Time Limit for Initiation of Penalty starts from the date on which the AO writes letter to the ACIT recommending the issuance of SCN: Delhi HC

The division bench of the Delhi High Court in Principal CIT v. Mahesh Wood Products Pvt Ltd, held that the time limitation for “initiation” of penalty proceedings under section 275(1)(c) of the Income Tax Act, starts from the date on which the AO wrote a letter recommending the issuance of the Show Cause Notice, and not from the date mentioned in the Show Cause Notice.

The bench, therefore, struck down the penalty orders by holding the same as illegal, being barred by time limitation.

In the present case, the department approached the High Court challenging the order of the ITAT quashing the penalty order on ground that the order was not passed within the time limit laid down under Section 275(1)(c) of the Income Tax Act.

In consequent to a search, the Officer initiated assessment proceedings under section 153A against the assessee with the approval of Joint Commissioner. The petitioner stated that the Officer initiated penalty proceedings u/ss 271D and 271E of the Act as a result of the contravention of Sections 269SS and 269T of the Act, after six months from the completion of assessment proceedings. The assessee maintained that the penalty proceedings are barred by limitation u/s 275(1)(c) of the Act.

On appeal, the CIT(A) quashed the penalty order on merits. However, it does not accepted the contention of the assessee regarding limitation. On further appeal, the ITAT held that the penalty orders were barred by limitation under Section 275(1)(c) of the Act.

Relying on the decision in PCIT v. JKD Capital & Finlease Ltd., Justice Muralidhar and Justice Chandra Sekhar said that the date on which the AO recommended the initiation of penalty proceedings was taken to be the relevant date as far as Section 275(1)(c) was concerned. There was no explanation for the delay of nearly five years in the ACIT acting on the said recommendation. The Court, in the above case, held that the starting point would be the ‘initiation’ of penalty proceedings. “Given the scheme of Section 275(1)(c) it would be the date on which the AO wrote a letter to the ACIT recommending the issuance of the SCN. While it is true that the ACIT had the discretion whether or not to issue the SCN, if he did decide to issue a SCN, the limitation would begin to run from the date of letter of the AO recommending ‘initiation’ of the penalty proceedings.”

Based on the ratio given in the above case, the bench held that in the present case, the limitation in terms of Section 275 (1) (iii) of the Act began to run on 23rd July, 2012 and the last date for passing the penalty orders was 31st January, 2013. Therefore, the penalty orders issued on 26th February 2013 were clearly barred by limitation.

Read the full text of the Order below.

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