Azure Power Uranus Private Limited Vs DCIT (ITAT Delhi)
No Penalty Notice, No Revision? PCIT’s Section 263 Order Quashed
The assessment and the PCIT’s objection
The Assessing Officer (AO) completed the assessment of Azure Power Uranus Private Limited for assessment year 2020–21 after making an addition of ₹72,48,011. The Transfer Pricing Officer had directed the AO to examine whether penalty proceedings under Section 270A should be initiated. The AO, however, did not initiate penalty proceedings in the assessment order.
The Principal Commissioner of Income Tax (PCIT) viewed that omission as making the assessment order erroneous and prejudicial to the interests of the Revenue. He therefore invoked his revisionary power under Section 263. The company challenged the revision before the Delhi ITAT.
The question was a narrow one: Can an otherwise completed assessment be revised under Section 263 solely because the AO did not initiate penalty proceedings?
The quantum assessment was not the complaint
The Tribunal first identified what the PCIT was—and was not—seeking to correct. His revision order did not dispute the determination of the company’s assessed income. The grievance concerned only the AO’s failure to initiate penalty under Section 270A.
That distinction mattered because assessment and penalty are separate proceedings. An assessment determines taxable income. Penalty involves a further decision under the applicable penalty provision. The absence of penalty initiation in an assessment order does not, by itself, show that the assessment of income is erroneous.
The company had raised several objections to the PCIT’s order, including that the AO had conducted enquiries and that the PCIT was impermissibly substituting his opinion. The Tribunal did not need to decide those wider issues separately. The limited basis stated in the revision order was enough to dispose of the appeal.
What the High Court decisions say
The Tribunal relied particularly on CIT (Central) v. Rakesh Nain Trivedi, in which the Punjab and Haryana High Court held that a Commissioner cannot use Section 263 to direct an AO to initiate penalty proceedings merely because the AO had omitted to do so while completing an assessment. That judgment followed an established line of decisions treating penalty proceedings as distinct from assessment proceedings.
For the Delhi Tribunal, two decisions of the jurisdictional Delhi High Court were also significant. In Addl. CIT v. J.K. D’s Costa, the High Court held that an AO’s failure to record satisfaction about the leviability of penalty does not vitiate the assessment order. The assessment cannot be labelled erroneous and prejudicial to the Revenue on that ground alone. The Delhi High Court reiterated the separation between assessment and penalty proceedings in CIT v. Nihal Chand Rekyan.
The precedents discussed by the Tribunal concerned earlier penalty provisions, particularly Section 271(1)(c). The omission in Azure Power’s case concerned Section 270A. The Tribunal applied the same principle to the PCIT’s attempt to revise the assessment: the lack of penalty initiation did not provide a ground to revise the quantum order under Section 263.
The order reproduced the discussion in Rakesh Nain Trivedi acknowledging a contrary approach taken by the Madhya Pradesh and Allahabad High Courts. The Punjab and Haryana High Court had expressly declined to follow that approach. The Delhi Tribunal’s conclusion was supported by the Delhi High Court decisions it cited.
The limit of Section 263 in this case
The Tribunal reasoned that if the PCIT could not use Section 263 to direct initiation of penalty proceedings, he could not achieve that result by revising the assessment on the same ground. The Transfer Pricing Officer’s direction to examine penalty initiation did not change the character of the PCIT’s grievance: it remained a complaint about penalty, rather than an identified error in the assessed income.
Accordingly, the Tribunal quashed the PCIT’s Section 263 order and allowed the company’s appeal. The decision did not disturb the assessment addition itself. It decided the validity of the PCIT’s revision founded on non-initiation of penalty.
Author’s comment
The practical lesson is that Section 263 requires an error in the order being revised that is prejudicial to the Revenue. A PCIT cannot treat the assessment order as defective merely because it does not contain a penalty direction, when the assessed income itself is not questioned.
The distinction should be kept precise. This ruling does not decide whether the facts could ever warrant penalty under Section 270A; nor does it provide immunity from a penalty proceeding validly initiated under the law. It holds that revision of the assessment is not the route for curing this particular omission. For professionals reviewing a Section 263 notice, the first enquiry should therefore be: What error has the PCIT actually identified in the assessment order? If the answer is only “the AO did not initiate penalty,” this decision offers a direct challenge to the revision.
