AAMRAKUNJ REALTY LIMITED,AHMEDABAD vs. THE PR. CIT, AHMEDABAD-1, AHMEDABAD

The assessee has challenged the Revision order passed by the Ld. PCIT on the following grounds: “1. The Ld. PCIT erred on facts and in law in invoking provisions of section 263 of the Act without any justification.

Brief facts of the case are that the assessing officer in the order u/s. 143(3) r.w.s. 144B of the Income Tax Act made two additions to the appellant’s returned income. First addition was in respect of disallowance of contract payments of Rs.2,01,00,000/- made by the assessee to M/s. Skyline Infra, on the ground that this payment was not proved by the assessee because the proprietor of the said M/s. Skyline Infra did not respond to the notice u/s. 133(6) and subsequent reminders. The Assessing Officer also made a disallowance of Rs.1,67,68,738/- out of the interest expenditure incurred by the assessee. The Assessing Officer initiated penalty proceedings u/s. 270A of the Act.

Subsequently, the Ld. PCIT invoked his revisionary power u/s 263 and held that the assessing officer erred, while making addition of Rs.2,01,00,000/- on account of non-genuine contract expenditure, in not initiating penalty proceedings u/s. 271AAD of the Act. The Ld. PCIT directed the Assessing Officer to modify the assessment in the following words: “The error in the assessment order has resulted into loss of revenue to the extent of initiation and levy of penalty under section 271AAD of the Act. The order passed by the Assessing Officer is, thus, erroneous and prejudicial to the interest of the Revenue to the extent of levy of penalty under section 271AAD of the Act. Therefore, provisions of section 263 of the Act are applicable in this case. 8. Hence, in exercise of power conferred in me u/s.263 of the Act, the A.O. is directed to initiate and levy penal proceedings under section 271AAD of the Act. However, the A.O. may levy penalty under section 271AAD of the Act or may keep the proceedings in abeyance in case of any pending appeal before CIT(A). Accordingly, assessment order passed under section 143(3) r.w.s. 144B of the Income tax Act dated 27/12/2022 for the A.Y. 2018-19 is modified.”

Aggrieved by this order u/s 263 of the Act, the assessee is in appeal before us. In the meantime, vide order dated 10.03.2026, the assessing officer has modified the assessment order to the effect of initiating penalty proceedings u/s. 271AAD of the Act. The A.O. also noted that in accordance with the direction of Ld. PCIT the penalty may be levied later subject to the outcome of the Ld. CIT(A)’s order and the ITAT order. The issue for consideration rising of the grounds of appeal raised by the assessee is whether the Ld. PCIT in exercise of his power u/s. 263 can direct the assessing officer to initiate penalty proceedings u/s. 271AAD of the Act.

It is seen that the power to levy penalty u/s. 271AAD which was with the assessing officer has been extended to the Commissioner (Appeals) by Finance Act, 2022 with effect from 01.04.2022 and this was further extended to the Joint Commissioner (Appeals) by the Finance Act, 2023 with effect from 01.04.2023. The provision as it stands today (after the amendments by Finance Act 2022 & 2023) still does not empower the Ld. PCIT or CIT to initiate or levy penalty. It is also seen that while this provision empowers the authorities mentioned therein to levy penalty such levy is not automatic and the actual levy depends upon the final determination of whether the assessee made a ‘false entry’ in the books of account.

In the present case, the claim of the assessee with regard to the expenditure of Rs. 2,01,00,000/- is disallowed by the A.O. on suspicion arising out of the fact that the recipient did not respond to notice u/s. 133(6). Further the assessee’s appeal is still pending before the First Appellate Authority who may find evidence and accept the assessee’s claim. In any case, the First Appellate Authority is also vested with the power to initiate and levy penalty u/s 271AAD in case he is satisfied to do so.

The extent of power of the Commissioner/Principal Commissioner to direct initiation of penalty proceedings has been examined by various Courts and Benches of this Tribunal several of which have been cited by the assessee’s Counsel before us.

