2022 (11) TMI 1294 - AT - Income Tax

Revision u/s 263 by CIT - mistake of non-initiation or incorrect initiation of penalty - assessment order that Penalty u/s. 271(1)(c) is initiated for concealment of income by way of issue of notice u/s. 274 r.w.s. 271(1)(c) - HELD THAT - It is well-settled that once an appeal has been preferred against an order of assessment the entire assessment is open before the appellate authority. The appellate authority is entitled to do all that the AO could have done. The powers of the appellate authority are co-extensive and co-terminus with the powers of the AO. It is equally well-settled that PCIT cannot exercise revisional jurisdiction qua proceedings before an appellate authority. The order of assessment does not have any independent existence and stands merged with the order of the appellate authority. Hence, to read s. 263 as being applicable only in case of an AO for the purposes of initiation and levy of penalty and not being applicable to the appellate authority, cannot be the legislative intent. To the contrary, the inherent indication u/s 271(1) makes it clear that the Pr. CIT / CIT does not have any powers to direct either of the authorities, the AO or the appellate authority, to initiate and levy penalty. The section requires the AO or the appellate authority to be satisfied in the course of any proceedings . This means, any proceedings before either of the specified authority Pr. CIT / CIT cannot create proceedings. If he is not permitted to direct the appellate authority (and this is an accepted position) he cannot be permitted to substitute jurisdiction/powers of only the AO by his satisfaction by creating proceedings where none exist- assessment having already been completed.. The identical issue is directly covered by the binding decision in case of CIT vs Keshrimal Parasmal 1985 (5) TMI 34 - RAJASTHAN HIGH COURT As decided in Smt.Rekha Shekawat 2022 (8) TMI 791 - ITAT JAIPUR on examination of assessment record, the PCIT cannot direct initiation of penalty proceedings because penalty proceedings are not part of assessment proceedings. Thus, the PCIT s revisionary decision relating to non-initiation/ incorrect initiation of penalty which without holding that assessment order passed by the AO as erroneous and prejudicial to the interest of revenue is vague and bad in law. Being consistent, as there is no contrary finding serviced before us by the revenue we are of the considered view that the invocation of provision of 263 to correct the section under which the penalty is leviable or not is beyond the power vested under section 263 of the Act, when there are other options available with the ld. AO. Therefore, the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Invocation of Section 263 of the Income Tax Act.
2. Assumption of jurisdiction under Section 263 for incorrect initiation of penalty proceedings.
3. Condonation of delay in filing the appeal.
4. Validity of the Principal Commissioner of Income Tax's (PCIT) direction to initiate penalty proceedings.

Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act:
The primary issue is whether the Principal Commissioner of Income Tax (PCIT) was correct in invoking Section 263 of the Income Tax Act. The PCIT observed that the Assessing Officer (AO) had failed to correctly initiate penalty proceedings under the appropriate section, which caused prejudice to the Revenue. The PCIT issued a show cause notice and directed the AO to initiate and levy penalty under the correct sections after arriving at due satisfaction independently.

2. Assumption of Jurisdiction under Section 263 for Incorrect Initiation of Penalty Proceedings:
The assessee contested the PCIT's assumption of jurisdiction under Section 263, arguing that the AO's failure to initiate penalty proceedings correctly does not make the assessment order erroneous and prejudicial to the interests of the Revenue. The assessee relied on various judicial precedents, including the decision in CIT vs. Keshrimal Parasmal, which held that the Commissioner cannot direct the AO to initiate penalty proceedings under Section 263 as penalty proceedings are separate and distinct from assessment proceedings.

3. Condonation of Delay in Filing the Appeal:
The assessee filed an application for condonation of delay in filing the appeal, arguing that the delay was due to a bona fide belief regarding the limitation period. The Revenue did not object to the condonation of delay. The Tribunal condoned the delay, finding merit in the assessee's explanation.

4. Validity of the PCIT's Direction to Initiate Penalty Proceedings:
The Tribunal examined whether the PCIT had the authority to direct the AO to initiate penalty proceedings under Section 263. It was noted that the AO had already initiated penalty proceedings under Section 271AAB(1A), which the PCIT found to be incorrect. The Tribunal referred to multiple judicial precedents, including the Supreme Court's dismissal of a special leave petition in CIT vs. J.K. D'Costa, which confirmed that the Commissioner cannot direct the AO to initiate penalty proceedings under Section 263.

Conclusion:
The Tribunal found that the PCIT exceeded his jurisdiction by invoking Section 263 to correct the AO's initiation of penalty proceedings. The Tribunal held that penalty proceedings are separate from assessment proceedings, and the PCIT cannot direct the AO to initiate penalty proceedings under Section 263. The Tribunal allowed the appeals filed by the assessee, quashing the orders passed by the PCIT under Section 263.