Cases Discussed
- CIT (Central), Ludhiana v. Rakesh Nain Trivedi, ITA No. 290 of 2014, dated 29.10.2015 (Punjab & Haryana High Court) — Relied upon for holding that the Commissioner cannot invoke Section 263 to direct initiation of penalty proceedings merely because the AO failed to initiate them while completing assessment.
- CIT v. Subhash Kumar Jain, (2011) 335 ITR 364 (Punjab & Haryana High Court) — Followed the Delhi, Rajasthan, Calcutta and Gauhati High Court line holding that non-initiation of penalty cannot support revision of the assessment under Section 263.
- Addl. CIT v. J.K.D.’Costa, (1982) 133 ITR 7 (Delhi High Court); [1982] 9 Taxman 88 (Delhi) — Held that penalty proceedings are independent of assessment proceedings and failure to record satisfaction regarding penalty does not vitiate the assessment order.
- CIT v. Sudershan Talkies, (1993) 201 ITR 289 (Delhi High Court) — Reiterated the Delhi High Court view that penalty proceedings are separate from assessment proceedings.
- CIT v. Nihal Chand Rekyan, (2000) 242 ITR 45 (Delhi High Court); [2002] 123 Taxman 353 (Delhi) — Followed for holding that the PCIT cannot direct initiation of penalty merely by revising the assessment.
- CIT v. Keshrimal Parasmal, (1986) 157 ITR 484 (Rajasthan High Court) — Cited as following the Delhi High Court approach concerning the separate character of penalty proceedings.
- CIT v. Linotype & Machinery Ltd., (1991) 192 ITR 337 (Calcutta High Court) — Cited as following the principle laid down in J.K.D.’Costa.
- Surendra Prasad Singh and others v. CIT, (1988) 173 ITR 510 (Gauhati High Court) — Cited as supporting the view that penalty proceedings are separate from assessment proceedings.
- Addl. CIT v. Indian Pharmaceuticals, (1980) 123 ITR 874 (Madhya Pradesh High Court) — Contrary approach noticed; the Punjab and Haryana High Court expressly declined to subscribe to this view.
- Addl. CIT v. Kantilal Jain, (1980) 125 ITR 373 (Madhya Pradesh High Court) — Contrary Madhya Pradesh High Court authority noticed and not followed.
- Addl. CWT v. Nathoolal Balaram, (1980) 125 ITR 596 (Madhya Pradesh High Court) — Contrary authority noticed and not followed.
- CIT v. Surendra Prasad Agrawal, (2005) 275 ITR 113 (Allahabad High Court) — Revenue relied upon this contrary authority; the Punjab and Haryana High Court declined to subscribe to its approach.
- CIT v. Jagriti Aggarwal, (2011) 339 ITR 610 (Punjab & Haryana High Court) — Cited by the assessee before the Punjab and Haryana High Court.
- CIT v. Jagtar Singh Chawla, (2013) 215 Taxman 154 (Punjab & Haryana High Court) — Cited by the assessee before the Punjab and Haryana High Court.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. This is appeal in ITA No. 6222/Del/2026 for A.Y.2020-21 arises out of the order by the Ld. Pr. Commissioner of Income Tax, Delhi-1 dated 31-03-2026 [hereinafter referred to as “Ld. Pr. CIT in short”] against the assessment order u/s 143(3)r.w.s.144C(3) the Income Tax Act, 1961(hereinafter referred to as Act) dated 31-10-3-2023 by the Ld. Assessment Unit Income Tax Department (hereinafter referred to as ld. AO).
2. The assessee has raised the following grounds in appeal:
1. That on the facts and in the circumstances of the case and in law, the impugned order dated 31-03-2026 passed by the Principal Commissioner of Income Tax-1 Delhi(“PCIT”) under section 263 of the Income-tax Act, 1961 (“the Act”) revising the assessment order dated 31-10-2023 passed under Section 143(3) read with Sections 144C(3) and 144B of the Act by the Assessment Unit (“AU”) / Assessing Officer(“AO”) is illegal, bad in law, without jurisdiction contrary to the provisions of the Act and liable to be quashed.
