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Facts
The assessee, a partnership firm, did not file its original income tax return for AY 2017-18. Following a notice under Section 148 for high-value transactions, the assessee filed a return which the AO accepted in an assessment order under Sections 147/143(3). The PCIT initiated revisionary proceedings under Section 263, alleging the AO's order was erroneous and prejudicial to revenue for not initiating penalty under Section 270A for alleged under-reporting of income, despite the assessee's explanation of a partnership dispute preventing timely filing.
Held
The Tribunal held that the PCIT erred in invoking Section 263. Citing High Court judgments, it ruled that the non-initiation of penalty proceedings under Section 270A, without a specific finding by the AO regarding concealment or inaccurate particulars of income, does not render the assessment order erroneous or prejudicial to the revenue. Penalty proceedings are distinct from assessment proceedings, and the PCIT cannot substitute its own views. The impugned revision order passed by the PCIT under Section 263 was therefore quashed.
Key Issues
Whether the Principal Commissioner of Income Tax can initiate revisionary proceedings under Section 263 solely due to the Assessing Officer's failure to initiate penalty proceedings under Section 270A for alleged under-reporting of income, in the absence of a recorded finding of income concealment by the AO.
Sections Cited
263, 147, 148, 143(3), 270A, 270A(2)(b), 270A(6), 271B, 271F, 139(1), 44AB, 143(1), 115JB, 115JC, 271(1)(a), 273(b), 144B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI AMARJIT SINGHSHRI SANDEEP SINGH KARHAIL
Date of Hearing – 24/01/2025 Date of Order – 12/03/2025
O R D E R PER SANDEEP SINGH KARHAIL, J.M. The assessee has filed the present appeal challenging the impugned order dated 29/03/2024, passed under section 263 of the Income Tax Act, 1961 (“the Act”) by the learned Principal Commissioner of Income Tax, Mumbai-20, [“learned PCIT”], for the assessment year 2017-18.
2. In this appeal, the assessee has raised the following grounds:
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1. On the facts and the circumstances of the case and in laws, the CIT was not justified at initiating proceedings u/s 263 of the Income Tax Act, 1961.
The appellant submits that then proceedings initiated u/s 263 of the Income Tax Act, 1961 are bad and law and ought to be quashed.
2. WITHOUT PREJUDICE TO THE ABOVE On the facts and in the circumstances of the case and in law, the CIT was not justified in rejecting the justified and bonafide explanation of the appellant for not filing the return of income holding that the revision proceedings were not the right forum for the justification.
3. WITHOUT PREJUDICE TO THE ABOVE The CIT has grossly erred in coming to a conclusion that non initiation of penalty proceedings u/s 270A of the Act, amounts to allowing relief to the appellant to term the assessment order passed u/s 143(3) as erroneous and prejudicial to the interest of the revenue.”
3. The only grievance of the assessee is against the revisionary proceedings initiated under section 263 of the Act.
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.
Subsequently, the learned PCIT issued a notice dated 04/03/2024 under section 263 of the Act, observing as follows: - “2. In your case, an assessment order u/s 143(3) r.w. 144B of the I.T Act, 1961 for A.Y. 2017-18 was passed on 30.03.2022 accepting the returned income.
On verification of the assessment records, it is noticed that your firm was engaged in the business of construction and has offered sale proceeds of Rs. 35,71,00.001/- in its return of income for A.Y. 2017-18. The assessment proceedings were completed on 30.03.2022 by accepting the returned income at Rs. 31,79,65.030/-. On going through the assessment order and case records, the following issues emerge:
1. 1. No details-of expenses has been provided by you though the same were called for by the FAO.
2. You have not filed its return of income u/s 139 of the Act. The return has been filed first time in response to notice u/s148.
3. You have admitted that no books of accounts maintained during the year under consideration, it is quiet surprising how come the returned income has been accepted as no satisfaction has been noted by the AO either in the order sheet or in the assessment order.
4. You have not provided any detail so opening/closing stock.
5. If the project was completed in2012, then whether any profit was declared by the assessee or not is not clear.
6. It could not be ascertained that you are whether maintaining percentage method or project completion method.
7. All fats were sold to family members. Copies of agreement/index Il were not provided.
8. The flats were hold by the firm, no rent income under the head income from house property has been declared/estimated by the AO.
9. What about the sundry debtors, creditors and other assets held by the firm is not clear. Further, it is also noted that you have not disclosed all the material facts necessary for the assessment. You have failed to report his income as per the Income Tax Act, 1961 and the AO has not initiated penalty proceedings u/s 270A for non reporting of income.
4. In the light of the above, the undersigned proposes to revise the assessment u/s.263 as the said assessment order passed u/s 143(3) r.w.s 147 of the I.T Act, 1961 for A. Y 2017-18 was passed on 30.03.2022 is 'erroneous' and 'prejudicial to the interest of the revenue' in the light of the facts mentioned above.
5. In this regard, you are hereby given an opportunity to file your written submission in this office latest by 11.03.2024. In case, there is no compliance till the given date, it will be presumed that you did not wish to avail this opportunity and order u/s. 263(1) of the I.T. Act. 1961 will be passed, as above.”
After considering the response from the assessee dated 11/03/2024, the learned PCIT issued fresh notice dated 12/03/2024 under section 263 of the Act, observing as follows: – “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 2017-18dated 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.
3. 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 18th March, 2024.”
