Kamalkant Bhagwatiprasad Oza Vs PCIT (Central) (ITAT Ahmedabad)
Summary: ITAT Ahmedabad allowed the assessee’s appeal against the PCIT’s Section 263 revision for A.Y. 2022-23. The assessee had declared income of Rs.6,06,500/- and contractual receipts of Rs.3,38,54,329/-, with TDS credit of Rs.3,38,545/-. Following a Section 132 search concerning Urmin Group, the AO treated the contractual receipts and payments as bogus, rejected the books under Section 145(3), disallowed the TDS credit and completed assessment under Section 143(3) at Rs.9,45,045/-. The PCIT invoked Section 263, holding that the AO’s failure to initiate penalty proceedings under Section 270A rendered the assessment erroneous and prejudicial to Revenue, and directed initiation of penalty proceedings. The Tribunal observed that the PCIT had not established how the assessment was erroneous and prejudicial to Revenue. It held that there was no under-reporting of income, as the TDS amount was already included in the returned income, and the Section 270A(3) penalty mechanism did not operate in the circumstances. It further held that initiation of Section 270A penalty proceedings was discretionary based on the AO’s satisfaction, not mandatory. The Section 263 order was therefore quashed and the assessee’s appeal allowed.
Core Issue: Whether an assessment order can be revised under section 263 merely because the AO did not initiate penalty proceedings under section 270A, where no statutory under-reporting of income was actually established and initiation of penalty proceedings is dependent upon the AO’s satisfaction.
Facts: The assessee disclosed contractual receipts of ₹3,38,54,329 from entities of the Urmin Group and returned income of ₹6,06,500. Search proceedings revealed that the contractual transactions were allegedly bogus. The AO rejected the books under section 145(3) and disallowed TDS credit of ₹3,38,545 relating to the contractual receipts, adding that amount to the returned income and determining total income at ₹9,45,045. However, the AO did not make any separate addition representing the alleged bogus contractual receipts or estimate any additional income. The PCIT subsequently invoked section 263 on the ground that the assessee had allegedly misreported income and that the AO ought to have initiated penalty proceedings under section 270A.
AO Finding: The AO rejected the books on the ground that the contractual business with Urmin Group was bogus and denied the TDS credit of ₹3,38,545. However, he accepted the returned income of ₹6,06,500 and assessed total income at ₹9,45,045 by adding only the disallowed TDS credit; no separate income was brought to tax on account of the alleged bogus contractual receipts.
PCIT Finding: The PCIT held that the assessee had misreported the nature and source of income and furnished inaccurate information attracting section 270A. Since the AO had failed to initiate penalty proceedings under section 270A while completing the assessment, the PCIT considered the assessment order erroneous and prejudicial to the interests of Revenue and set it aside under section 263 with a limited direction to initiate penalty proceedings.
ITAT Finding: The ITAT held that the PCIT failed to establish how the assessment order was erroneous and prejudicial to Revenue. The TDS credit of ₹3,38,545 had already formed part of the contractual turnover and was included in the returned income; therefore, its disallowance did not result in any under-reporting of income. Even independently, the amount of ₹3,38,545 was lower than the returned income of ₹6,06,500. Hence, the statutory computation mechanism under section 270A(3) itself did not result in under-reported income on the facts of the case.
Penalty Finding: The Tribunal further held that initiation of penalty proceedings under section 270A is dependent upon the satisfaction of the Assessing Officer and is discretionary, and cannot be treated as an automatic or mandatory consequence of every adverse finding in assessment. Therefore, mere non-initiation of penalty proceedings could not, by itself, make the assessment order erroneous and prejudicial to the interests of Revenue.
Section 263 Finding: The Tribunal emphasised that the two essential conditions for section 263—“erroneous” and “prejudicial to the interests of Revenue”—were not satisfied. In fact, the AO’s computation, if anything, was prejudicial to the assessee because the TDS credit was added back despite the corresponding amount already being embedded in the returned turnover/income; it did not demonstrate any under-reporting contemplated by section 270A.
Final Decision: The ITAT quashed the PCIT’s revision order under section 263 and allowed the assessee’s appeal, holding that the assessment could not be revised merely for failure to initiate section 270A penalty proceedings when no under-reporting of income was established and penalty initiation itself was discretionary.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal is filed by the Assessee against the order of Principal Commissioner of Income Tax (Central) – Ahmedabad [hereinafter referred to as “PCIT”] dated 22.03.2026 for the Assessment Year (A.Y.) 2022-23 passed in his revisional jurisdiction u/s. 263 of the Income Tax Act [hereinafter referred as “the Act”].
