Facts of the Case

The assessee, Radheshyam Agarwal, proprietor of M/s Laxmandas Radheshyam Saraf, is engaged in the business of trading in gold and silver ornaments and money lending. A survey under Section 133A was conducted at the business premises on 08.03.2018, during which excess stock of gold and silver ornaments and undisclosed interest income from pawning debtors were found. The assessee admitted undisclosed income aggregating to ₹72,84,973 comprising excess stock and interest income and incorporated the same in the books of account. For Assessment Year 2018-19, reassessment proceedings were initiated under Section 147 and the assessee filed a return declaring total income of ₹1,00,50,700, inclusive of surrendered income. The Assessing Officer completed the reassessment under Section 147 read with Section 143(3) accepting the returned income and applied provisions of Sections 69 and 69A read with Section 115BBE for taxation of surrendered income but did not initiate or examine penalty proceedings under Section 271AAC. The Principal Commissioner of Income Tax (Central), Bhopal invoked revisionary jurisdiction under Section 263 and set aside the assessment to the extent of directing the Assessing Officer to reframe the assessment after examining initiation of penalty under Section 271AAC.

Issues Involved

Whether failure of the Assessing Officer to examine or initiate penalty proceedings under Section 271AAC on surrendered income taxed under Section 115BBE rendered the assessment order erroneous and prejudicial to the interests of the Revenue, whether penalty initiation under Section 271AAC is discretionary or mandatory, and whether revision under Section 263 was valid in the facts of the case.

Petitioner’s Arguments

The assessee contended that non-initiation of penalty under Section 271AAC could not render the assessment order erroneous, as penalty proceedings are independent of assessment proceedings. It was argued that Section 271AAC uses the word “may” and therefore initiation of penalty is discretionary and not mandatory. The assessee submitted that the surrendered income represented normal business income arising from excess stock and interest from money lending business and was wrongly subjected to tax under Section 115BBE, which issue was already pending before the CIT(A). It was further contended that where two views are possible, revision under Section 263 is not permissible, relying on judicial precedents including Malabar Industrial Co. Ltd. and Vegetable Products Ltd.

Respondent’s Arguments

The Revenue argued that the Assessing Officer failed to make necessary enquiries and apply his mind to the mandatory consequences flowing from application of Sections 69 and 69A read with Section 115BBE, particularly initiation of penalty under Section 271AAC. It was contended that the assessment order was silent on penalty initiation and did not record any satisfaction for non-levy of penalty. Relying on decisions of the Madhya Pradesh High Court and the Allahabad High Court, the Revenue submitted that omission to consider penalty during assessment renders the assessment order erroneous and prejudicial to the interests of the Revenue, justifying revision under Section 263.

Court Order / Findings

The ITAT Indore held that the assessment order suffered from lack of enquiry and application of mind insofar as the Assessing Officer failed to examine initiation of penalty under Section 271AAC despite having applied Sections 69 and 69A read with Section 115BBE. The Tribunal observed that the scope of an assessment order is wide and includes not only computation of income but also examination of statutory consequences such as levy of interest and penalty. The Tribunal held that mere absence of satisfaction or discussion regarding penalty in the assessment order rendered the order erroneous within the meaning of Explanation 2(a) to Section 263. The Tribunal rejected the assessee’s contention that penalty initiation is wholly discretionary and held that failure to examine the issue itself constituted an error prejudicial to the interests of the Revenue. The Tribunal found the revision order to be well-reasoned and legally sustainable.

Important Clarification

The Tribunal clarified that when the Assessing Officer invokes deeming provisions under Sections 69 and 69A read with Section 115BBE, it is incumbent upon him to examine the applicability of penalty under Section 271AAC. Failure to conduct such examination or record satisfaction renders the assessment order erroneous and prejudicial, thereby attracting revision under Section 263.

Final Outcome

The appeal filed by the assessee was dismissed, and the revision order passed by the Principal Commissioner of Income Tax (Central), Bhopal under Section 263 directing the Assessing Officer to reframe the assessment after examining initiation of penalty under Section 271AAC was upheld in full.

Link to Download Order- https://www.mytaxexpert.co.in/uploads/1769159089_RADHESHYAMAGARWALBHOPALVS.THEPCITCENTRALBHOPALBHOPAL.pdf

 

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