CIT cannot direct the AO to initiate penalty proceedings while exercising his revisionary power u/s 263

ITAT  Ahmedabad: CIT cannot direct the Assessing Officer to initiate penalty proceedings while exercising his revisionary power u/s 263 of the Act.

Facts and Issue:

• The present appeal has been filed by the assessee against the order passed by the Ld. Principal Commissioner of Income Tax-7, Ahmedabad, dated 10-03-2015, in exercise of his revisionary jurisdiction u/s. 263 of the Income Tax Act, 1961
• The said impugned order was passed in a revision petition filed against the order passed by the Assessing Officer u/s 147 of the Act which was found by the Ld. PCIT to be erroneous so as to cause prejudice to the revenue on the following counts:-
• Non-verification of the cash deposits in the bank of the assessee
• Non-verification of the interest income returned by the assessee
• For not initiating penalty proceedings u/s 271(1)(c) of the Act despite being in the know that the assessee had returned income only when subjected to re-assessment proceedings.
• The Ld. PCIT held that the order passed by the Assessing Officer u/s. 147 r.w.s. 143(3) of the Act was erroneous and prejudicial to the interest of the Revenue on the above counts and directed him to reframe assessment after verifying and considering the same.
• Aggrieved by the same, the assessee has come up in appeal.

Observations and Findings:

• On the first two aspects, the bench agreed with the CIT DR that the fact of no addition made in consequential proceedings is of no relevance for determining whether the power of revision u/s 263 of the Act was validly exercised.
• What is relevant for the exercise of revisionary power is the existence of twin conditions of there being an error in the order of the AO and the error causing prejudice to the Revenue. The CIT/PCIT has to prima facie make out a case finding fulfillment of both the aforesaid conditions. This is sufficient to validly assume powers of revision u/s 263 of the Act and take/direct necessary action thereafter.
• That subsequent to such direction it may be found that no addition is to be made to the income of the assessee but that does not take away the fact that on the basis of material on record the findings of error by the PCIT were un-refutably justifying exercise of revisionary power.
• The lack of inquiry by the AO on the cash transactions in the bank of the assessee and also the interest earned by the assessee ,was the error noted by the PCIT causing prejudice to the Revenue.
• The Bench saw no reason therefore to disagree with the PCIT since no inquiry by AO is sufficient to hold the order erroneous. The order of the PCIT on the afore-stated two issues, i.e of non-examination of cash deposits in the bank account of the assessee and the interest income earned by the assessee ,was therefore upheld.
• The aspect of the assessment order being held erroneous for non-initiation of penalty proceedings u/s. 271(1)(c) of the Act post amendment to section 271(1)(c) w.e.f. 1-4-2002 authorizing the commissioner also initiate penalty u/s 271(1)(c), the CIT still cannot direct the Assessing Officer to initiate penalty proceedings while exercising his revisionary power u/s. 263 of the act.
• The decision of the Jurisdictional High Court in the case of CIT vs. Parmanand M. Patel278 ITR 3 (Gujarat), still holds fort. It was pointed out that while the decision in CIT vs Parmanand (Supra) were rendered in the context of the pre amended provisions of section 271(1)(c) which did not grant power to the CIT to initiate penalty proceedings, but the ITAT Ahmedabad Benches in the case of Easy Transcription and Software Pvt. Ltd. vs. CIT (2017) 88 taxmann.com 772 had held that the ratio laid down by the Hon’ble Gujarat High Court in the case of Parmanad Patel still applied post amendment to the section.

Held:

• The order of the PCIT exercising revisionary powers for directing initiation of penalty proceedings was therefore held to be not in accordance with law and was accordingly set aside.