2. That on the facts and in the circumstances of the case and in law, the impugned order dated 31-03-2026 passed by the PCIT is illegal, bad in law without jurisdiction, since the assessment order dated 31-10-2023 passed under section 143(3) read with Sections 144C(3) and 144B of the Act itself is illegal, bad in law and barred by time limitation and therefore, the impugned order is liable to be set aside.
3. That on the facts and in the circumstances of the case and in law, the conditions precedent for assumption of jurisdiction under section 263 of the Act were not satisfied in as much as the assessment order dated 31-10-2023 passed under Section 143(3) read with sections 144C(3) and 144B of the Act was neither erroneous except to the extent it is challenged in appeal by the assessee, nor prejudicial to the interest of the Revenue.
4. That the PCIT erred in law and on the facts in ignoring the fact that the assessment order passed under section 143(3) read with sections 144C(3)and 144B of the Act is subject matter of appeal and the impugned order passed u/s 263 in this respect is illegal, bad in law and liable to be set aside.
5.That without prejudice, on the facts and in the circumstances of the case in law, the assessment order dated 31-10-2023 under section 143(3) read with sections 144C(3)and 144B of the Act was passed after detailed enquiries and therefore the same could not have been revised under section 263 of the Act.
6. That on the facts and in the circumstance of the case , the PCIT erred on facts and in law in exercising the jurisdiction under Section 263 of the Act since the same is premised on substitution of opinion which is impressible in the eyes of law.
7. That on the facts and in the circumstance of the case, the PCIT erred on facts and in law in invoking Explanation2(a) and 2(b) to section 263 which is not applicable in the given facts and circumstances without appreciating that the said Explanation cannot change the basic fundamental principle of Section 263 of the Act.
8. That on the facts and in the circumstance of the case, in law the PCIT erred on facts and in law in holding that non-initiation of penalty proceedings under section 270A of the Act in the assessment order dated 31-10-2023 passed under section 143(3) read with sections 144C(3)and 144B of the Act is erroneous and prejudicial to the interest of revenue in terms of Section 263 of the Act.
9. That on the facts and in the circumstance of the case, and in law the PCIT has grossly erred on facts and in law in exercising the jurisdiction u/s 263 of the Act for non-initiation of penalty proceedings under Section 270A of the Act, without appreciating that the same cannot be subject matter of revision u/s 263 of the Act.
10. That on the facts and in the circumstance of the case, the PCIT has erred on facts and in law in that the view taken by the AO in the assessment order qua the issues raised in the impugned order is a plausible view and therefore the impugned order is beyond the scope section 263 of the Act and hence the same is liable to be quashed.
11. That , without prejudice the directions and findings given by the PCIT while passing the impugned order u/s 263 of the Act are illegal, bad in law and without jurisdiction.
12. That on the facts and in circumstances of the case and in law, the impugned order passed under section 263 of the Act is bad in law and liable to be quashed as the replies and submissions furnished by the assessee were not properly appreciated or judiciously considered in violation of the principles of natural justice.
3. The brief facts of the case are that the assessee has filed the return of income for the relevant A.Y. 2020-21 on 05-02-2021 declaring total losses at Rs.1,1,96,22,771/-. Subsequently in assessee’s case assessment was completed u/s 143(3) r.w.s.144C (3) 144B of the Act on 31-10-2023 assessing total losses at Rs.47,14,260/- after making the additions of Rs. 72,48,011/- to returned losses of Rs.1,19,62,271/-. In the order under section 92 CA(3) of the Act, the TPO directed the AO to examine the issue of initiation of penalty u/s 270A of the Act. The assessment order dated 31-10-2023 framed by the ld. AO but no penalty proceedings were initiated. The Ld. Pr. CIT sought to invoke his revision jurisdiction u/s 263 of the Act by treating the order passed by the ld. AO as erroneous in as much as it is prejudicial to the interest of the revenue on the ground that the ld. AO failed to initiate the penalty proceedings u/s 270A92) of the Act. The Ld. Pr. CIT observed that the action of the AO of not initiating the penalty proceeding under relevant provisions of the Act, has resulted in the assessment order passed by AO which is erroneous and prejudicial to the interest of revenue under the ambit of the provisions of section 263 of the Act.
