ITAT Indore: Assessment Order Invalid When AO Fails to Examine Mandatory Penalty Under Section 271AAC - PCIT's Section 263 Revision Upheld
Background of the Case
The Indore Bench of the Income Tax Appellate Tribunal examined a critical question: whether the Assessing Officer's failure to consider and initiate penalty proceedings under Section 271AAC(1) constitutes grounds for revision under Section 263 by the Principal Commissioner of Income Tax. The case involved Radheshyam Agarwal Vs PCIT and pertained to Assessment Year 2018-19.
The assessee operated as a proprietor of M/s Laxmandas Radheshyam Saraf, conducting business in gold and silver ornament trading alongside money lending operations. The business premises were subjected to survey proceedings under Section 133A of the Income Tax Act 1961, which revealed significant discrepancies requiring detailed examination.
Survey Findings and Disclosures
During the survey action conducted on 08.03.2018 at the business location situated at Chintaman Chouraha, Chowk, Bhopal, the Department discovered multiple irregularities:
Cash Book Discrepancies
Physical verification of cash revealed a shortfall of Rs. 3,55,677 when compared against the cash book maintained at the premises. The recorded cash book balance showed Rs. 26,41,477, while actual physical verification yielded only Rs. 22,85,800.
Stock Register Variations
More significantly, examination of the stock register disclosed substantial excess stock. The books of account reflected silver stock valued at Rs. 41,12,673 and gold worth Rs. 66,166. However, physical verification established the actual presence of silver and gold stock valued at Rs. 64,14,906. This resulted in excess stock amounting to Rs. 23,02,233, which the assessee acknowledged as undisclosed income.
Undisclosed Interest Income
During recorded statement on oath, the assessee admitted to earning undisclosed interest income totaling Rs. 49,82,740. This declaration formed part of the total surrendered income during survey proceedings.
The combined surrendered amount reached Rs. 72,84,973, representing the aggregate of excess stock and concealed interest receipts from money lending operations.
Assessment Proceedings and Completion
The assessee had not filed the return of income for Assessment Year 2018-19 initially. Following the survey, reassessment proceedings were initiated under Sections 147/148 of the Income Tax Act 1961.
Notice under Section 148A(b) dated 31.03.2022 was issued to the assessee, who submitted response on 02.04.2022. After considering the reply, the Assessing Officer passed order under Section 148A(d) on 13.04.2022. Subsequently, notice under Section 148 dated 13.04.2022 along with order under Section 148A(d) was served upon the assessee after obtaining prior approval from the PCIT (Central), Bhopal.
In response, the assessee filed the return of income on 29.04.2022 declaring total income of Rs. 1,00,50,700, which included the surrendered income of Rs. 73,00,000 (consisting of the survey disclosures).
Notice under Section 143(2) was issued on 29.06.2022 to conduct detailed assessment proceedings.
Taxation Under Section 115BBE
The Assessing Officer examined whether the surrendered income qualified for taxation under the special provisions of Section 115BBE read with Sections 69/69A of the Income Tax Act 1961.
Through notice under Section 142(1) dated 20.03.2023, the assessee was asked to explain why tax rate as per Section 115BBE should not be applied to the surrendered income.
Assessee's Contentions Against Section 115BBE
The assessee submitted detailed objections on 22.03.2023, arguing:
Business Income Character: The excess stock of gold and silver ornaments represented normal business inventory. Since the assessee was engaged in trading these items, the difference between physical stock and book stock should be treated as suppressed business receipts, not unexplained investment.
Identifiable Source: The source of investment was clearly identifiable and related to regular business operations. The excess stock had no independent existence separate from declared business assets.
Money Lending Business: Similarly, the undisclosed interest income from pawning debtors arose from the regular money lending business and should be taxed as business income.
Judicial Precedents: The assessee relied on multiple decisions including:
- Choksi Hiralal Maganlal v/s DCIT (ITAT Ahmedabad)
- ACIT Central Circle-13 Mumbai v. Rahil Agencies
- Fashion World v/s ACIT (ITAT Ahmedabad)
- Lovish Singhal and Ors. v/s ITO and Ors. (ITAT Jodhpur)
- PCIT v Deccan Jewellers (P) Ltd. [2021] 132 com 73 (AP)
These decisions supported the proposition that where excess stock is found during survey and has no independent physical identity separate from regular business stock, the difference should be treated as undisclosed business receipt, not unexplained investment under Section 69.