2. The brief facts of the case are that the assessee had filed his return of income for A.Y. 2022-23 on 06.10.2022 declaring income of Rs.6,06,500/-. The assessee had disclosed contract receipt of Rs.3,38,54,329/- in the P&L account and the net profit disclosed by the assessee as per audited account was Rs. 6,41,982/-. The assessee had also claimed credit for TDS of Rs. 3,38,545/- in respect of this contractual income. The contractual receipt of the assessee was from entities of Urmin Group, in which a search action u/s. 132 of the Act was carried out on 07.03.2022 and the premises of the assessee was also covered during the search. From the evidences retrieved during the course of search, it had transpired that the assessee did not carry out any contractual work with Urmin Group and the entire contractual receipts and payments disclosed by the assessee were bogus. The AO had, therefore, rejected the books of accounts of the assessee on the ground that the contractual business shown by the assessee was bogus and held that the assessee was not entitled to claim credit of TDS on the contractual receipts. At the same time, the TDS credit of Rs. 3,38,545/- claimed by the assessee in the return, was added to income of the assessee. The assessment was completed u/s. 143(3) of the Act on 21.03.2024 at total income of Rs.9,45,045/-. Subsequently, the case record was called for and examined by the Ld. PCIT. He found that the assessee had misreported the nature and source of his income and provided inaccurate information and, therefore, provision of section 270A of the Act was attracted in the present case. The AO, however, didn’t initiate penalty proceeding u/s 270A of the Act while completing the assessment. According to the Ld. PCIT, the failure of the AO to initiate penalty proceeding u/s. 270A of the Act, made the assessment order erroneous and pre-judicial to the interest of revenue. He, therefore, set aside the assessment order dated 21.03.2024 to the file of the AO with a limited direction to initiate penalty proceeding u/s. 270A of the Act.
3. Aggrieved with the order of the Ld. PCIT, the assessee is in appeal before us. The following grounds have been taken in this appeal:
1. The Learned Pr. Commissioner of Income Tax, (Central), Ahmedabad has erred in passing an order u/s 263 of the LT. Act, 1961 setting aside the Assessment Order passed uis.143(3) of the LT. Act, 1961 dtd.21.03.2024 which is neither erroneous nor prejudicial to the interest of the Revenue.
2. The Learned Pr. Commissioner of Income Tax, (Central), Ahmedabad has erred in passing an order u/s.263 of the LT Act, 1961 for limited purpose of initiating penalty proceedings u/s 270A of the Act holding that the Assessing Officer has not recorded satisfaction for initiating penalty proceedings u/s 270A of the 1.T.Act, 1961
3. The Learned Pr. Commissioner of Income Tax, (Central) Ahmedabad has erred in not considering fact that the assessment proceedings and penalty proceedings are separate and distinct and for non-initiation of penalty proceedings during assessment proceedings by the Assessing Officer is not an error for which revision proceedings can be invoked. Hence the Revision order so passed requires to be cancelled.
4. The appellant craves leave to add, alter, amend or modify any of the grounds of appeal on or before the date of hearing of appeal.
4. We have heard Shri Aseem L Thakkar, the Ld. AR and Shri Kiran Unavekar, the Ld. CIT-DR. The sole ground on which the Ld. PCIT has set aside the order is that the AO, while completing the assessment, had failed to initiate penalty proceeding u/s. 270A of the Act. However, the Ld. PCIT has not elaborated in his order, as to how the order of the AO was erroneous and pre-judicial to the interest of revenue, in the peculiar facts of the case as discussed earlier. In the present case, the assessee had disclosed income of Rs.6,06,500/- on the contractual receipts from the concerns of Urmin Group. According to the AO, the assessee did not carry out any contractual activity and, therefore, the AO had rejected the books of accounts of the assessee u/s. 145(3) of the Act. The entire contractual receipts as well as the payments made by the assessee, as per P&L account, were treated as bogus. The AO did not estimate any other income of the assessee and the only finding given in the assessment order was that the TDS credit claimed on the contractual receipts was to be disallowed. Having given this finding, the AO was not correct in accepting the returned income of Rs.6,06,500/- in respect of the contractual receipts, which were held as bogus. In the computation of income, the AO had proceeded from total income of Rs. 6,06,500/- as per return and made further addition of Rs.3,38,545/- in respect of disallowance of TDS credit and thus the total income was arrived at Rs. 9,45,045/- in the assessment order. In fact, the TDS credit claimed by the assessee was already part of the turnover of the assessee and was included in the income as disclosed in the return.
5. The working of total income as done by the AO is thus found to be prejudicial to the assessee and not to the revenue. When the AO had accepted the returned income of Rs.6,06,500/- while disallowing credit for TDS on contractual receipts, there was no under-reporting of income as the quantum of TDS was already part of turnover and included in the returned income. Even if the addition of Rs. 3,38,545/- in respect of disallowance of TDS is considered in isolation, this amount was less than the returned income of Rs.6,06,500/-. Under the circumstances, there was no case of under-reporting of income. In fact, the mechanism to impose the penalty, as provided u/s 270A(3) of the Act, fails in the present case and no penalty for under-reporting of income could have been levied. Further, the initiation of penalty proceeding u/s. 270A of the Act is discretionary on the satisfaction of the Assessing Officer and the Ld. PCIT was not correct in treating it as a mandatory exercise.
6. In view of the facts as discussed above, we are of the considered opinion that there was no basis for the Ld. PCIT to conclude that the order of the AO was erroneous and prejudicial to the interest of revenue. Therefore, the order u/s. 263 of the Act as passed by the Ld. PCIT, is quashed.
7. In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 05/08/2026 at Ahmedabad.
