Karnataka High Court Holds S. 271DA Penalty Begins Only With S. 274 Notice; Reads In Six Month Limit

The Karnataka High Court on 7 July held that penalty proceedings under Section 271DA of the Income Tax Act commence only when the Joint Commissioner issues a show cause notice under Section 274, and not when the Assessing Officer merely forwards a proposal for initiating penalty.

A Division Bench of Justices S.G. Pandit and K.V. Aravind partly allowed a batch of ten Revenue appeals, clarifying that, although the Act does not prescribe a time limit for issuing a notice under Section 274, the Joint Commissioner must issue it within six months from the end of the month in which the proposal is received from the Assessing Officer. The judges observed:

“The proposal/reference made by the Assessing Officer to the Joint Commissioner cannot, by itself, be construed as initiation of penalty proceedings under Section 271DA of the Act. Initiation, in the context of Section 271DA read with Sections 274 and 275(1)(c) of the Act, can only be understood as the issuance of a notice by the Joint Commissioner calling upon the assessee to show cause against the proposed imposition of penalty.”

The dispute arose after the Assessing Officer completed scrutiny assessments and referred certain cases to the Joint Commissioner for initiating penalty proceedings under Section 271DA for alleged violations of Section 269ST (which prohibits receipt of Rs. 2 lakh or more in cash in specified transactions).

The taxpayers challenged the notices subsequently issued by the Joint Commissioner, contending that they were barred by limitation under Section 275 (which prescribes the time limit for passing penalty orders). The Single Judge accepted the contention by following the earlier decision in K. Umesh Shetty, prompting the Revenue to file the present appeals.

Before the Division Bench, the Revenue argued that the Assessing Officer's proposal merely enabled the Joint Commissioner to examine whether penalty proceedings should be initiated and could not itself amount to initiation. The taxpayers, on the other hand, contended that limitation commenced when the Assessing Officer made the proposal and that the subsequent notices were therefore issued beyond time.

Examining the statutory scheme, the judges agreed that a proposal by the Assessing Officer could not be equated with initiation of penalty proceedings. They held that only the Joint Commissioner is empowered to initiate and impose penalties under Section 271DA. Accepting the taxpayers' interpretation would allow an authority lacking such power to effectively determine the limitation period available to the Joint Commissioner. They said:

“If the proposal/reference made by the Assessing Officer is construed as the starting point for computation of the said period of six months, it would again lead to an anomalous situation by curtailing the statutory period of six months available to the Joint Commissioner, who alone is competent to initiate and impose penalty under Section 271DA of the Act. Such an interpretation would also result in the Assessing Officer effectively controlling the period of limitation provided under Section 275 of the Act to the Joint Commissioner.”

The Court also relied on the Supreme Court's decision in Armour Security (India) Ltd., which held that proceedings commence only upon issuance of a statutory show cause notice and not at the stage of preliminary inquiry or collection of evidence. It held that the issuance of a notice under Section 274 reflects the competent authority's decision to commence adjudicatory proceedings.

Further, the Bench noted that while Section 275 prescribes the limitation period for passing a penalty order, it does not specify the time within which the Joint Commissioner must issue a notice under Section 274. It held that statutory powers cannot remain exercisable indefinitely, the Bench read a reasonable time limit into the provision and held that the notice must be issued within six months from the end of the month in which the Joint Commissioner receives the Assessing Officer's proposal.

Applying these principles, the Bench held that notices issued beyond the prescribed six month period were barred by limitation, while proceedings in the remaining cases had been initiated within time. It observed:

“The Joint Commissioner shall issue the notice under Section 274 of the Act within a period of six months from the end of the month in which the proposal/reference is received from the Assessing Officer for the purpose of considering initiation of proceedings for imposition of penalty under Section 271DA of the Act. The notice issued beyond the said period shall be liable to be held as barred by limitation.”

Accordingly, the High Court disposed of the appeals by modifying the reasoning adopted by the Single Judge while substantially affirming the relief granted in the time barred matters.

For Appellants: Sri Y.V. Ravi Raj, Senior Standing Counsel

For Respondents: Sri Shreehari Kutsa, Advocate