Thus, vide notice dated 12/03/2024, issued pursuant to the assessee’s submission, the learned PCIT confined the allegation only qua the non- initiation of penalty proceedings under section 270A of the Act on the basis that the assessee has under-reported its income as per the definition of the term contained in section 270A(2)(b) of the Act.
In response to the fresh notice dated 12/03/2024 issued under section 263 of the Act, the assessee submitted that the assessee could not file its return of income due to non-cooperation of one of its partners, who neither signed the accounts of the firm nor even made payments towards his share of taxes payable by the firm. The assessee also submitted that the firm paid the advance tax amounting to INR 10,26,56,016, but because there were disputes between the partners, therefore, the return of income could not be filed. The assessee further submitted that against total gross receipts of INR 35,71,00,001, the firm had declared a profit of INR 31,79,65,028, which shows the intention of the firm that the return was to be filed, but unfortunately, due to non-cooperation, the firm could not file the return. Thus, since 99% of the tax was paid, justifying the intention of the firm to not hold back the return of income, the assessee submitted that there was bona fide explanation, which does not justify levy of penalty under section 270A of the Act.
The learned PCIT, vide impugned order, disagreed with the submissions of the assessee and held that the AO did not initiate penalty proceedings despite under-reporting of income by the assessee, being squarely covered under section 270A(2)(b) of the Act, and because of the non-initiation of penalty proceedings, the penalty payable in respect of the under-reported income cannot be contemplated. Accordingly, it was held that due to non- initiation of the relevant penalty, the assessment order passed under section 143(3) read with section 147 of the Act is rendered erroneous and prejudicial to the interest of the Revenue as envisaged under section 263 of the Act. Accordingly, the learned PCIT directed the AO to initiate penalty proceedings under section 270A for under-reporting of income as per section 270A(2)(b) of the Act. Being aggrieved, the assessee is in appeal before us.
During the hearing, the learned Authorised Representative (“learned AR”) reiterating the submissions made before the lower authorities and submitted that the assessee could not file the original return of income due to dispute among the partners, as one of the partners refused to sign the accounts and therefore, the tax audit report also could not be filed. The learned AR further submitted that ultimately the dispute amongst the partners was referred to a sole arbitrator, who has also passed an order which forms part of the record. The learned AR submitted that initially, the learned PCIT raised various issues vide its notice dated 04/03/2024 issued under section 263 of the Act, however, all of them were dropped except the issue of levy of penalty under section 270A of the Act. Accordingly, the learned AR submitted that the case of the assessee falls within the bona fide explanation under section 270A(6) of the Act, which does not justify levy of penalty in the present case. The learned AR also relied upon various judicial pronouncements to support its submission that revisionary proceedings under section 263 of the Act cannot be initiated to direct initiation of penalty proceedings.
On the other hand, the learned Departmental Representative vehemently relied upon the impugned order and submitted that the proceedings under section 263 of the Act have rightly been initiated in the present case as the AO did not follow the statutory provisions.
We have considered the submissions of both sides and perused the material available on record. In the present case, it is evident from the record that the only basis on which the learned PCIT assumed the jurisdiction under section 263 of the Act is to initiate the penalty under section 270A of the Act. As per the learned PCIT, since the AO did not initiate penalty proceedings despite under-reporting of the income by the assessee, thus the present case is squarely covered under the provisions of section 270A(2)(b) of the Act. Before proceeding further, it is relevant to note the provisions of section 270A(2)(b) of the Act, which reads as follows: –
“(2) A person shall be considered to have under-reported his income, if— (a) the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143; (b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished; (c) the income reassessed is greater than the income assessed or reassessed immediately before such reassessment; (d) the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143; (e) the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed; (f) the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment; (g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.”
Therefore, as per the learned PCIT, since in the present case, the assessee did not file its original return of income and the income assessed vide order passed under section 143(3) read with section 147 of the Act is greater than the maximum amount not chargeable to tax, therefore, the assessee has under-reported its income. Accordingly, as per the learned PCIT, the AO erred in not directing initiation of penalty under section 270A of the Act.
From the perusal of the record, we find that during the assessment proceedings under section 147 of the Act, the assessee in response to notice under section 148 of the Act submitted that since 1990 there is a dispute amongst the partners of the assessee firm and the matter has been referred to an Arbitrator. It was further submitted that due to the aforesaid reason, one of the partners did not sign the accounts or even made payment towards his share of the taxes payable by the assessee firm, which was ultimately paid by other partners along with interest so that the return could be filed in response to notice issued under section 148 of the Act. The assessee further submitted that since the notice under section 148 of the Act is received, the return has been filed to comply with the legal requirements. It was also submitted that since the bank account of the firm is frozen, with a view to cooperate with the Department, the other partners have presently paid the balance tax out of their own funds. We find that the AO, vide order dated 30/03/2022 passed under section 147 of the Act, after considering the submissions filed by the assessee, assessed the total income of the assessee at the income returned. It is further evident from the assessment order that the AO also directed initiation of penalty proceedings under section 271B of the Act for failure of the assessee to get the accounts audited as mandated by the provisions of section 44AB of the Act, and also directed initiation of penalty proceedings under section 271F of the Act for failure on the part of the assessee to furnish the return of income as required under section 139(1) of the Act. However, it is clearly evident from the record that there was neither any recording of satisfaction by the AO for initiating the penalty proceedings under section 270A of the Act nor there was any direction in this regard. Thus, ostensibly, there is no observation of under-reporting or misreporting of income by the assessee in the assessment order.
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.
15. 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 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 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.
In the result, the appeal by the assessee is allowed. Order pronounced in the open Court on 12/03/2025