Penalty section cannot be subject matter of revisionary jurisdiction under section 263

Section under which penalty should be initiated cannot be subject matter of revisionary jurisdiction under section 263 of Income Tax Act – ITAT

In a recent judgment, ITAT Surat has held that the section under which AO should initiate penalty cannot be determined under revisionary jurisdiction under section 263 of Income Tax Act 1961.

ABCAUS Case Law Citation:
5104 (2026) (04) abacus.in ITAT

In the instant case, the assessee had challenged the order passed by the Principal Commissioner of Income-tax (PCIT) by assuming jurisdiction u/s 263 of the Act by holding that the AO instead of initiating penalty proceeding u/s 271(1)(c) initiated the penalty proceedings u/s 270A of the Act, hence, the assessment order passed by the AO was erroneous and prejudicial to the interest of revenue.

As per the information the assesee’s case of the assessee was reopened u/s 147 in respect of investing unaccounted money in commodity market and properties. During the assessment proceedings, it was found that commodity market entries were reflecting in assessee’s bank account. The assessee did not reply any statutory notices, therefore, the assessment was passed under Section 147 r.w.s. 144 r.w.s. 144B of the Act after making addition treating the said amount as unexplained credits under Section 68 of the Act. 

The PCIT observed that the Assessing Officer had not initiated penalty under Section 271(1)(c) and initiated penalty under Section 270A of the Act.  The show cause notice under Section 263 was issued. The assessee did not file any reply, therefore, the PCIT directed the Assessing Officer under Section 263 to modify the assessment order thereby initiating the correct penalty proceedings under Section 271(1)(c) of the Act.  The assessee filed present appeal in respect of the same before us.

Before the Tribunal, the assessee contended that the PCIT assumed the jurisdiction under Section 263 of the Act wrongly. The initiation of penalty proceedings under Section 270A in respect of 271(1)(c) of the Act is not a revisional power and cannot be initiated under Section 263 of the Act. 

The Tribunal noted that Section 275 categorically mentions in First Proviso that no order of imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for imposition of penalty shall be passed unless the assessee has been heard, or has been given reasonable opportunity of being heard.

The Tribunal observed that in the present case the penalty under which section had to be initiated cannot be determined under Section 263 which is a revisionary power as the Assessing Officer had initiated penalty under Section 270A and in fact the penalty had already been initiated. 

The Tribunal held that the revisionary power cannot be exercised merely on the fact that the penalty proceedings were not rightly invoked / initiated.  Assessment order on the very same basis cannot be held as erroneous in so far as prejudicial to the interest of Revenue.

Accordingly, the appeal of the assessee was allowed.

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