Penalty Proceedings Under Section 271DA Initiated Only Upon Issuance of Notice Under Section 274

The respondents (assessees) were selected for scrutiny, and the Assessing Officer (AO) completed assessments wherein he found potential violations of Section 269ST (receiving cash exceeding ₹2 Lakhs).

As the power to levy penalty under Section 271DA is vested exclusively with the Joint Commissioner of Income Tax (JCIT), the AO sent proposals/references to the JCIT for initiation of penalty.

The JCIT subsequently issued notices under Section 274 and passed penalty orders. The assessees challenged these proceedings in writ petitions, contending they were barred by limitation under Section 275(1)(c) because the "initiation" should be reckoned from the date of the AO’s proposal.

The learned Single Judge, relying on PCIT v. K. Umesh Shetty, allowed the petitions, holding that limitation runs from the date of the AO's reference. The Revenue appealed these orders.

1. Whether the "action for imposition of penalty" under Section 275(1)(c) of the Income Tax Act is "initiated" on the date the Assessing Officer makes a proposal to the Joint Commissioner or on the date the Joint Commissioner issues a notice under Section 274.

2. Whether there is a requirement for the Joint Commissioner to record independent "satisfaction" before issuing a notice under Section 274 read with Section 271DA.

3. What constitutes a "reasonable time" for the Joint Commissioner to initiate proceedings after receiving a proposal from the Assessing Officer.

Section 271DA, which vests penalty powers for Section 269ST violations in the Joint Commissioner, and Section 274, which mandates a reasonable opportunity of being heard.

Limitation periods under Section 275(1)(c), which bars penalty orders after the expiry of the financial year of the underlying proceedings or six months from the end of the month in which action was initiated.

Supreme Court precedent in Armour Security (India) Limited v. Commissioner, CGST, which held that "initiation of proceedings" refers to the formal commencement via show-cause notice, not preliminary inquiry or summons.

The principle from State of Punjab v. Bhatinda District Coop. Milk Producers Union Ltd. regarding the exercise of statutory power within a "reasonable period" when no specific timeline is provided by the legislature.

The Court reasoned that "initiation" cannot be equated with a mere internal proposal by the AO, as the AO lacks jurisdiction to impose Section 271DA penalties; thus, an incompetent authority cannot set the statutory clock in motion.

Applying Armour Security, the Court held that initiation occurs only when the competent authority (JCIT) manifests its decision to proceed by issuing a notice under Section 274.

To prevent arbitrary delays where the statute is silent, the Court read a "reasonable time" requirement into the scheme and determined that the JCIT must issue the Section 274 notice within six months from the end of the month in which the AO's proposal is received, paralleling the six-month limit for completion under Section 275(1)(c).

The Court distinguished the Delhi High Court's JKD Capital and its own prior K. Umesh Shetty ruling, stating they were superseded by the Supreme Court’s clarification on what constitutes "initiation".

Regarding "satisfaction," the court held that unlike Section 271, Section 271DA does not explicitly require a recorded satisfaction in the assessment order.

Writ Appeal Nos. 1991, 1994, 1996, and 2021 of 2025 were dismissed as the JCIT issued notices more than six months after the AO's proposal. Writ Appeal Nos. 1995, 1977, 1980, 1982, 2003, and 2023 of 2025 were allowed as the notices were issued within the six-month window from the proposal, and penalty orders were restored.