2025 (5) TMI 2044 - AT - Income Tax

Revision u/s 263 - penalty notice was issued u/s 271(1)(c) instead of the penalty provision rightly applicable section 271AAC(1) of the Act as discussed in the body of the reassessment order. HELD THAT - AO has consciously and correctly invoked Section 271AAC(1) in the reassessment order however wrongly issued penalty notice u/s. 271(1)(c) of the Act. Therefore revisionary jurisdiction invoked u/s. 263 by directing the AO to issue correct penalty notice by modifying the reassessment order is well within the provisions of law which does not require any interference. Appeal filed by the Assessee is hereby dismissed.

Summary

The core legal questions considered in this judgment revolve around the correctness and validity of the revision order passed under section 263 of the Income Tax Act, 1961, particularly concerning the issuance of penalty notices under incorrect sections. The issues include:

1. Whether the reassessment order passed under section 147 r.w.s. 144B of the Act for AY 2017-18 is erroneous and prejudicial to the interest of revenue due to the issuance of penalty notice under the wrong section (271(1)(c) instead of 271AAC(1)).

2. Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisionary powers under section 263 of the Act to set aside the penalty notice issued under section 271(1)(c) and direct the Assessing Officer (AO) to issue a fresh penalty notice under section 271AAC(1).

3. Whether the penalty proceedings form part of the assessment proceedings such that failure to initiate or initiation under a wrong section vitiates the assessment order, rendering it erroneous and prejudicial to the interest of revenue.

4. The applicability of precedents regarding the independence of penalty proceedings from assessment proceedings and the scope of revision under section 263.

Issue-wise Detailed Analysis

1. Correctness of Reassessment Order and Penalty Notice Issuance

The reassessment order under section 147 r.w.s. 144B was passed to tax an unexplained amount of Rs. 66,63,250/- under section 69A of the Act. The AO initiated penalty proceedings under section 271AAC(1) as per the reassessment order's body but erroneously issued penalty notice under section 271(1)(c) in the concluding part. The PCIT considered this discrepancy a serious procedural error prejudicial to the revenue's interest and invoked revisionary powers under section 263 to set aside the penalty notice under section 271(1)(c) and directed the AO to issue a fresh notice under section 271AAC(1).

The assessee contended that the penalty proceedings are independent of assessment proceedings and that the error in issuing penalty notice under the wrong section was a procedural defect that could have been rectified by the AO under section 292B without invoking revision under section 263. The assessee also highlighted that the reassessment order and penalty proceedings under the correct section were pending appeal before the Commissioner (Appeals).

The PCIT's revision order was challenged on grounds that the reassessment order itself was not erroneous or prejudicial to revenue, and that the PCIT had no jurisdiction to revise the penalty notice issuance, which is beyond the scope of section 263.

2. Legal Framework and Precedents on Penalty Proceedings and Section 263 Jurisdiction

Section 263 empowers the PCIT to revise an assessment order if it is found to be erroneous and prejudicial to the interest of revenue. However, the scope of revision under section 263 pertains to assessment orders and not penalty proceedings, which are independent and separate under the Act.

Precedents relied upon by the assessee include:

• Addl. CIT v. J.K. D'Costa (Delhi High Court) - Held that penalty proceedings are independent of assessment proceedings, and failure to initiate or wrongful initiation of penalty proceedings does not vitiate the assessment order or render it erroneous under section 263.
• Achal Kumar Jain (Delhi High Court) - Affirmed the independence of penalty proceedings and non-applicability of section 263 revision to penalty initiation.
• M/s. Anotra Realtors Pvt. Ltd. (Chennai Tribunal) - Held that PCIT cannot direct AO to initiate penalty through revision under section 263 if AO has already applied mind and initiated penalty, even if under the wrong section, unless there is no satisfaction recorded for concealment or inaccurate particulars.

On the other hand, the Department relied on the Allahabad High Court decision in CIT v. Surendra Prasad Agrawal, which took a contrary view, holding that omission to initiate penalty proceedings during assessment renders the assessment order erroneous and prejudicial to revenue, thereby justifying revision under section 263.

3. Court's Interpretation and Reasoning

The Tribunal examined the conflicting precedents and noted that the Delhi High Court decisions have consistently held that penalty proceedings are separate from assessment proceedings. The failure of the AO to record satisfaction or initiate penalty proceedings does not affect the validity of the assessment order.

However, the Allahabad High Court's decision was also considered, which held that failure to initiate penalty proceedings during assessment can render the order erroneous and prejudicial, thus permitting revision under section 263.

The Tribunal analyzed these positions and observed that the issue in the present case involved penalty under section 271(1)(c) and section 270A, which are pari materia (similar in nature). It found the reasoning in the Allahabad High Court decision persuasive and applicable.

Unlike the Chennai Tribunal case, where the AO had not recorded any satisfaction for penalty initiation, here the AO had consciously applied mind and invoked section 271AAC(1) penalty in the reassessment order but issued the penalty notice under the wrong section. This was held to be a substantive error prejudicial to revenue.

The Tribunal held that the revisionary jurisdiction under section 263 was rightly exercised by the PCIT to rectify this error by directing the AO to issue the correct penalty notice, which is within the ambit of modifying the assessment order to protect revenue interests.

4. Application of Law to Facts and Treatment of Competing Arguments

The Tribunal recognized that the error related to issuance of penalty notice under an incorrect section was a procedural defect but one that affected the correctness of the assessment order as it pertained to penalty initiation. It rejected the assessee's argument that such error could be rectified only under section 292B and not by revision under section 263.

The Tribunal distinguished the present facts from the Chennai Tribunal decision, emphasizing the AO's conscious invocation of the correct penalty provision in the reassessment order, which was contradicted by the issuance of penalty notice under the wrong section.

The Tribunal also noted the pendency of appeal before the CIT(A) did not preclude the PCIT from exercising revisionary powers under section 263 to correct an erroneous and prejudicial order.

Regarding the precedents, the Tribunal respectfully followed the Allahabad High Court's view that omission or error in penalty initiation can render the assessment order erroneous and prejudicial, thus justifying revision under section 263.

5. Conclusions

The Tribunal concluded that the revision order passed by the PCIT under section 263 was valid and lawful. The PCIT rightly set aside the penalty notice issued under section 271(1)(c) and directed the AO to issue a fresh penalty notice under section 271AAC(1), thereby modifying the reassessment order.

The appeal filed by the assessee against the revision order was accordingly dismissed.

Significant Holdings

"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." (J.K. D'Costa)

"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 or decides it wrongly." (Surendra Prasad Agrawal)

"In exercise of power conferred in me u/s. 263 of the Act, the A.O. is directed to drop the penal proceedings u/s 271(1)(c) of the Act and issue a fresh penalty notice u/s 271AAC(1) of the Act... after giving the assessee a reasonable opportunity of being heard." (Revision Order)

Core principles established include:

• Penalty proceedings are independent but related to assessment proceedings; errors in penalty notice issuance can render the assessment order erroneous and prejudicial if they affect the revenue's interest.
• Section 263 revision jurisdiction extends to correcting errors in assessment orders that are prejudicial to revenue, including errors relating to penalty initiation.
• Procedural errors in penalty notice issuance, when substantive and prejudicial, justify revision and modification of assessment orders.
• Pendency of appeal does not bar revision under section 263.

Final determinations:

• The reassessment order was erroneous and prejudicial to revenue due to issuance of penalty notice under wrong section.
• The PCIT validly exercised revisionary powers under section 263 to set aside the penalty notice under section 271(1)(c) and directed issuance of fresh notice under section 271AAC(1).
• The appeal against the revision order was dismissed.