4. Aggrieved by this revision order passed u/s 263 of the Act, the assessee is in appeal before us.
5. At the outset, we find the only order passed by the AO is quantum assessment order u/s 143(3) of the Act dated 31-10-2023. Though the penalty proceedings were not initiated in the said quantum assessment order. We find that the Ld. PCIT does not have grievance in determination of the total income of the assessee in the quantum assessment framed u/s 143(3) r.w.s. 144C(3) of the Act dated 31-10-2023. His only grievance not to initiate the penalty proceedings against the assessee. It is very well settled that penalty proceedings and assessment proceedings are distinct and separate. Moreover, in our considered opinion, the Ld. PCIT by invoking his revision jurisdiction under section 263 of the Act cannot direct the ld. AO to initiate penalty proceedings. This issue is no longer res integra in view of the order of the Hon’ble Punjab and Haryana High Court in the case of CIT(Central), Ludhiana vs. Rakesh Nain Trivedi in ITA No.290 of 2014 dated 29-10-2015. The Hon’ble High Court held as under:-
“1. This appeal has been filed by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 26.3.2014 (Annexure A-III) passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (hereinafter referred to as “the Tribunal”) in ITA No. 300(ASR)/2013 for the assessment year 2008-09, claiming the following substantial question of law:-
“Whether on the facts and in the circumstances of the case, the Hon’ble ITAT was right in law in cancelling the order u/s 263 of the Income Tax Act, 1961 by holding that the order passed by the Assessing Officer is not erroneous and prejudicial to the interest of revenue, on the issue of penalty proceedings u/s 271 (1)(c) of the Income Tax Act, 1961 read with Explanation 5A which had not been initiated by the Assessing Officer during the course of the assessment proceedings on the ground that due date for filing return includes return filed u/s 139(4) of I.T. Act?
2. Briefly stated, the facts necessary for adjudication of the instant appeal as narrated therein may be noticed. The assessee derives income from real estate business. On 11.12.2008, search and seizure operation under Section 132 of the Act was conducted at the premises of the assessee. Notice under Section 153A of the Act was issued to the assessee who filed his return of income on 31.3.2009 for the assessment year 2008-09 at Rs. 78,16,530/-. The Assessing Officer framed the assessment vide order dated 8.12.2010 (Annexure A-I) under Section 153A of the Act accepting the returned income. The Commissioner of Income Tax (Central) (for brevity “the CIT”) vide order dated 12.3.2013 (Annexure A-II) in exercise of powers under Section 263 of the Act set aside the assessment order holding that the same was erroneous and prejudicial to the interest of the revenue. The assessment order was cancelled by the CIT on the ground that i) the commission of Rs. 47,925/- had been paid without deduction of TDS and was not allowable; ii) Penalty under Section 271(1)(c) of the Act had not been initiated; and iii) Penalty under Sections 271A and 271B of the Act had not been initiated. Accordingly, the CIT directed the Assessing Officer to re-frame the order in accordance with the provisions of the Act. Feeling aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal vide order dated 26.3.2014 (Annexure A-III) partly allowed the appeal of the assessee holding that the assessee was not liable to deduct the TDS as his receipt did not exceed Rs. 40 lacs in the earlier year. Further, the Tribunal observed that the CIT cannot direct the Assessing Officer to initiate penalty proceedings under Section 271(1)(c) of the Act and that the penalty proceedings under Sections 271A and 271B of the Act are not related to the assessment and can be initiated at any time and, therefore, the assessment framed is not effected and there is no scope to apply provisions of Section 263 of the Act. Hence the present appeal by the revenue.
3. Learned counsel for the revenue in support of its case has relied upon the judgment of Allahabad High Court in Commissioner of Income Tax v. Surendra Prasad Agrawal (2005) 275 ITR 113 (All). On the other hand, learned counsel for the assessee has placed reliance upon the judgments in Commissioner of Income Tax v. J.K. D’s Costa (1984) 147 ITR (St.) 1 (SC), Commissioner of Income Tax v. Subhash Kumar Jain (2011) 335 ITR 364 (P&H), Additional Commissioner of Income Tax v. J.K.D’ Costs (1982) 133 ITR 7 (Delhi), Commissioner of Income Tax v. Jagriti Aggarwal (2011) 339 ITR 610 (P&H) and Commissioner of Income Tax v. Jagtar Singh Chawla (2013) 215 Taxman 154 (P&H).
