2025 (5) TMI 1774 - AT - Income Tax

Revision u/s 263 - validity of the assessment order u/s 147 r/w 144B on the ground that it was passed without issuance of notice u/s 143(2) - as argued as per doctrine of merger it is well settled law that when the impugned addition is subject matter of appeal then Ld. Pr. CIT cannot exercise his revision power u/s 263 for the same matter - HELD THAT - Even though the return might have submitted the Income Tax Department will not recognize it as a return unless it s verified within the specified timeline. In view of such mandatory provisions of law we find substance in the contention of the revenue that in absence of a return which is pending for verification the notice u/s 143(2) cannot be generated / issued. Dispute raised by the assessee that in absence of a notice u/s 143(2) the assessment framed u/s 147 r.w.s. 144B is at nullity cannot be acceded to as the AO was not having the authority / was divested from issuance of notice u/s 143(2) on account of assessee s failure in e-verifying the return thus the return filed was an invalid / non-est return as per prescribed provisions of section 139 r.w.s. 148 of the Act. If the return of income filed by the assessee in response to notice u/s 148 is treated to be an invalid / non-est return the assessment order passed u/s 143(3) r.w.s. 147 r.w.s. 144B is illegal a bad in law as the same ought to have been passed u/s 144 - While deliberating upon this issue on being queried about the status of the quantum addition u/s 68 in the present case Ld. AR informed that the same is challenged by the assessee under an appeal and the same is pending before the Ld. CIT(A). In view of such facts we find that this issue can be raised by the assessee before the First Appellate Authority who is having powers/ entrusted with duties co-terminus with that of powers and duties of the Ld. AO therefore it would be premature to discuss and decide such issues for which remedy is available to the assessee before the revenue authorities below. No substance in the contention raised by the Ld. AR therefore ground no. 1 of the present appeal and additional ground raised are dismissed. Initiating the revisionary proceedings u/s 263 - addition was made u/s 68 however he lost the sight to invoke the mandatory provisions to apply the special rate of tax u/s 115BBE and have invoked the provisions of section 271(1)(c) for initiating penalty on the assessee - we find that the issues i.e. (i) the addition u/s 68 to be taxed at special rate u/s 115BBE and (ii) the applicability of section 271AAC for levy of penalty effective from 01.04.2017 instead of 271(1)(c) which is no more in force for the year under consideration are not inter alia the issues which are subject matter before the CIT(A) therefore respectfully following the aforesaid judicial pronouncements it can be held that the issues which are not subject matter before the First Appellate Authority if they are causing any prejudice to the interest of revenue for the errors committed by the AO the same can form the basis for revision by the PCIT. In terms of aforesaid observations as the issues pending in appeal are different then the issues raised by the Ld. PCIT by invoking the provisions of section 263 therefore there was no illegality in the proceedings-initiated u/s 263 thus that the contention raised by the Ld. AR that pendency of an appeal before the First Appellate Authority precludes the Ld. PCIT to exercise the powers of revision u/s 263 is found to be bereft of substance we therefore are unable to persuade and to concur with such contention raised by the Ld. AR consequently ground of the assessee stands rejected in terms of aforesaid discussion. Initiation of penalty u/s 271AAC as erroneously initiated by the AO u/s 271(1)(c) - Initiation of penalty proceedings cannot be the subject matter of powers conferred upon the revisionary authority u/s 263 however initiation of penalty under an incorrect section cannot be placed in the same position wherein the revisionary proceedings are initiated only for invoking the penalty proceedings we thus are of the considered view that finding a mistake in the order of Ld. AO wherein the mandate of law is being vitiated can be corrected by way of revisionary proceedings u/s 263 especially in a case wherein there was prejudice to the interest of revenue on an issue besides the issue of levy of penalty under a wrong section. We find justification in the contention of the Ld. CIT-DR accordingly the order of Ld. PCIT u/s 263 is upheld on this aspect. PCIT erred in exercising jurisdiction u/s 263 on account of assessing officer s failure to make proper inquiry while framing the assessment u/s 147 r.w.s. 144B - Contention raised by the Ld. AR that the Assessing Officer had made adequate enquiries with respect to the issue of bogus sale and all the necessary evidence / document are furnished by the assessee cannot deprive the Ld. PCIT to exercise his powers u/s 263 as there was no material on record about the issue that AO during the assessment proceedings had enquired about the applicability of provisions of section 115BBE on the addition made u/s 68 and thereby had taken a plausible view to not apply the same in present case. Rather the provisions of section 115BBE are mandatory in nature which essentially needs to be invoked in a case where addition is made u/s 68 this shows that it was a total failure on the part of Ld. AO due to which the revenue has the reasons to treat the order of Ld. AO being erroneous and prejudicial to the interest of revenue. In view of such factual position Ld. PCIT was well within his jurisdiction to assume and exercise powers conferred upon him under the provisions of section 263 consequently we do not find any error in the order of Ld. PCIT passed u/s 263 the same therefore is upheld Assessee appeal dismissed.

