ITAT Upholds Section 263 Revision for Failure to Initiate Penalty under Section 270A

The assessee, an individual carrying on cloth trading under the name M/s. Priyanaka Textile did not file its return for AY 2018-19 despite substantial bank transactions. Information on the department’s insight portal revealed cash deposits of Rs. 1.26 crore and withdrawals of Rs. 7.45 lakh in an ICICI Bank account during FY 2017-18. Based on this, the assessing officer reopened the assessment by issuing a notice under Section 148 on 27.03.2022. Although the assessee initially failed to respond to statutory notices, he later filed a return in response to the notice under Section 148, declaring income of Rs. 10.52 lakh under the presumptive taxation scheme of Section 44AD on turnover of Rs. 1.31 crore and paid taxes and interest. The Assessing Officer accepted the returned income but initiated penalty proceedings only under Section 272A(1)(d) for non-compliance with notices.

The Principal Commissioner of Income Tax invoked revisionary jurisdiction under Section 263, observing that the Assessing Officer had failed to initiate penalty proceedings under Section 270A for under-reporting of income, particularly where the return was filed only after issuance of notice under Section 148. Holding the order to be erroneous and prejudicial to the interests of the Revenue, the PCIT directed initiation of penalty proceedings. The assessee challenged this revision before the Income Tax Appellate Tribunal.

Main Issue: Whether revision under Section 263 was justified where the Assessing Officer failed to initiate penalty proceedings under Section 270A for under-reporting of income.

ITAT’s Decision: The Income Tax Appellate Tribunal dismissed the assessee’s appeal and upheld the revision order. The Tribunal held that the assessee had neither filed the original return under Section 139(1) nor filed it within time after issuance of notice under Section 148, and had furnished the return only shortly before completion of reassessment. Such circumstances attracted Section 270A(2)(b), which treats income as under-reported where the return is filed for the first time under Section 148.

The Tribunal observed that the Assessing Officer failed to examine the applicability of the penalty under Section 270A despite clear facts on record, rendering the assessment order erroneous and prejudicial to the interests of the Revenue. Relying on CIT v. Surendra Prasad Agrawal, it held that failure to initiate penalty proceedings during assessment can justify revision under Section 263. Thus, the direction of the PCIT to initiate penalty proceedings under Section 270A was upheld, and the appeal was dismissed.

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