CIT has no power u/s 263 to direct initiating penalty proceedings u/s 271(1)(c)

CIT assuming jurisdiction u/s 263 has no power to direct initiating penalty proceedings u/s 271(1)(c)

CIT Revision u/s 263 for AO accepting revised return without initiating penalty proceedings u/s 271(1)(c) quashed by ITAT following jurisdictional High Court order

In the instant case, the assessee had challenged the revisionary order u/s 263 of the Income Tax Act, 1961 (the Act) passed by the Pr. Commissioner of Income Tax holding that the assessment order passed by the Assessing Officer (AO) under Section 143(3) of the Act was erroneous and prejudicial to the interest of Revenue as the AO failed in initiating penalty proceedings u/s 271(1)(c) of the Act.

ABCAUS Case Law Citation
ABCAUS 3523 (2021) (07) ITAT

Important case law relied referred:
Addl. CIT Vs. J. K. D Costa; 9 Taxman 88 (Del.)
Addl. CIT vs. Indian Pharmaceuticals (1980) 123 ITR 874 (MP)
Addl. CIT Vs. Achal Kumar Jain; 11 Taxman 228 (Del.)
CIT Vs. Rakesh Nain Trivedi 282 CTR 205 (P & H)
Amarjeet Dhall Vs. CIT

The assessee was an Advocate by profession. The case of the assessee was selected for limited scrutiny through computer added selection system (CASS) on the reasons of mismatch of income and tax credits as per Form 26AS.

A notice under Section 143(2) of the Act was issued to the assessee who revised the return by increasing the gross receipts.

The Assessing Officer accepted the revised return and assessed the total income as per order under Section 143(3) of the Act. In the said assessment order, the AO did not initiate penalty proceedings under Section 271(1)(c) of the Act.

On examination of the record of the assessee, the Pr. CIT noted that the order assed by the AO was erroneous and prejudicial to the interest of Revenue.   

CIT found that the assessee had revised the return only when the assessee was asked to reconcile the mis-match between the receipts shown in Income Tax return and 26AS. 

According to Pr. CIT, section 139(5) of the Act has been enacted when a  bonafide mistake is discovered;  assessee can revise return of income.   The CIT was of the opinion that the assessee had mis-used this provision for her undue benefit and intentionally did not offer whole of the professional receipts in original return of income and its deliberate suppression of facts, which attracts penalty under Section 271(1)(c) of the Act.

The CIT, therefore, was of the view that Assessing Officer did not apply his mind and did not make due verification and, therefore, the order was erroneous in so far as it was prejudicial to the interest of Revenue. 

Therefore, CIT issued a show cause notice u/s 263.

The assessee submitted that she discovered that tax counsel/CA, who prepared the return did not reconcile the professional receipts with Form No. 26AS and, therefore, she revised return for assessment year. The assessee had also submitted a letter stating the above facts before the Assessing Officer.

The Pr CIT ordered Assessing Officer to initiate penalty proceedings under Section 271(1)(c) of the Act for concealment of income.

Before the Tribunal, the assessee submitted that the assessee had revised her return of income as soon as she came to know about the bonafide error in the original return of income.

She referred to the provisions of the Act wherein according to Section 139(5) of the Act, the assessee could validly revise return of income  as found bona fide error in it.

She also submitted that the Chartered Accountant who committed the error, had also submitted an affidavit owning the mistake.

It was further submitted that when a revised return filed by an assessee is accepted by Assessing Officer then merely by virtue of the fact that such revised return discloses a higher income, penalty under Section 271(1)(c) of the Act could not be imposed automatically. Even inadequate enquiry in itself cannot give power to revise the order if AO has a different opinion in the matter.

The Tribunal noted that this issue was squarely covered in favour of the assessee by the decision of the jurisdictional High Court holding that the assessment proceeding is a separate proceedings from penalty proceedings. When the principal Commissioner of income tax is assuming jurisdiction u/s 263 of the income tax act, she does not have any right to direct the assessing officer to initiate penalty proceedings u/s 271(1)(c) of the act. However, other High Court have adopted an opposite approach.

The Department contended that the satisfaction of the assessing officer is always the part of the order of assessment. Therefore, initiation of penalty proceedings is always the part of the order of the assessment.  The non-initiation of penalty proceedings by the learned assessing officer makes the order of the assessing officer erroneous.

In view of the binding decision of the jurisdictional High Court, the Tribunal held that there was no reason to sustain the order passed by the principal Commissioner of income tax u/s 263 of the act and therefore it was quashed and appeal was allowed in favour of the assessee.  

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