ORDER
Joginder Pall, A.M.
1. By this order, I shall dispose of this appeal of the assessee filed against the order of the CIT (A), Shimla (Camp : Jammu) for the asst. yr. 1996-97.
2. The only effective issue raised in this appeal is that the learned CIT (A) was not justified in cancelling the penalty of Rs. 1,51,040 imposed by the AO under Section 271(1)(c) of the IT Act, 1961 (in short ‘the Act’). Briefly stated, the facts of the case are that the assessee filed the return of income on 14th Jan., 1998 declaring therein income of Rs. 47,204. The case was selected by the AO under scrutiny. The AO noticed credit of Rs. 4 lakhs in the capital account of the assessee. On being asked to explain the source of the same, it was submitted that the assessee had received the amount by way of three cheques from bank account of his late father Sh. Ram Dhan. It was also submitted that the amount was kept in his home chest and he was suffering from left side paralysis since 1994. The father of the assessee expired on 21st March, 1996. It was submitted that the amount was given to the assessee before his death. It was also submitted that the amount was taken as help to assessee being youngest in the family and all other brothers had asked the father to give their share to the assessee. This explanation of the assessee did not find favour with the AO on the ground that no convenient reason had been given for keeping the huge amount at home chest. He also wondered why the amount was deposited in the bank to be given to the assessee by cheques. There was also no evidence regarding earnings of Sh. Ram Dhan or he was even a taxpayer. Thus, the AO made an addition of Rs. 4 lakhs which was upheld upto the level of the Tribunal. Though the assessee has denied initiation of proceedings in the assessment order as per original copy of the order received by the assessee, yet a copy of the assessment order filed by the Revenue along with the appeal shows that penalty proceedings under Section 271(1)(c) were initiated at the end of the assessment order in the handwriting of the AO. It was submitted before the AO that no penalty proceedings have been initiated during the course of assessment proceedings and, therefore, no penalty was exigible. However, the AO observed that at the time of completing the assessment, the AO had written in his own handwriting that penalty proceedings under Section 271(1)(c) have been separately initiated. Thus, the AO imposed a penalty of Rs. 1,51,040 on the ground that the assessee had furnished inaccurate particulars of income.
3. Being aggrieved, the assessee impugned the levy of penalty in appeal before the CIT(A). It was submitted before the CIT(A) that the AO has neither mentioned in the assessment order that the penalty proceedings are initiated nor any satisfaction for initiating penalty proceedings was recorded. Thus, relying on the judgments of Hon’ble Delhi High Court in the cases of Dewan Enterprises v. CIT , Shri Bhagwant Finance Co. Ltd. v. CIT (2005) 196 CTR (Del) 462 and the judgment of Hon’ble Calcutta High Court in the case of CIT v. A.K. Das (1970) 77 LTR 31 (Cal), it was submitted that the order for imposing penalty without recording satisfaction in the assessment order was invalid and bad in law. Even on merits, the assessee had argued that addition was made merely on the ground that explanation given by the assessee was not found satisfactory. This fact, by itself, was not enough to justify levy of penalty under Section 271(1)(c). Accepting the contentions of the assessee, the learned CIT(A) cancelled the penalty, firstly on the ground that AO had not recorded valid satisfaction in the assessment order at the time of initiating the assessment order and secondly on merits.
The Revenue is aggrieved by the order of the CIT(A). Hence, this appeal before this Bench.
4. The learned Departmental Representative, Sh. Tarsem Lal, submitted that mere indication in the assessment is sufficient for recording satisfaction of the AO. He relied on the judgment of Hon’ble Madras High Court in the case of M. Sajjanraj Nahar v. CIT . He further submitted that the learned CIT(A) was not justified in cancelling the impugned penalty.
5. The learned Counsel for the assessee, Sh. R.K. Gupta, on the other hand relied on the order of the CIT(A). He further submitted that the judgment of Hon’ble Madras High Court in the case of M. Sajjanraj Nahai v. CIT (supra) is not applicable because as per the assessment order served on the assessee, no satisfaction was at all recorded. In fact, even the penalty proceedings under Section 271(1)(c) have not been initiated. He drew my attention to pp. 1 to 3 of the paper book which is a copy of the assessment order served on the assessee. He also produced before me a copy of the original order served on the assessee which does not show that such proceedings were initiated in the assessment order. He further relied on the judgment of jurisdictional High Court of Punjab & Haryana in the case of CIT v. Munish Iron Store , judgments of Hon’ble Delhi High Court in the case of CIT v. Ram Commercial Enterprises Ltd. , CIT v. Super Metal & Re-rollers (2003) 185 CTR (Del) 349 : (2004) 265 ITR 82 (Del), CIT v. Vikas Promoters , Dewan Enterprises v. CIT (supra) in support of the contention that order for imposing penalty under Section 271(1)(c) was without jurisdiction and bad in law. Hence, the learned Counsel for the assessee submitted that the learned CIT(A) has rightly cancelled the same.
