable under s. 271(1)(a), 271(1)(b) and 271(1)(c) of the Act and since the legislature has not prescribed any period of limitation for initiating penalty proceedings, the penalty proceedings initiated in 1992 are valid and the penalties levied within six months of the initiation of the penalty proceedings are in accordance with the provisions of law. He has filed detailed written submissions wherein it was stated that the limitation applicable to the penalty matter is governed by the law in force at the time of initiation of penalty proceedings or the date on which the order was passed which, according to him, is supported by the decision of the Orissa High Court in the case of Bhikari Charan Panda vs. CIT (1975) 104 ITR 73 (Ori). On merits, he submitted that the illness of the partner has not been supported by any material evidence adduced before the authorities below and, hence, the first appellate authority is justified in confirming the levy of penalty.
8. We have heard the rival submissions and also perused the records.
The provisions of s. 275 of the Act, as it existed prior to its amendment, by the Taxation Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989, are reproduced hereunder : (a) in a case where the relevant assessment or other order is the subject matter of an appeal to the Dy. CIT(A) or the CIT(A) under s.
246 or an appeal to the Appellate Tribunal under sub-s. (2) of s.
253, after the expiration of a period of - (i) 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, or (ii) six months from the end of the month in which the order of the Dy. CIT(A) or the CIT(A), as the case may be, or the Tribunal is received by the Chief CIT or CIT, (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." From a plain reading of the language of s. 275, it is clear that no order imposing a penalty under this Chapter i.e., Chapter XXI can be passed beyond the periods stipulated in s. 275 of the Act. Admittedly, s. 271B of the Act falls within the said Chapter and is governed by the provisions of s. 275 of the Act. A plain reading of the provisions of ss. 275/271B of the Act shows that the penalty proceedings have to be initiated in the course of any proceeding which, by necessary implication, must be initiated in the course of assessment proceedings.
Admittedly, in the present case, the assessment proceedings were completed on 31st Jan., 1989. In the first paragraph of the assessment orders for all the years it was mentioned that auditors report in Form No. 3CB and 3CD were filed. It may not be out of place to mention that at the bottom of the assessment orders, the AO has clearly mentioned that penalty proceedings under s. 271(1)(a) and 271(1)(c) have been initiated. Admittedly, penalty proceedings under s. 271(1)(a), 271(1)(b) and 271(1)(c) have to be initiated in the course of the assessment proceedings but it is not a necessary precondition that a mention be made in the assessment order itself. Nevertheless, the AO has mentioned the same in the assessment order. This indicates that the then incumbent AO has never intended to initiate penalty proceedings under s. 271B of the Act though having mentioned about the filing of the audit reports as prescribed under s. 44AB in the opening paragraph of the assessment orders. Sec. 271B gives discretion to the AO not to levy penalty even though there is a failure to obtain the audit report.
Thus, the non-initiation of the penalty proceedings during the course of the assessment proceedings can be inferred to the effect that the AO has exercised his discretion under s. 271B of the Act in the given facts and circumstances of the case. At any rate, the penalty proceedings were not initiated during the course of the assessment proceedings and as we have stated herein above, on an interpretation of the unamended provisions of s. 275 of the Act, penalty proceedings initiated long after the completion of the assessment proceedings are not valid and the penalties levied thereon cannot be sustained. Similar view was taken by the Ahmedabad Bench of the Tribunal in the case of H.Ajitbhai & Co. vs. Asstt. CIT reported in (1993) 47 TTJ (Ahd) 22 : (1993) 45 ITD 262 (Ahd).
9. It is the case of the learned Departmental Representative that s.
275 deals with procedural law and in the case of procedural law, the provisions as it stood at the time of initiation of penalty proceedings are applicable as there is no vested right to the assessee in such matters. We have given careful consideration to the submissions of the learned Departmental Representative. The amended provisions of s. 275 which have come into effect from 1st April, 1989, are applicable only to those cases where the limitation as per the unamended provisions, is not expired. In fact, in the case cited by the learned Departmental Representative i.e., Bhikari Charan Panda vs. CIT (supra) their Lordships have held that two year period mentioned in s. 275 of the unamended Act had not expired at the stage when the new provisions have been introduced. Per contra, it implies that in a case where the limitation has expired before the amended provisions have come into force, the new provisions cannot be applied to such assessee as the vested right which has already been acquired by the assessee before the amendment cannot be taken away. The Hon'ble Delhi High Court in the case of CIT vs. Pratap Singh of Nabha (1982) 138 ITR 27 (Del) has dealt with a similar case wherein their Lordships have held that as per the law as it then stood, penalty order has to be passed within two years and since there is no change of law within this period, the period of limitation cannot be extended by applying the amended provisions. In the present case, as on 31st Jan., 1989, penalty proceedings have not been initiated. As we have already held that under the unamended provisions of s. 275 the AO is required to initiate penalty proceedings in the course of the assessment proceedings. The non-initiation thereof would take away the jurisdiction of the AO to initiate proceedings subsequently. Thus, before the amendment of s. 275, i.e., 1st April, 1989, the AO ceased to have jurisdiction to levy penalty and thus the amended provisions cannot be applied to disturb the vested right of the assessee. We, therefore, hold that the amended provisions of s. 275 of the Act are not applicable to the given facts.