Summary

The primary issues considered in this appeal revolve around the validity and jurisdictional aspects of the assessment order framed under sections 147 read with 144B of the Income Tax Act, 1961 (the Act), the correctness of invoking revisionary powers under section 263 of the Act by the Principal Commissioner of Income Tax (PCIT), the applicability and initiation of penalty proceedings under the correct statutory provisions, and the adequacy of inquiries conducted by the Assessing Officer (AO) during the assessment proceedings.

Issue 1: Validity of the Assessment Order passed under section 147 read with 144B without issuance of notice under section 143(2)

The assessee challenged the validity of the assessment order dated 26.03.2022 passed under section 147 read with 144B on the ground that it was passed without issuance of notice under section 143(2), and the return filed in response to notice under section 148 was not e-verified, rendering the return invalid and the assessment order non-est in law. The assessee further contended that in the absence of a valid return, the assessment should have been passed under section 144, and the PCIT's revision under section 263 of such an invalid order exceeded jurisdiction.

The legal framework involves sections 139 (filing and verification of return), 143(2) (notice for scrutiny assessment), 144 (best judgment assessment), 147 (income escaping assessment), and 144B (special provisions for search cases). Section 139 mandates that a return must be verified in the prescribed manner to be valid. Section 144 applies only if the assessee fails to file a return or comply with notices as detailed in its clauses (a), (b), and (c).

The AO submitted a report clarifying that the return filed in response to notice under section 148 was not e-verified within the stipulated time, hence remained pending for verification. Consequently, the AO was not authorized to issue notice under section 143(2) through the ITBA portal, as a precondition for such notice is a valid return. The Tribunal noted that since the assessee had filed the original return under section 139(1) and complied with notices under section 142(1), none of the conditions for invoking section 144 applied. Therefore, the AO was justified in passing the assessment order under section 147 read with 144B.

The Tribunal further analyzed the requirement for a valid return under section 139(1)(b), emphasizing the mandatory e-verification. The failure to e-verify rendered the return invalid for processing, and thus, no notice under section 143(2) could be issued. The contention that the assessment order was invalid due to absence of section 143(2) notice was rejected, as the AO lacked authority to issue such notice without a valid return. The alternative plea that assessment should have been under section 144 was also dismissed on the ground that none of the conditions for section 144 applied.

Regarding the issue of whether the invalidity of the return and assessment order could be challenged before the Tribunal, the Tribunal observed that the quantum addition under section 68 was already under appeal before the Commissioner of Income Tax (Appeals) (CIT(A)), and the question of validity of assessment order on this ground was premature and better suited for adjudication before the CIT(A). Consequently, this ground and additional ground were dismissed.

Issue 2: Jurisdiction of the PCIT to invoke revisionary powers under section 263 when appeal is pending before CIT(A)

The assessee contended that the PCIT had no jurisdiction to revise the assessment order under section 263 when the same issue was pending appeal before the CIT(A), relying on the doctrine of merger and judicial precedents. The contention was that once an appeal is filed, the revisionary powers under section 263 are barred by Explanation 1(c) to section 263(1) of the Act.

Section 263(1), Explanation 1(c) provides that if any order passed by the AO is the subject matter of an appeal filed on or after 1 June 1988, the powers of the PCIT or Commissioner under section 263 extend only to matters not considered or decided in such appeal.

The Tribunal noted that the appeal challenging the addition under section 68 was filed on 13.04.2022 and was pending before the CIT(A) when the PCIT initiated revision proceedings under section 263 on 09.10.2023. The Tribunal referred to authoritative judicial pronouncements, including decisions of the Allahabad and Madras High Courts and ITAT rulings, holding that the PCIT cannot exercise revisionary powers under section 263 on issues that are the subject matter of a pending appeal before the CIT(A).