6. I have heard both the parties and carefully considered the rival submissions with reference to facts, evidence and material on record. I have also gone through the order of the CIT(A). Section 271(1)(c) of the Act provides for initiation of penalty proceedings. Clause (c) of Sub-section (1) of Section 271 provides that if the AO or the CIT(A) or the CIT in the course of any proceedings under this Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty as specified in Clause (iii) of Section 271(1) of the Act. Thus, recording of satisfaction in the assessment order is mandatory requirement of law for initiation of penalty proceedings. If the satisfaction is not recorded by the AO in the assessment order it would mean that the proceedings initiated under this section are not valid and without jurisdiction. The recording of satisfaction means that the assessment order must apparently show that there was an application of mind by the AO. The application of mind can only be gathered by the reasons stated in the assessment order. This view finds support from the judgments of Delhi High Court in the case of Shri Bhagwant Finance Co. Ltd. v. CIT (supra), CIT v. Auto Lamps Ltd. (Del), CIT v. Vikas Promoters (P) Ltd. (supra), CIT v. Super Metal Re-rollers (supra), Diwan Enterprises v. CIT (supra), CIT v. B.R. Sharma and CIT v. Ram Commercial Enterprises Ltd. (supra). Besides, in the case of CIT v. Munish Iron Store (supra), the Hon’ble Punjab & Haryana High Court has also held that the jurisdiction to impose penalty flows from recording of the satisfaction of the AO regarding concealment of income. In case, there is defect in the assumption of jurisdiction i.e. if satisfaction has not been recorded, such defect cannot be cured. The Hon’ble Punjab & Haryana High Court, apart from relying on the two judgments of Delhi High Court in the case of CIT v. Ram Commercial Enterprises Ltd. (supra) and Diwan Enterprises v. CIT (supra) has also relied on two judgments of Hon’ble Supreme Court in the cases of Jain Bros. v. Union of India and DM. Manasvi v. CIT . Thus, the sum and substance of the ratio of the various decisions is that recording of satisfaction by the AO in the assessment order is sine qua non for initiating the penalty proceedings. In the absence of such satisfaction, the initiation of penalty proceedings would be illegal, invalid and without jurisdiction.
6.1 Now in this case, I find from the copy of the assessment order served on the assessee, penalty proceedings under Section 271(1)(c) have not at all been initiated. The fact that in the copy filed with the appeal memo shows such addition was made in the handwriting of AO lends support to the fact that such proceedings were initiated subsequently. Since the copy of assessment order sent to assessee does not mention initiation of proceedings in the assessment order, I am inclined to accept assessee’s contention that penalty proceedings have not been initiated at the time of completing the assessment and, therefore, the order for imposing the penalty is without jurisdiction, illegal and bad in law. Assuming that proceedings were initiated at the time of completing the assessment, the same is again not a valid satisfaction in the eye of law. A copy of the assessment order filed along with the appeal shows that the AO had initiated penalty proceedings in his own handwriting at the end in the following manner:
Penalty proceedings under Section 271(1)(c) have been separately initiated.
