Loading judgment…
Facts
The assessee did not file a return of income for the relevant assessment year. Subsequently, a notice under section 148 was issued, and the assessee filed a return. The AO accepted the returned income without variation. The Pr. CIT invoked Section 263, holding the assessment order erroneous and prejudicial to revenue for not initiating penalty proceedings.
Held
The Tribunal held that the Pr. CIT erred in invoking Section 263 and directing the AO to initiate penalty proceedings under Section 270A when the AO had not formed an opinion about concealment or inaccurate particulars. The penalty proceedings are separate from assessment proceedings.
Key Issues
Whether the Pr. CIT can invoke Section 263 to direct initiation of penalty proceedings when the AO has not recorded any finding of concealment or inaccurate particulars of income during the assessment.
Sections Cited
263, 147, 144B, 139, 148, 148A, 270A, 271B, 271F, 271(1), 273(b)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HON’BLE & SHRI ANIKESH BANERJEE, HON’BLE
Assessee by : Shri Viraj Mehta, A/R Revenue by : Shri Vivek Perampurna, CIT D/R सुनवाई की तारीख/Date of Hearing : 06/10/2025 घोषणा की तारीख /Date of Pronouncement: 08/10/2025 आदेश/O R D E R
PER NARENDRA KUMAR BILLAIYA, AM:
This appeal by the assessee is preferred against the order of the ld. Pr. CIT, Mumbai – 27 [hereinafter “the ld. Pr. CIT”] dated 20/03/2025 framed u/s 263 of the Act pertaining to AY 2018-19.
2. The sum and substance of the grievance of the assessee is that the ld. Pr. CIT erred in assuming jurisdiction by invoking provisions u/s 263 of the Act and further erred in holding that the assessment order dated 23/03/2023 framed u/s 147 r.w.s. 144B of the Act is erroneous inasmuch as it is prejudicial to the interest of the revenue. 3. Briefly stated the facts of the case are that the assessee is an individual earning rental income, salary income, interest income and capital gains on sale of securities. For the year under consideration, the assessee missed filing the return of income u/s 139 of the Act and as per the information received from the INSIGHT portal, the AO formed a 2 belief that the assessee has not disclosed certain transactions and hence has not filed his return of income. By taking prior approval the case was reopened and order u/s 148A(d) of the Act was passed resulting into the issue of notice u/s 148 of the Act. 3.1. Pursuant to the notice, the assessee filed his return of income declaring total income at Rs. 71,24,380/-. After examining the documents furnished by the assessee and the evidence, the AO framed the assessment order dated 23/03/2023 u/s 147 r.w.s. 144B of the Act and assessed the total income at Rs. 71,24,380/- which means that the returned income of the assessee was accepted as such. 4. Assuming jurisdiction conferred upon him by the provisions of Section 263 of the Act, the ld. Pr. CIT was of the opinion that the impugned assessment order is erroneous inasmuch as it is prejudicial to the interest of the revenue as the AO has erred in not initiating the penalty proceedings u/s 270A of the Act. The ld. Pr. CIT vide order dated 20/03/2025 held that the impugned assessment order dated 20/03/2023 is erroneous insofar as it is prejudicial to the interest of the revenue and set aside the assessment order with the directions to pass fresh assessment order initiating penalty u/s 270A of the Act. 5. We have given a thoughtful consideration to the orders of the authorities below. It is true that the assessee did not file the return of income before issuance of notice u/s 148 of the Act but it is equally true that the return filed pursuant to the notice was accepted as such as there was no various done by the AO. Since there was no variation, the AO was of the opinion that it is not a fit case for initiating penalty proceedings.
On identical set of facts, the Co-ordinate Bench in the case of Ms. GM Builders vs. PCIT in AY 2017-18, has set aside the order of the ld. Pr. CIT and restored that of the AO. The facts considered by the Co-ordinate Bench read as under:- “The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a partnership firm and did not file its original return of income for the year under consideration. Subsequently, on the basis of the information available in the AIMS module of the ITBA system that the assessee is a non-filler of income despite conducting high-value transactions in respect of transfer of immovable property, notice under section 148 of the Act was issued on 23/03/2021 and proceedings under section 147 of the Act were initiated. In response to notice issued under section 148 of the Act, the assessee filed its return of income on 10/03/2022, declaring a total income of INR 31,79,65,030. The Assessing Officer ("AO"), vide order dated 30/03/2022 passed under section 147 of the Act, assessed the total income of the assessee at the returned income.”