Assessing Officer's Decision
The Assessing Officer rejected the assessee's contentions and held:
"Reply of the assessee is perused and considered but not found to be acceptable as he could not substantiate his claim of such surrender income to be part of his business concern. After the survey proceedings carried out in his business premise, he has taken into books of accounts and filed ITR accordingly. Merely doing such addition of surrender income into his books of accounts does not show that the same was part of his business."
Consequently, the Assessing Officer applied provisions of Sections 69/69A read with Section 115BBE and taxed the surrendered income at the higher rate prescribed under Section 115BBE.
Significantly, the assessment order made no mention of penalty proceedings under Section 271AAC(1) and contained no recorded satisfaction regarding initiation or non-initiation of such penalty.
The assessment order under Sections 147/143(3) dated 31.03.2023 computed total income at Rs. 1,00,50,700.
Revision Proceedings Under Section 263
The Principal Commissioner of Income Tax (Central), Bhopal examined the assessment order and initiated revision proceedings under Section 263 of the Income Tax Act 1961.
Grounds for Revision
The PCIT held that once income is taxed under Section 115BBE, examination and initiation of penalty under Section 271AAC(1) becomes imperative. The complete absence of any consideration or recording of satisfaction regarding penalty proceedings rendered the assessment order erroneous and prejudicial to Revenue interest.
The PCIT observed:
"The Assessing Officer has not enquired into and verified and has passed the order without proper consideration of law & application of mind and, accordingly, has not initiated penalty u/s 271AAC(1) on the surrendered income of Rs. 72,84,973/- despite the AO himself having applied provisions of section 69 and 69A r.w.s. 115BBE and he has not carried out inquiries or verifications to conclude that initiation / levy of penalty is not called for."
Application of Explanation 2(a) to Section 263
The PCIT invoked Explanation 2(a) to Section 263(1), which provides that an order shall be deemed erroneous in so far as it is prejudicial to Revenue interest if the order is passed without making inquiries or verification which should have been made.
The PCIT held that failure to examine penalty liability under Section 271AAC(1) constituted lack of enquiry and non-application of mind, squarely falling within the mischief of Explanation 2(a).
Directions Issued
The PCIT set aside the assessment order to the limited extent of examining penalty provisions and directed the Assessing Officer to:
- Reframe the assessment de novo to the extent of penalty examination
- Conduct proper inquiries regarding applicability of
Section 271AAC(1) - Record satisfaction whether penalty proceedings should be initiated
- Leave other issues in the original assessment order untouched
- Afford reasonable opportunity of hearing to the assessee
The revision order was passed on 15.03.2025 bearing Number ITBA/REV/F/REV5/2024-25/1074524226(1).
Appeal Before ITAT Indore
Aggrieved by the revision order, the assessee filed appeal before the Income Tax Appellate Tribunal, Indore under Section 253 of the Income Tax Act 1961.
Grounds of Appeal
The assessee raised following grounds:
The order passed by PCIT under
Section 263setting aside the assessment order and directing the Assessing Officer to initiate penalty underSection 271AAC(1)is erroneous and should be quashed.Liberty to add, amend or alter any ground of appeal.
Assessee's Arguments Before Tribunal
The learned Authorized Representative for the assessee advanced following contentions:
Penalty Initiation is Discretionary
The AR argued that Section 271AAC(1) uses the word "may" which denotes discretion, not mandatory obligation. The provision reads as discretionary power vested in the Assessing Officer, not a compulsory duty that must be exercised in every case.
Penalty Proceedings Are Independent
It was submitted that penalty proceedings are independent and separate from assessment proceedings. Mere non-mention of penalty in the assessment order cannot render the assessment erroneous or prejudicial to Revenue.
No Lack of Enquiry
The AR contended that the Assessing Officer had conducted detailed enquiry during assessment proceedings. The fact that penalty satisfaction was not specifically recorded does not establish lack of enquiry.
Interpretation of "Assessment"
The assessee relied on decisions of the Hon'ble Delhi High Court in:
- Addl. CIT v. J.K. D'Costa [1982] 133 ITR 71 (Delhi)
- CIT v. Achal Kumar Jain [1983] 142 ITR 606 (Delhi)
These decisions held that penalty proceedings do not form part of assessment proceedings and failure to record satisfaction regarding penalty leviability cannot vitiate the assessment order.
Supreme Court Precedent
Reliance was placed on the Hon'ble Supreme Court decision in Vegetable Products case, supporting the proposition that assessment and penalty are distinct proceedings.