ITAT Ahmedabad on limits of PCIT’s powers u/s 263 for non-initiation of penalty u/s 271D

Background of the dispute

In Naeem Sirajuddin Tirmizi Vs PCIT (Central) (ITAT Ahmedabad), the Ahmedabad Bench of the Income Tax Appellate Tribunal decided a batch of seven appeals filed by the assessee. These appeals related to Assessment Years (AYs) 2014-2015 to 2019-2020 and 2021-2022, all arising from separate but identically worded revisionary orders passed by the PCIT (Central), Ahmedabad under Section 263 of the Income Tax Act 1961.

All seven appeals raised the same core legal issue and rested on materially similar facts. The Tribunal, with consent of both sides, treated ITA No. 2108/AHD/2026 for AY 2014-2015 as the lead appeal and applied its findings mutatis mutandis to the remaining six years.

The controversy stemmed from a reassessment order dated 21/03/2024 passed under Section 147. The PCIT set aside this reassessment on the footing that the Assessing Officer (AO) had not recorded satisfaction for initiating penalty proceedings under Section 271D for an alleged violation of Section 269SS. On this basis, the PCIT concluded that the assessment order was “erroneous in so far as it is prejudicial to the interests of the Revenue” within the meaning of Section 263.

The precise legal question before the Tribunal was:

Can an assessment order be branded as erroneous and prejudicial to the interests of the Revenue merely because the AO did not record satisfaction or initiate penalty proceedings under Section 271D for an alleged contravention of Section 269SS, at a time when the AO had no statutory jurisdiction to impose such penalty?

PCIT’s reasoning for invoking Section 263

The PCIT (Central) issued a Section 263 show-cause notice and ultimately passed revisionary orders for each year on the following line of reasoning:

  • Based on seized material and records, the PCIT assumed that the assessee had accepted cash loans, deposits or specified sums allegedly in breach of Section 269SS.
  • According to the PCIT, this should have prompted the AO, while completing reassessment, to:
    • record satisfaction for initiating penalty under Section 271D, and
    • start penalty proceedings for violation of Section 269SS.
  • The AO did not record such satisfaction nor did he initiate penalty proceedings under Section 271D in the reassessment order dated 21/03/2024.
  • The PCIT treated this omission as an error which, in his view, had caused prejudice to the interests of the Revenue.
  • On this basis, he exercised revisionary jurisdiction under Section 263, set aside the reassessment order, and directed initiation of penalty proceedings under Section 271D.

Accordingly, the PCIT concluded that the twin conditions of Section 263—error in the order and prejudice to the Revenue—stood satisfied solely due to the AO’s alleged inaction on Section 271D.

Assessee’s primary challenge to revision

The assessee, in appeal, assailed the Section 263 orders broadly on the following grounds:

  • The AO had no statutory authority to impose penalty under Section 271D on the date when the reassessment order dated 21/03/2024 was passed.
  • As per the legal framework then in force, only the Joint Commissioner was empowered to impose penalty under Section 271D(2).
  • The proviso empowering the AO to levy penalty under Section 271D(2) came into effect only from 01.04.2025.
  • Penalty proceedings under Section 271D are distinct, independent and collateral to assessment proceedings; hence, failure to initiate a separate penalty proceeding cannot, by itself, taint the assessment order as erroneous or prejudicial.
  • Since the AO lacked jurisdiction to impose penalty at the relevant time, he could not be faulted for not recording satisfaction or not initiating proceedings which were outside his powers.

The assessee placed strong reliance on:

  • Judgment of the Gujarat High Court in Dilip Patel Vs. Principal Commission of Income Tax (Central): [2026] 311 Taxman 250 (Gujarat).
  • Circular No. 09/DV/2016 dated 26/04/2016 issued by CBDT.
  • Decision of ITAT Ahmedabad in **Aamrakunj Realty Limited Vs.