6.1. The cause for the assumption of jurisdiction u/s 263 of the Act considered by the Co-ordinate Bench, reads as under:- “Please refer to the assessment framed in your case u/s 143(3) read with section 147 of the Income Tax Act, 1961 for Asst. Year 2017-18 dated 30.03.2022. From the facts of the case, it is ascertained that you had not filed the return of income for A.Y. 2017- 18. The return was filed only after the notice u/s.148 was issued. In response thereto, you filed the return of income on 10.03.2022 declaring therein total income of Rs.31,79,65,030/-
The assessment was subsequently framed on the income declared in the return filed u/s.148 of the Act. This implies that despite your income being greater than the maximum amount not chargeable to tax in A.Y.2017-18, you did not file the return of income and this return is furnished for the first time under section 148 of the Act. Because of the aforementioned factual matrix of your case, you have to be considered as a person who has under-reported its income as per the definition of the term contained in Section 270A(2)(b) of the Act. However, in the assessment framed, the Assessing Officer has not initiated the said penalty proceedings u/s.270A during the course of the assessment. Thus, the said assessment order dated 30.03.2022 passed u/s.143(3) r.w.s. 147 of the Income-tax Act, 1961 is construed as erroneous in so far as it is prejudicial to the interest of Revenue.
You are requested to show cause as to why the aforementioned assessment order be not modified accordingly. In this regard, your case is fixed for hearing on 1gth March, 2024."
6.2. It can be seen that the facts of the case in hand and the cause for assumption of jurisdiction are pari materia the same. The Co-ordinate bench held as under :- “15. The learned PCIT, vide impugned order passed under section 263 of the Act, placed reliance upon the decision of the Hon’ble Allahabad High Court in CIT v/s Surender Prasad Agarwal, reported in [2005] 275 ITR 113 (All.), wherein the Hon’ble High Court held that omission of ITO to initiate penalty proceedings in course of assessment renders assessment order erroneous and prejudicial to interests of the Revenue and the Commissioner has jurisdiction to revise such an order under section 263 of the Act. We find that the Hon’ble Madras High Court in CIT v/s Chennai Metro Rail Ltd., reported in [2018] 92 taxmann.com 329 (Mad.), after considering the aforesaid decision of the Hon’ble Allahabad High Court, observed as follows: – “14. In view of Section 271(1) read with Section 263 of the Act, the Principal Commissioner might pass such order as the circumstances of the case might justify, which could include an order enhancing or modifying the assessment or cancelling the assessment or directing a fresh assessment. Directing fresh assessment would, in our view, include assessment of penalty. It cannot, therefore, be said that the Principal Commissioner had no jurisdiction to pass such order. The issue has been decided by a Division Bench of the High Court of Allahabad in CIT v. Surendra Prasad Agrawal [2005] 142 Taxman 653. However, the Principal Commissioner, we find, has recorded a finding that "on examination of the records, it is found that the Assessing Officer had in the assessment order established that the Assessee had concealed his income by filing inaccurate particulars". There is no such finding in the order of assessment. The Principal Commissioner seems to have distorted the order of assessment. The finding of the Principal Commissioner is to that extent perverse.
In our view, in the absence of any finding of the Assessing Officer with regard to concealment of income or with regard to furnishing of inaccurate particulars of income, the Commissioner clearly erred in holding that omission to record satisfaction to initiate penalty proceedings was erroneous or prejudicial to the interest of Revenue. The learned Tribunal rightly set aside the direction of the Principal Commissioner directing the Assessing Officer to initiate penalty proceedings although we may not agree with the reasoning in its entirety.”
Therefore, the Hon’ble Madras High Court held that unless and until there is a finding of the AO with regard to concealment of income or with regard to furnishing of inaccurate particulars of income, the learned PCIT cannot hold that omission to 5 record satisfaction to initiate penalty proceedings is erroneous or prejudicial to the interest of the Revenue. In the present case, it is evident from the record that though the AO has directed initiation of penalty proceedings under section 271B and section 271F of the Act, however, there is no recording of any finding that there was under- reporting of income by the assessee under section 270A(2) of the Act.