Our attention has been drawn in particular to the decision of the Hon’ble Gujarat High Court in CIT vs. Dr. Suresh G. Shah [2007] 289 ITR 110 (Gujarat). The relevant observations and the decisions of the Hon’ble High Court are quoted below: “3. The short facts necessary for disposal of the present reference are that the Assessing Officer assessed the total income for the current year 1986-87 at Rs. 2,02,240 under section 143(3) of the Income-tax Act. The Commissioner of Income-tax, on examination of the records, noticed that the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue on account of the fact, amongst others, that the Assessing Officer failed to initiate penalty proceedings under section 271(1)(a) and section 273(2)(c) while completing the assessment. After taking into consideration the reply to the show- cause notice under section 263, the Commissioner of Income-tax 5 recorded his disagreement with the submissions made by the assessee, set aside the assessment and directed initiation of penalty proceedings. The assessee being dissatisfied, took up the matter before the Tribunal. The Tribunal observed that the Commissioner of Income-tax, while exercising powers under section 263 of the Act was not entitled to direct initiation of proceedings, because, it was within the jurisdiction of the Assessing Officer. The Revenue, feeling dissatisfied, requested the Tribunal to refer the question to this court. 4. In the matter of CIT v. Parmarmnd M. Patel [2005] 278 ITR 3, a Division Bench of this court, in its judgment dated July 6, 2005, has observed that the Commissioner is not empowered to record satisfaction by Invoking section 271(1) of the Act and if he is not entitled to do so, on his own, he cannot do it by directing the assessing authority. The court observed that in other words, what the Commissioner himself cannot do, he cannot get it done through the assessing authority by exercising revisional powers. 5. In view of the authoritative pronouncement by this court, the question will have to be answered against the interest of the Revenue and in favour of the assessee. It is accordingly answered. The reference stands disposed of. No costs.”

The counsel of the assessee has also invited our attention of decision of ITAT Ahmedabad Bench in the case of Air Wind Green Energy Limited vs. PCIT, Ahmedabad-1 in ITA No. 615/Ahd/2025. In that case the Ld. PCIT sought to revise the assessment order on the ground that the A.O. had erred in not initiating penalty proceedings u/s. 270A(9) of the Act. The Co- ordinate Bench of the Tribunal held as under: “6. We have gone through the said decisions and we have noted that in the case of M/s. G M Builders, Mumbai (supra), the ITAT took note of the decision of the Hon'ble Delhi High Court in the case of Addl. CIT v/s J.K. D's Costa, reported in [1982] 133 ITR 7 (Delhi), wherein Hon'ble High Court was seized with an identical case wherein revisionary powers were assumed for directing initiation of penalty proceedings u/s.271(1)(c) of the Act. Hon'ble High court noted that assessment proceedings and penalty proceedings are separate proceedings and when the Commissioner is dealing with assessment proceedings u/s.263 of the Act, he cannot 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 him. The High Court noted that the requirement of initiation of penalty proceeding during assessment by law need not necessarily be by way of recording the same in the assessment order. The Hon'ble High Court held that it would suffice if there were some records somewhere, even apart from the assessment order itself, that the ITO records his satisfaction that the assessee is guilty of concealment or other default for which penalty action is called for. The High Court noted that in certain cases it is possible for the AO to issue a penalty notice or initiate penalty proceedings even before the assessment is completed though the actual penalty order cannot be passed until the assessment finalised. Noting so, therefore, that assessment proceedings are separate from penalty proceedings the Hon'ble High Court held the assessment order cannot be held to be erroneous for not having initiated penalty proceedings therein. This proposition of law has been reiterated by the ITAT in the case of Vijay Vikas Gupta(supra) & Mikuni India (P) Ltd. (supra). 7. Since the judicial position on this issue is in favour of the assessee and no contrary view of any higher judicial authority has been brought to our notice, we hold that the order passed in the present case u/s.263 of the Act directing initiation of penalty u/s 270A of the Act in the assessment order made in the case of the assessee, is beyond the powers prescribed as per law. The order passed u/s 263 of the Act is therefore held to be not sustainable in law. 8. In the result, appeal filed by the assessee is allowed.”

In view of the decision of the Co-ordinate Bench as also decision of the Jurisdictional High Court of Gujarat, we are not dealing with all the other case cited by the ld. counsel for the appellant.

The Ld. CIT-DR strongly defended the impugned order of the Ld. PCIT. However he did not have any judicial precedents expressing a view contrary to those in the cases cited above.

Considering the facts and circumstances of the case, the contents of the direction of the Ld. PCIT and the binding decisions of the Jurisdictional High Court and the Co-ordinate Bench of the ITAT, we are inclined to hold that the exercise of jurisdiction u/s 263 as done in the impugned order is bad in law and accordingly the order u/s 263 is quashed.

In the result, the appeal of the Assessee is allowed.