When penalty is barred

Section 275 of the Income-tax Act, 1961, which falls under Chapter XXI, deals with penalties. Clauses (a) and (b) of section 275(1) 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 Act, respectively. Sub-section (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. Therefore, it 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 categories 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.

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 section Chapter XXI by following the procedure prescribed in section 274 of the 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.

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 when action for imposition of penalty is initiated.

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.

Thus, 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.

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 would be a period of six months beginning from the end of the month in which the action for imposition of penalty was initiated.

This point was considered by the Delhi High Court in Subodh Kumar Bhargava v CIT (309 ITR 31).

The facts in this case were that penalty proceedings in respect of a return of income filed for the assessment year 2000-01 and processed under section 143(1) were initiated by the assistant commissioner by issue of show-clause notice under section 274 read with section 271-B of the Act on July 31, 2003. The show-clause 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 furnish it within the stipulated time.

The assessee contested the penalty proceedings both on the merits and on the ground of limitation. The assistant commissioner rejected the plea of the assessee and imposed a penalty. Before the commissioner (appeals) the assessee contended that the penalty order could be passed within six months from July 31, 2003, whereas the penalty order 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. Therefore, the penalty order passed on February 17, 2004 was time barred.

The commissioner (appeals) confirmed the order of the assistant commissioner. The commissioner (appeals) was of the view that the penalty order could be passed within six months from July 31, 2003, up to the end of the financial year in which such proceedings had been initiated, whichever period expired later. Since the financial year expired on March 31, 2004, the penalty order passed on February 17, 2004, was within time. The Appellate Tribunal upheld the order of the commissioner (appeals).

On further appeal the High Court held, allowing the appeal, that the assessee’s case was covered under the second part of section 275(1)(c) 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 July 31, 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 January 31, 2004. The penalty order passed on February 17, 2004, was hit by the bar of limitation.

The aforesaid decision gives the correct interpretation of the law. It spells out the circumstances in which penalty proceedings would be barred by limitation. A penalty order which is so passed would be non est in law.

The author is advocate, Supreme Court