Recording of reasons mandatory while levying penalty

Penalty cannot be imposed if an Assessing Officer does not record his finding that there was a concealment of income or furnishing of incorrect details of income. In absence of such recording it is considered that there is no “satisfaction”, as such penalty cannot be imposed.

“Satisfaction” an essence of imposing penalty:  

Satisfaction of the AO is the most essential condition for levy of the penalty and its related proceedings. Such satisfaction is formed during any proceeding under the provisions of the Income Tax Act. It is an admitted position in law that during issuance of a notice under section 274 of the Act, the tax authority should be satisfied that the assessee has not complied with any of the provisions contained in the Act.

Different views of courts:

There are divergent views regarding the necessity of recording the reasons in writing before imposing the penalty.

The Calcutta High Court held that satisfaction of the AO is necessary prior to issuance of a notice. But the same is not necessary in writing in each case. The Allahabad High Court in the case of Crossings Infrastructure (P.) Ltd. vs. Commissioner of Income Tax also had a similar view that recording of reasons in writing is not necessary for imposing a penalty.

Contrary to that, the Delhi high Court and the Kerala High Court held that the recording of satisfaction is an essence for initiating the penalty proceedings.

“Reasons” to be distinguished from “conclusion”:

“Reasons” and “conclusions” are not the same. “Reasons” refer to mental exercise of authorities in coming to a conclusion. Only recording a conclusion by saying that the assessee has not been complied with any provision of the Act by the AO will not suffice for levying penalty.

View of the Supreme Court:

The Supreme Court in the case of Competition Commission of India v. Steel Authority of India Ltd. & Another, JT 2010 (10) SC 26 held that reasons are the connections between the matters on which some conclusions are based. It clearly stated that the concept of reasoned judgment is an important part of the basic principles of law.  It is an essential requirement of the law. Reasoning is the foundation of a just judicial system. As such for imposing a penalty or for initiating penalty proceedings an assessing Officer while passing the order should record his reasons for doing so. The reasons should disclose the application of mind in arriving at a decision regarding the subject-matter irrespective of the fact that the decision is administrative or judicial. The Apex Court held that the reasons must reveal a relation between reasoning and conclusion. In the absence of the reasons, the levy of penalty will not be valid and binding upon the assessee.