N.. JAMNADAS & CO.,MUMBAI vs. CIT (CEN)-III, MUMBAI

O R D E R PER RAJESH KUMAR, A. M: This is an appeal filed by the assessee challenging the order dated 28.3.2012 passed by the Commissioner of Income Tax, Mumbai for the assessment year 2007-08. 2. The issue raised in all the grounds of appeal is against the exercising the revisionary powers under section 263 of the Income Tax Act, 1961 by the CIT on the ground that the AO has failed to initiate penalty proceedings u/s 271(1)(c) of the Act in the re-assessment order.

3 “5 Assessee filed written submission on 21/03/2012. It was stated that these expenses were incurred for and on behalf of clients/principals on whose behalf it acted as Agents. The assessee further submitted that though the assessing officer has been disallowing all expenses, however, ITAT restricted the disallowance to 25% of these expenses on the basis of its decision in the case of the assessee for the assessment years 1997-98 & 1998-99. The assessee further submitted that the ITAT upheld the disallowance on the basis of assumption that expenditure to the extent of 25% was paid to Government employees and hence, not allowable as the same is covered by Explanation to section 37(1) of the Income Tax Act. On these facts, assessee submitted that expenditure was disallowed on estimated basis and therefore, there is no question of levy of penalty. The assessee has also relied on the decision of Supreme Court in the-case of CIT vs Reliance Petro Products(P)Ltd reported in 332 ITR 158. The assessee submitted that the order of the assessing officer is not erroneous and also not prejudicial to the interest of revenue and hence provision of section 263 is not applicable”.

5 8. We have carefully considered the rival contentions, perused the material placed before us during the course of hearing including the decision of authorities below and also the decisions relied upon by the parties. We find that the AO has not initiated penalty proceedings in the assessment order. The expenses disallowed were by the AO on the basis of the order of the Tribunal for the assessment year 1997-98 in which 25% of the total expenses were sustained by the Tribunal, whereas the assessee claimed whole expenses in the return of income filed by it. In our considered view , it is a trite law that initiation of penalty is a sole prerogative and within the jurisdiction of the AO who makes the addition whether to initiate penalty or not to initiate penalty proceedings. It is true that there is no whisper in the assessment order to initiate penalty proceedings u/s 271(1)(c) but that does not mean that the AO has not gone into the mater. The rationale behind the CIT exercising revisionary powers u/s 263 of the Act seems quite absurd and meaningless for the reason that to initiate the penalty proceedings in the assessment order and then drop in the same order when the AO is satisfied. In our opinion, the question of levy of penalty is a debatable issue which is to be decided by the AO on the basis of nature of addition made in the assessment order depending on the facts whether the same amounted concealment of income and furnishing inaccurate particulars of income and there is no tailor made formula to levy penalty under section 271(1)(c) of the Act. Moreover the assessee counsel submitted before the ld CIT that the 6 penalty proceedings were not attracted in view of the apex court decisions in the case of CIT V/s Reliance Petroproduct Pvt.Ltd -322 ITR 158 (SC), wherein it has been held by the Hon’ble Supreme Court that the “claim which may be wrong or not accepted or was not acceptable to revenue, that by itself would not attract penalty under section 271(1)(c) of the Act.”. In view of these legal aspects, we are of the considered opinion that non-initiation of penalty is neither erroneous nor prejudicial to the interest of revenue as has been opined by the CIT and the exercise of revisionary power under section 263 of the Act by the CIT was wrong and against the provisions of the Act. We are not convinced with the conclusion drawn by the CIT on this issue. We have also perused the ratio laid down by the Hon’ble Apex Court in the case of Malabar Hills (supra) wherein it has been held that the reopening and revisionary can only powers could be exercised under section 263 of the Act only in the case of where the order passed by the AO is erroneous and prejudicial to the interest of revenue. But in the present case, the order of the AO is neither erroneous nor prejudicial to the interest of revenue and therefore the ratio has wrongly been applied by the CIT. Accordingly, we set aside the proceedings u/s 263 of the Act and the consequent order of the ld.CIT.