The Indore bench of the Income Tax Appellate Tribunal (ITAT) has quashed a penalty imposed under section 271D of the Income Tax Act, 1961 for the absence of assessment proceedings as the assessee in this case had not filed a return of income for the assessment year under consideration and the AO had initiated penalty proceedings under section 271D, but the ITAT held that the penalty was not valid because there were no assessment proceedings.
The assessee, Umakant Sharma a resident of Indore, Madhya Pradesh, failed to file an income return for the 2008-09 assessment year. The AO initiated penalty proceedings under section 271D of the Income Tax Act, 1961, which the assessee challenged in the ITAT.
The assessee argued that the penalty was not valid because there were no assessment proceedings and the AO had no jurisdiction to initiate penalty proceedings without first completing the assessment proceedings.
The assessee also argued that the penalty was imposed in violation of the principles of natural justice.
The AO argued that the penalty was valid due to the assessee’s failure to file an income return, and also argued that the assessment proceedings were unnecessary before imposing the penalty and that it was imposed by the law and natural justice principles.
The Supreme Court ruled in CIT v. Jain Laxmi Rice Mills that a penalty under section 271D of the Income Tax Act, 1961 cannot be imposed without completion of assessment proceedings. The court also ruled that the assessee must be satisfied that they failed to file a return of income willfully before imposing the penalty.
The Tribunal observed that the Assessing Officer (AO) initiated penalty proceedings under section 271D of the Income Tax Act, 1961 without completing the assessment proceedings and did not confirm the assessee’s willful failure to file an income return.
The Two-member bench comprising B.M. Biyani (Accountant Member) and Vijay Pal Rao (Judicial Member) quashed the penalty order and held that the penalty was not valid because it was imposed without the completion of assessment proceedings and the recording of satisfaction by the AO.
The Tribunal also held that the penalty was imposed without giving the assessee an opportunity to be heard and that it was disproportionate to the assessee’s failure to file a return of income.
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