10. For the sake of argument, we proceed on the presumption that the provisions of the amended s. 275 are applicable to the facts of the case. The Notes on Clauses, appended to the Direct Tax Laws (Amendment) Bill, 1987 [(1988) 168 ITR (St) 301 at 352] reads as under : "Clause (c) incorporates the provisions of the existing cl. (b).
However, the limitation for passing penalty order where no appeal is filed is reduced from two years from the end of the financial year, to the end of the financial year itself in which assessment order, etc. is passed or six months from the end of the month in which penalty proceedings were initiated, whichever is later." On a reading of the provisions of s. 275(c) along with the Notes on Clauses, we are of opinion that the amended cl. (c) is no different from the unamended cl. (c) of s. 275(1) of the Act and the legislature only intended to reduce the period of limitation which was hitherto two years from the end of the financial year. Thus, to our mind, the same interpretation which was placed on the unamended cl. (1) of s. 275 applies to the provisions of amended w.e.f. 1st April, 1989. We may further observe that even accepting for a moment that there is no time-limit prescribed under the Act for initiating penalty proceedings under s. 271B/275 of the Act, as rightly submitted by the learned counsel for the assessee, by taking the spirit of the provisions of s.
275 fixing the time-limit for initiation of penalty proceedings under s. 271(1)(a), 271(1)(b), etc. in the case of the assessee, penalty proceedings have to be initiated by the AO within a reasonable period of time and any proceeding initiated after an abnormal delay, is liable to be treated as invalid in law. Admittedly, the assessments were completed in 1989 and penalty proceedings were initiated after about 43 months after the date of completion of the assessment and about 50 months from the date of obtaining the audit report. The subsequent incumbent AO has initiated the penalty proceedings. To our mind, taking the limitation period prescribed in s. 275 for initiation of penalty proceedings under the other sections of this Chapter and also by respectfully following the judgment of the jurisdictional High Court in the case reported in 1990 CrLJ 1110, maximum of two years from the end of the assessment year in which the assessments are completed, can be said to be a reasonable time within which the AO could have initiated the penalty proceedings. As in the present case, the penalty proceedings have been initiated about 43 months after the completion of the assessment, we are of the opinion that the penalty proceedings are barred by limitation and consequently penalties levied under s. 271B cannot be sustained.
11. In this context we may also draw support from the judgment of the Hon'ble Andhra Pradesh High Court in the case of K. P. Narayanappa Setty & Co. vs. CIT (1975) 100 ITR 17 (AP) wherein their Lordships have held that though no specific period was prescribed within which penalty may be levied, there should not be inordinate delay and the penalty should be levied within reasonable time. We may further observe that the intention of the legislature cannot be otherwise, in as much as, Democles Sword cannot be allowed to hang on the head of the assessee perennially giving discretion to the AO before whom the audit report is submitted and the successor AO, to initiate the penalty proceedings at any time. The other fact that only 6 months is provided for completion of assessment proceedings from the date of initiation indicates that the initiation itself should be within a reasonable time.
12. Even on merits, one has to bear in mind the intention of the legislature for considering the reasonableness of the explanation given by the assessee. As is evident from the Speech of the Hon'ble Finance Minister while introducing the provisions of s. 44AB, tax audit report is intended to ensure that the books of account and other records are properly maintained and fully reflect the true income of the taxpayer.
In other words, the audit report is intended to facilitate the AO to cross check the income returned while completing the assessment. In this case, the assessee has voluntarily filed the returns of income along with the tax audit reports and the assessments were completed on the basis of the said tax audit reports by duly accepting the tax audit reports. In other words, the tax audit report was on record before the AO at the time of completion of assessment. Thus, the delay in obtaining the audit report, can at best be treated as a technical or venial breach of the provisions of law. Penalty proceedings are quasi-criminal proceedings in nature and hence penalty shall not ordinarily be levied unless the assessee either acted in defiance of law or acted in its conscious disregard of its obligation. The Hon'ble Supreme Court has held in the case of Hindustan Steel Ltd. vs. State of Orissa (1972) 83 ITR 26 (SC) that penalty will not be imposed merely it is lawful to do so. Their Lordships have further held that when there is technical or venial breach of the provisions of the Act, the authority competent to impose penalty may be justified in refusing to impose the penalty. In the case of partnership-firm, it is not uncommon to find that one partner would be exclusively looking after the taxation and accounting work, whereas another partner will attend to the business which facilitates them to specialise in their fields and work more effectively. Thus, it cannot be totally brushed aside that the illness of one of the partners, who is looking after the accounts and taxation work, constitutes reasonable cause for the delay in obtaining the audit reports. At any rate, the delay in finalising the accounts and obtaining the audit reports for the asst. yr. 1986-87 can certainly be taken as reasonable cause for the delay in obtaining the audit reports of the subsequent years, inasmuch as, unless the accounts of the earlier years are finalised, and closing balances are worked out, subsequent year's accounts cannot be finalised. In the present case, the audit report was obtained for the asst. yr. 1987-88 within 22 days from the date of completion of audit for asst. yr. 1986-87 and for the asst. yr. 1988-89 within 42 days from the date of completion of audit for the asst. yr. 1987-88.
13. In the result, the penalties levied for the asst. yrs. 1986-87 to 1988-89 are hereby cancelled. Consequently, the appeals are allowed.