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Facts
The Principal Commissioner of Income Tax (PCIT) invoked Section 263 to revise an assessment order for AY 2018-19, observing that the Assessing Officer (AO) had passed the order without proper verification of material issues and failed to initiate penalty proceedings under Section 270A. This was particularly relevant as the assessee had filed the return only after a notice under Section 148, indicating under-reported income. The PCIT deemed the AO's order erroneous and prejudicial to the interests of the revenue and directed a fresh assessment to initiate penalty proceedings.
Held
The Tribunal upheld the PCIT's order under Section 263, stating that the AO's failure to examine statutory consequences arising from the assessment, specifically the applicability of Section 270A penalty for under-reporting of income, rendered the order erroneous and prejudicial to the revenue. It clarified that penalty proceedings under Section 270A are intrinsically linked to assessment proceedings, and not independent, thereby distinguishing earlier precedents under old penalty provisions. Thus, the PCIT was justified in exercising revisionary jurisdiction.
Key Issues
Whether the Principal Commissioner was justified in exercising revisionary powers under Section 263 to direct the Assessing Officer to initiate penalty proceedings under Section 270A, on the grounds that the AO's failure to do so rendered the original assessment order erroneous and prejudicial to the revenue, especially when the assessee had under-reported income.
Sections Cited
Section 263, Section 270A, Section 148, Section 147, Section 144B, Section 151A, Section 271(1)(a), Section 273
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Order PER LALIET KUMAR, J.M: This is an appeal filed by the Assessee against the order passed by the Ld. Pr. CIT, Chandigarh-1, dt. 04/03/2025 for the Assessment Year 2018-19.
At the outset, it is noticed that the appeal is barred by limitation by 40 days. The assessee has filed an application supported by an affidavit explaining that the delay occurred due to procedural circumstances beyond his control, and the same was neither intentional nor deliberate. The learned Departmental Representative opposed the condonation but did not controvert the factual explanation. Having considered the explanation and keeping in view that substantial justice should prevail over technicalities, we are satisfied that the assessee was prevented by reasonable cause in filing the appeal within time. Accordingly, the delay of 40 days is condoned, and the appeal is admitted for adjudication on the merits.
In the present appeal Assessee has raised the following grounds:
1. 1. 1. 1. 2 1. That the Learned PCIT has erred in law and facts and circumstance of the case invoking section 263 by directing the AO to initiate penalty u/s 270A when no penalty u/s 270A was initiated by AO in his order.
2. That the Learned PCIT has erred in law and facts and circumstance of the case invoking section 263 by directing the AO to initiate penalty u/s 270A inspite the fact that he himself has not initiated any penalty proceedings u/s 270A.
3. That the Learned CIT has erred in law and facts and circumstances of the case by relying upon Allahabad High Court decisions rendered in the year 2005 and ignoring the jurisprudence laid before and thereafter.
4. That the Learned CIT has erred in law and facts and circumstances of the case by ignoring supreme court decision in Vegetable Products 88 ITR 192.
5. That the Learned CIT has erred in law and facts and circumstances of the case by directing to revise order which is void ab initio because assessment has been carried out in violation of Notification dated 29-03-2022 issued u/s 151A.
4. Briefly stated, the assessment was completed by the Assessing Officer, determining the income of the assessee. On examination of records, the Principal Commissioner observed that the Assessing Officer had passed the order without proper verification of material issues and without examining the applicability of penalty provisions under section 270A arising out of the determination of income. The Principal Commissioner, therefore, held that the assessment order was erroneous insofar as it was prejudicial to the interests of the revenue and set aside the assessment with a direction to frame the order afresh after a proper enquiry. The relevant portion of the finding of the Ld. PCIT are as under:
7.1 In the instant case, the assessee had not filed the original ROI despite having a taxable income, and thereafter, he filed the ROI only in response to the notice u/s 148 of the Act. Had the provisions of section 147 not been invoked, the assessee would have never filed the ROI and paid the taxes. Since the Assessing Officer failed to initiate the penalty proceedings which were warranted as per the Act, the two conditions of the impugned order being erroneous and prejudicial to the interests of revenue therefore exist.
7.3 It is well established that the Assessing Officer has to initiate proceedings for imposition of penalty during the course of the assessment itself. If he fails to initiate or record his satisfaction for the initiation of the penalty proceedings during the course of the assessment proceedings, it would be a case where the assessment order can be said to be erroneous as he has not decided a point nor recorded a finding on an issue which ought to have been done.
3 7.4 In view of the above, the Assessment Order in the instant case is erroneous and prejudicial to the interest of Revenue and therefore the Pr.CIT has jurisdiction to invoke provisions of Section 263 and revise the Order.
In view of all the above, it is held that the objections raised by the assessee vide his written submissions dated 03.01.2025 in response to notice u/s 263, are not tenable in law as well as in facts. Considering the facts of the case as discussed in preceding paragraphs, it is hereby held that the Assessment Order passed by the A.O. (NaFAC) u/s 147 r.w.s. 144B on 13.03.2023 for A.Y. 2018-19 is erroneous and prejudicial to the interest of revenue. Accordingly, the same is set-aside to the file of the A.O. for the purpose of initiating penalty proceedings u/s 270A of the Act after following due procedure laid down and to take consequential action.
