Background of the Case:

The appellant, engaged in retail trade and operating multiple showrooms in Delhi, had filed its return for AY 2020-21 declaring substantial income, which was subsequently taken up for complete scrutiny under CASS. The assessment was completed under section 143(3) read with section 144B, wherein certain additions were made relating to unexplained cash deposits and disallowance of interest expenses. However, while examining the assessment records, the Principal Commissioner of Income Tax noticed that the Tax Audit Report in Form 3CD disclosed repayment of an amount of Rs.11 lakh otherwise than through prescribed banking channels, allegedly in violation of section 269T.

On the premise that such violation attracted penalty under section 271E and that the Assessing Officer had failed to initiate penalty proceedings, the PCIT invoked section 263 and directed initiation of penalty proceedings, holding the assessment order to be erroneous and prejudicial to the interest of revenue.

Arguments by the Appellant (Assessee)

Aggrieved by the revisionary order, the appellant challenged the assumption of jurisdiction under section 263 before the ITAT. It was contended that the amount of Rs.11 lakh was not a loan or deposit repayment but merely an adjustment entry against a security deposit of Rs.1 crore received in an earlier year, which was wrongly reported by the auditor in Form 3CD. The appellant argued that a mere book adjustment without movement of money does not attract the rigour of section 269T and, consequently, penalty under section 271E could not be levied.

More importantly, the appellant asserted that penalty proceedings are independent of assessment proceedings and, in the absence of any satisfaction recorded by the Assessing Officer in the assessment order, the PCIT had no authority under section 263 to direct initiation of penalty proceedings.
Reliance was placed on binding judicial precedents, including the Delhi High Court decision in CIT v. Nihal Chand Rekyan and the Supreme Court ruling in CIT v. Jai Laxmi Rice Mills Ambala City, to emphasize that satisfaction of the Assessing Officer is a sine qua non for initiation of penalty proceedings.

Respondent’s Response (Revenue)

The Revenue, on the other hand, supported the order passed by the PCIT and contended that the Tax Audit Report clearly reflected a violation of section 269T, which could not be ignored lightly. It was argued that the auditor’s reporting in Form 3CD carries statutory significance and, unless corrected through a revised audit report, the same must be relied upon. The PCIT justified the invocation of section 263 on the ground that failure of the Assessing Officer to initiate penalty proceedings resulted in loss of revenue. The Revenue further sought to distinguish the decision of the Delhi High Court in Nihal Chand Rekyan by submitting that the said judgment pertained to section 271(1)(c), whereas penalty under section 271E could be initiated independently.

Reliance was also placed on the decision of the ITAT Chennai Bench to contend that initiation of penalty proceedings for violation of sections 269SS/269T is mandatory during assessment proceedings.

Court Findings and Decision

After considering the rival submissions and examining the record, the ITAT Delhi Bench held that the PCIT had exceeded the jurisdiction conferred under section 263. The Tribunal observed that initiation of penalty proceedings is not a part of assessment proceedings and cannot be directed by the Commissioner in revisionary jurisdiction, particularly in the absence of satisfaction recorded by the Assessing Officer.

The Bench categorically relied on the Supreme Court judgment in Jai Laxmi Rice Mills Ambala City, which held that penalty under section 271E cannot survive unless satisfaction for such penalty is recorded in the assessment order itself. The Tribunal further noted that the PCIT’s attempt to distinguish the Delhi High Court decision in Nihal Chand Rekyan was misplaced and contrary to settled law.

Since no satisfaction for initiation of penalty under section 271E was recorded by the Assessing Officer, the direction issued under section 263 was held to be unsustainable. Accordingly, the revisionary order was quashed and the appeal of the appellant was allowed.

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The post ITAT Quashes Order u/s 263: Holds PCIT Cannot Mandate Penalty Proceedings u/s 271E Without AO’s Satisfaction appeared first on Tax Unplug.