However, the Tribunal distinguished the issues raised by the PCIT under section 263 from those pending in appeal. The PCIT's revision focused on the AO's failure to apply the mandatory provisions of section 115BBE (special tax rate on income under section 68) and initiation of penalty under incorrect section 271(1)(c) instead of section 271AAC. These issues were not before the CIT(A). The Tribunal held that the PCIT's jurisdiction under section 263 extends to matters not considered or decided in the appeal. The pendency of appeal does not bar revision on distinct issues prejudicial to revenue.

Accordingly, the Tribunal rejected the assessee's contention and upheld the PCIT's jurisdiction to revise the assessment order on issues not covered in the appeal before CIT(A).

Issue 3: Legality of initiation of penalty proceedings under section 271AAC by PCIT when AO initiated penalty under section 271(1)(c)

The assessee challenged the PCIT's revision on the ground that initiation of penalty proceedings under section 271AAC was beyond the PCIT's jurisdiction and that penalty proceedings are independent and cannot be directed by the PCIT under section 263. The assessee relied on judicial precedents holding that penalty proceedings are separate from assessment proceedings and the PCIT cannot direct initiation or change of penalty proceedings under section 263.

The Tribunal examined the legal position, referring to authoritative judgments including those of the Rajasthan High Court and ITAT Jaipur, which held that penalty proceedings are independent and the PCIT cannot direct initiation of penalty proceedings or alter the section under which penalty is initiated via revisionary powers under section 263.

However, the Tribunal distinguished the present facts, noting that the AO had initiated penalty under an incorrect section (271(1)(c)) which was not applicable for the assessment year 2017-18 for additions under section 68. The PCIT's revision was not merely to initiate penalty but to correct the erroneous application of penalty provisions, which caused prejudice to revenue. The Tribunal held that such correction of legal errors affecting the interest of revenue is within the scope of revision under section 263. Therefore, the PCIT's revision to rectify the penalty section was justified and did not amount to impermissible direction to initiate penalty proceedings.

Accordingly, the Tribunal dismissed the assessee's ground and upheld the PCIT's order on this issue.

Issue 4: Adequacy of inquiries conducted by AO during assessment and justification for revision under section 263

The assessee contended that the AO had made adequate inquiries regarding the alleged bogus sales and had verified all necessary evidence and documents, making the PCIT's revision under section 263 arbitrary and unjustified.

The Tribunal analyzed the record and found that the PCIT's revision was based on the AO's failure to apply the mandatory provisions of section 115BBE relating to special tax rate on income under section 68, which was an apparent error causing prejudice to revenue. The Tribunal emphasized that the AO did not make any plausible or recorded application of section 115BBE, which is mandatory in such cases.

The Tribunal held that the adequacy of inquiries does not preclude the PCIT from exercising revisionary powers if the AO's order is erroneous and prejudicial to revenue. The PCIT was justified in revising the order for failure to apply mandatory provisions, notwithstanding the submissions of the assessee regarding inquiries.

Therefore, the Tribunal rejected the assessee's contention and upheld the revision under section 263 on this ground.

Significant Holdings:

1. "The return filed by the assessee in response to notice under section 148 which is not e-verified within the prescribed time is invalid and cannot be treated as a valid return for issuance of notice under section 143(2). Consequently, the assessment order passed under section 147 read with 144B is valid and not liable to be quashed for want of notice under section 143(2)."

2. "The powers of the Principal Commissioner or Commissioner under section 263 are barred in respect of matters that are the subject matter of any appeal pending before the Commissioner of Income Tax (Appeals). However, such powers extend to matters not considered or decided in such appeal. Therefore, pendency of appeal does not preclude revision on distinct issues not before the appellate authority."

3. "Penalty proceedings are independent of assessment proceedings and the Commissioner under section 263 cannot direct initiation or change of penalty proceedings. However, correction of an error in the assessment order relating to the incorrect invocation of penalty provisions causing prejudice to revenue can be made under section 263."

4. "Failure of the Assessing Officer to apply mandatory provisions of law, such as section 115BBE in case of additions under section 68, constitutes an erroneous order prejudicial to the interest of revenue, justifying exercise of revisionary powers under section 263."

5. "The absence of issuance of notice under section 143(2) due to non-verification of return filed under section 148 does not invalidate the assessment order passed under section 147 read with 144B, as the AO was divested of authority to issue such notice."

6. "The doctrine of merger does not prohibit the PCIT from revising the assessment order under section 263 on issues distinct from those pending in appeal before the CIT(A)."

7. "The Tribunal upheld the PCIT's order dated 13.03.2024 passed under section 263 revising the assessment order dated 26.03.2022, dismissing all grounds raised by the assessee challenging the revision."