There are two limbs of penalty under Section 271(1)(c) i.e. where the assessee has concealed particulars of income or furnished inaccurate particulars of his income. Nowhere, the AO has mentioned that penalty proceedings were initiated either for furnishing inaccurate particulars or for concealing particulars of income. This only shows that the AO has not applied his mind before initiating the penalty proceedings. This in my view does not amount to recording of valid satisfaction in the eye of law. Therefore, the order for imposing penalty suffers from jurisdictional defect and is illegal and bad in law. The various judgments cited above including the judgment of Punjab & Haryana High Court in the case of CIT v. Munish Iron Store (supra) support this view. We also do not find any merit in the submissions of the learned Departmental Representative that since no such plea was taken before the CIT(A), the assessee cannot raise this issue before the CIT(A) or Tribunal. Since the issue raised before us goes to the very root of the order for imposing penalty which is without jurisdiction and the issue is purely legal in nature, the same can be raised before the Tribunal for the first time. Reliance in this regard is placed on the judgment of Punjab & Haryana High Court in the case of CIT v. Dehati Co-op. Marketing Society and the judgment of Allahabad High Court in the case of CIT v. Mohd. Ayyub & Sons Agency . Reliance is also placed on the decision of Tribunal, Delhi Bench in the case of Asstt. CIT v. Eicher Ltd. (2006) 101 TTJ (Del) 369. Likewise the powers of CIT(A) are coterminous with the AO. Therefore, such issue can also be raised before him provided all facts relating to the same are on record. Accordingly, I do not find any merit in the ground of appeal of the Revenue.
6.2 As regards the judgment of Hon’ble Madras High Court in the case of M. Sajjanraj Nahar v. CIT (supra) relied upon by the learned Departmental Representative, the same is not applicable to the facts of the present case because in that case penalty proceedings were initiated in the assessment order. In the present case, as noted above, such proceedings have not at all been initiated by the AO. Further, the judgment of jurisdictional High Court in the case of CIT v. Munish Iron Store (supra) is binding on the authorities including the Tribunal in its jurisdiction. Therefore, following the same and other judgments cited (supra), I do not find any merit in the plea of the Revenue.
6.3 Even on merits, I find that the learned CIT(A) has rightly cancelled the penalty. It is no doubt true that addition of Rs. 4 lakhs was upheld by the Tribunal. But it is a settled law that both assessment and penalty proceedings are separate and independent proceedings though the reasoning given in the assessment order constitutes evidence and base for levy of penalty under Section 271(1)(c). However, the findings recorded in the assessment order are not conclusive for the purpose of levy of penalty under Section 271(1)(c). Apart from the judgment of Hon’ble Allahabad High Court in the case of Sushil Kumar Sharad Kumar v. CIT (All), the judgment of Hon’ble Punjab & Haryana High Court in the case of Vishwakarma Industries v. CIT , also supports the same view. In the case of CIT v. Smt. Padma Devi Jain , the Hon’ble MP High Court has held mere disallowance of claim of the assessee does not amount to concealment of income, if the explanation furnished by the assessee was found to be bona fide. In the case of CIT v. Inden Bisleis (Mad) the Hon’ble Madras High Court has held that merely additions have been made to the income does not mean that there has been concealment of income. A mere disallowance of expenditure does not result in imposition of penalty under Section 271(1)(c). Similar view was taken by the Hon’ble Delhi High Court in the case of CIT v. Mis. Baljit Jolly (2003) 183 CTR (Del) 419 : (2003) 263 ITR 239 (Del) and Hon’ble Calcutta High Court in the case of CIT v. Amalendu Paul . Moreover, the addition can be made under Section 68 if the explanation of the assessee in regard to the source of credit found in the books of account of the assessee has not been found satisfactory by the AO. The addition is made under the deeming provisions of Section 68 of the Act. But the operation of the deeming provisions of Section 68 cannot be extended to penalty under Section 271(1)(c). For the purpose of levy of penalty, the AO is required to establish that the explanation furnished by the assessee is false or the same is not bona fide and that all the material facts relating to computation of income have not been disclosed. The word ‘concealment’ inherently means hidden and implies mala fide intent on part of assessee to evade tax or contumacious conduct. In the absence of the same, penalty under Section 271(1)(c) could not be levied. In the present case, the addition has been made merely on the ground that the explanation of the assessee in regard to the source of a sum of Rs. 4 lakhs received from the father has not been found satisfactory. There is no discussion in the assessment order or penalty order that the assessee had furnished inaccurate particulars with mala fide intent to evade tax or the explanation given by the assessee was not bona fide or false. Therefore, I am of the opinion that penalty under Section 271(1)(c) was not exigible in this case even on merits.
7. Thus, in the light of abovementioned facts and circumstances of the case and the legal position discussed above, I am of the considered opinion that the learned CIT(A) was justified in cancelling the impugned penalty. Accordingly, the order of the CIT(A) is upheld and the grounds of appeal of the assessee are dismissed.
8. In the result, the appeal of the Revenue is dismissed.