Aggrieved, the assessee has preferred the present appeal before the Tribunal.
During the course of hearing the Ld. AR submitted that the Assessing Officer had examined the matter and therefore the revision under section 263 was invalid. It was contended that the Principal Commissioner merely substituted his opinion for that of the Assessing Officer and no lack of enquiry existed. The AR further submitted that initiation of penalty proceedings is independent of assessment proceedings and failure to initiate penalty cannot render the assessment erroneous. It was argued that the provisions of section 263 cannot be invoked merely to direct the initiation of penalty proceedings. In support of these contentions, reliance was placed upon the decisions in Addl. CIT vs. J.K. D’Costa (133 ITR 7, Delhi), Addl. CIT vs. Achal Kumar Jain (142 ITR 606, Delhi), CIT vs. Sudarshan Talkies (201 ITR 289, Delhi), CIT vs. Nihal Chand Rekyan (242 ITR 45, Delhi), CIT vs. KeshrimalParasmal (157 ITR 484, Rajasthan), CIT vs. Linotype & Machinery Ltd. (192 ITR 337, Calcutta), CIT vs. Parmanand Patel (278 ITR 3, Gujarat), and certain Tribunal decisions including Amarjeet Dhall, Easy Transcription & Software Pvt. Ltd., GM Builders and Air Wind Green Energy Ltd., to contend that revision cannot be exercised merely for initiation of penalty proceedings and therefore the impugned order deserves to be quashed.
Per contra, the learned Departmental Representative strongly supported the order passed under section 263 and submitted that the assessment order was passed in a routine manner without enquiry and without examining statutory consequences arising from the assessment. It was submitted that the penalty under section 270A is 4 directly linked to the determination of income and therefore failure of the Assessing Officer to examine the issue amounts to a lack of enquiry and renders the order erroneous and prejudicial to the interest of revenue. The DR further submitted that the decisions relied upon by the assessee relate to the old penalty provisions and are distinguishable. He had drawn our attention to the following provisions of the Income Tax Act, 1961 Section 263 The Principal Commissioner may revise any order if it is erroneous in so far as it is prejudicial to the interests of the revenue and may cancel the assessment and direct fresh assessment. Section 270A The Assessing Officer may, during the course of any proceedings under this Act, direct that a person who has under-reported his income shall be liable to pay a penalty.
Further, under-reporting includes a case where income is assessed in a return filed for the first time under section 148.
We have heard the rival submissions and perused the material available on record. Section 263 of the Act empowers the Principal Commissioner to revise an order if he considers that any order passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the revenue. Thus, the twin conditions of “erroneous” and “prejudicial” must co-exist. Section 270A provides for the levy of a penalty on under- reporting or misreporting of income determined during assessment proceedings. The penalty is computed with reference to the income assessed and therefore arises directly from the assessment determination. 8.1 The admitted position is that the assessee did not file the original return and filed the return only after the issuance of notice under section 148. Therefore, the case squarely falls within the statutory under-reporting of income under section 270A.The language of section 270A clearly provides that the penalty is to be considered during the course of proceedings under the Act. Hence, initiation of penalty proceedings is intrinsically connected with assessment proceedings and not independent of them. 8.2 When the statute itself mandates consideration of penalty in defined situations, failure of the Assessing Officer to examine the issue amounts to non-application of mind and lack of enquiry. Therefore, the assessment order becomes erroneous and 5 prejudicial to the interest of revenue within the meaning of section 263. Therefore, the principal contention of the assessee is that penalty proceedings are independent of assessment proceedings are not sustainable. We are unable to accept this contention in the context of section 270A. The existence and quantification of under-reported income is to be determined only upon completion of assessment, and therefore initiation of proceedings under section 270A forms part of the statutory consequences flowing from assessment itself. The omission of the Assessing Officer to examine such consequences amounts to a failure to apply mind and renders the assessment legally unsustainable. 8.3 The assessee has relied heavily upon the decision in J.K. D’Costa (Delhi High Court) and other decisions of the Tribunal. In J.K. D’Costa (Delhi High Court)case, the Assessing Officer failed to initiate a penalty under sections 271(1)(a) and 273, and the Commissioner revised the assessment, directing the initiation of a penalty. The High Court held that penalty proceedings under the old scheme were independent, and that failure to initiate them did not render the assessment erroneous. However, the said decision was rendered in the context of the earlier penalty provisions, which were concealment-based and dependent upon subjective satisfaction. The present case is governed by section 270A, which creates statutory situations of under-reporting linked directly to assessed income. Therefore, the ratio of that decision cannot be applied to the present statutory framework.
8.4 We also find guidance from the reasoning adopted by the recent decision of Bangalore Tribunal passed under section 263 r.w.s 270A wherein it was held that when the Assessing Officer passes an order without proper enquiry into statutory implications arising from the assessment, the order becomes erroneous and prejudicial to the interest of the revenue as the Assessing Officer has failed to discharge his investigative duty. Applying the same principle, failure to examine the applicability of section 270A consequences constitutes lack of enquiry. All the other judgments relied upon by the assessee were rendered in the context of earlier penalty provisions, and none of them deals with the scheme of section 270A, which statutorily links penalty to assessed income. Therefore, those authorities are distinguishable on facts as well as law.