We further find that the Hon’ble Delhi High Court in Addl. CIT v/s J.K. D's Costa, reported in [1982] 133 ITR 7 (Delhi), observed as follows: – “We have heard Mr. Wazir Singh, learned counsel for the department, but we are of opinion that the conclusion reached by the Tribunal is the only possible conclusion that can be arrived at in, the circumstances of the case. Section 263 enables the Commissioner to call for and examine the record of any proceedings under the Act and if he considers that any order passed therein by the ITO is erroneous, in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such enquiries as he deemed necessary, pass such orders thereon as the circumstances of the case justify. In the present case, the Addl. Commissioner called for the record of the assessment proceedings and it is also clear from this order that in his view the assessment orders passed by the ITO on 28th March, 1969, were erroneous and prejudicial to the interest of the revenue. As the Tribunal has rightly pointed out, his jurisdiction was confined to the proceedings of assessment and the assessment orders, and he had full powers to revise the assessment order in regard to any error he may discover therein which is prejudicial to the interest of the revenue. In the present case, the complaint of the Addl. Commissioner is that while completing the assessment and passing the assessment orders, the ITO had failed to take steps to charge interest and that he had also failed to initiate penalty proceedings against the assessee. The question, therefore, is whether these two aspects of the matter formed part of the proceedings which were being examined by the Commissioner and also whether these are two aspects which form an integral part of the assessment orders which the Commissioner is seeking to revise. The Tribunal has held, so far as the question of interest is concerned, that it is a part of the proceedings of assessment and that the direction to charge interest can also be said to be an integral part of the assessment order. So far as this part of the Commissioner's order is concerned, it has not been challenged by the assessee in the reference and we are not concerned with this part of the Commissioner's order. The only question before us is whether the Tribunal was right in revoking the order of the Addl. Commissioner in so far as it pertains to the question of penalties under sections 271(1)(a) and 273(b). Here, we find ourselves in complete agreement with the view taken by the Tribunal. It is well established that proceedings for the levy of a penalty whether under section 271(1)(a) or under section 273(b) are proceedings independent of and separate from the assessment proceedings. Though the 6 expression "assessment" is used in the Act with different meanings in different contexts, so far as section 263 is concerned, it refers to a particular proceeding that is being considered by the Commissioner and it is not possible when the Commissioner is dealing with the assessment proceedings and the assessment order to expand the scope of these proceedings and to view the penalty proceedings also as part of the proceedings which are being sought to be revised by the Commissioner. There is no identity between the assessment proceedings and the penalty proceedings; the latter are separate proceedings that may, in some cases, follow as a consequence of the assessment proceedings. As the Tribunal has pointed out, though it is usual for the ITO to record in the assessment order that penalty proceedings are being initiated, this is more a matter of convenience than of legal requirement. All that the law requires, so far as the penalty proceedings are concerned, is that they should be initiated in the course of the proceedings for assessment. It is sufficient if there is some record somewhere, even apart from the assessment order itself, that the ITO has recorded his satisfaction that the assessee is guilty of concealment or other default for which penalty action is called for. Indeed, in certain cases it is possible for the ITO to issue a penalty notice or initiate, penalty proceedings even long before the assessment is completed though the actual penalty order cannot be passed until the assessment is finalised. We, therefore, agree with the view taken by the Tribunal that the penalty proceedings do not form part of the assessment proceedings and that the failure of the ITO to record in the assessment order his satisfaction Or the lack of it in regard to the leviability of penalty cannot be said to be a factor vitiating the assessment order in any respect. An assessment cannot be said to be erroneous or prejudicial to the interest of the revenue because of the failure of the. ITO to record his opinion about the leviability of penalty in the case. We, therefore, answer the first question referred to us in the affirmative and in favour of the assessee.” (emphasis supplied)
Therefore, in view of the facts and circumstances of the present case and the decisions of the Hon’ble Delhi High Court and the Hon’ble Madras High Court as noted above, we are of the considered view that the learned PCIT erred in invoking the provisions of section 263 of the Act, and directing the AO to initiate penalty proceedings under section 270A of the Act, as the AO has chosen not to initiate the penalty proceedings. Therefore, we are of the considered view that such being the facts, the learned PCIT cannot substitute his views and observe that the AO has passed erroneous order which is prejudicial to the interest of the Revenue. Thus, the impugned revision order passed by the learned PCIT under section 263 is quashed. As a result, the grounds raised by the assessee are allowed.”