4. We have heard learned counsel for the parties.
5. After hearing learned counsel for the parties, we find the issue that arises for consideration of this Court in this appeal is could the CIT in exercise of power under Section 263 of the Act hold the order of the Assessing Officer to be erroneous and prejudicial to the interest of the revenue where the Assessing Officer had failed to initiate penalty proceedings while completing assessment under Section 153A of the Act.
6. It may be noticed that the said issue is no longer res integra. This Court in Commissioner of Income Tax v. Subhash Kumar Jain (2011) 335 ITR 364 agreeing with the view of High Courts of Delhi in Additional CIT v. J.K.D.’Costa (1982) 133 ITR 7 (Del), Commissioner of Income Tax v. Sudershan Talkies (1993) 201 ITR 289 (Del) and Commissioner of Income Tax v. Nihal Chand Rekyan (2000) 242 ITR 45 (Del), Rajasthan in Commissioner of Income Tax v. Keshrimal Parasmal (1986) 157 ITR 484 (Raj), Calcutta in Commissioner of Income Tax v. Linotype & Machinery Ltd. (1991) 192 ITR 337 (Cal) and Gauhati in Surendra Prasad Singh and others v. Commissioner of Income Tax (1988) 173 ITR 510 (Gau.) whereas dissenting with the diametrically opposite approach of Madhya Pradesh High Court in Additional Commissioner of Income Tax v. Indian Pharmaceuticals (1980) 123 ITR 874 (MP), Additional Commissioner of Income Tax v. Kantilal Jain (1980) 125 ITR 373 (MP) and Addl. CWT v. Nathoolal Balaram (1980) 125 ITR 596 (MP) had concluded that where the CIT finds that the Assessing Officer had not initiated penalty proceedings under Section 271(1)(c) of the Act in the assessment order, he cannot direct the Assessing Officer to initiate penalty proceedings under Section 271(1)(c) of the Act in exercise of revisional power under Section 263 of the Act. The relevant observations recorded therein read thus:-
“9. Now adverting to the second limb, it may be noticed that the Delhi High Court in judgment reported in Addl. CIT vs. J.K.D.’Costa (1981) 25 CTR (Del) 224 : (1982) 133 ITR 7 (Del) has held that the CIT cannot pass an order under s. 263 of the Act pertaining to imposition of penalty where the assessment order under s. 143(3) is silent in that respect. The relevant observations recorded are:
“It is well established that proceedings for the levy of a penalty whether under s. 271(1)(a) or under s. 273(b) are proceedings independent of and separate from the assessment proceedings. Though the expression “assessment” is used in the Act with different meanings in different contexts, so far as s. 263 is concerned, it refers to a particular proceeding that is being considered by the Commissioner and it is not possible when the Commissioner is dealing with the assessment proceedings and the assessment order to expand the scope of these proceedings and to view the penalty proceedings also as part of the proceedings which are being sought to be revised by the Commissioner. There is no identity between the assessment proceedings and the penalty proceedings; the latter are separate proceedings, that may, in some cases, follow as a consequence of the assessment proceedings. As the Tribunal has pointed out, though it is usual for the ITO to record in the assessment order that penalty proceedings are being initiated, this is more a matter of convenience than of legal requirement. All that the law requires, so far as the penalty proceedings are concerned, is that they should be initiated in the court of the proceedings for assessment. It is sufficient if there is some record somewhere, even apart from the assessment order itself, that the ITO has recorded his satisfaction that the assessed is guilty of concealment or other default for which penalty action is called for. Indeed, in certain cases it is possible for the ITO to issue a penalty notice or initiate penalty proceedings even long before the assessment is completed though the actual penalty order cannot be passed until the assessment finalised. We, therefore, agree with the view taken by the Tribunal that the penalty proceedings do not form part of the assessment proceedings and that the failure of the ITO to record in the assessment order his satisfaction or the lack of it in regard to the leviability of penalty cannot be said to be a factor vitiating the assessment order in any respect. An assessment cannot be said to be erroneous or prejudicial to the interest of the revenue because of the failure of the ITO to record his opinion about the leviability of penalty in the case.”
10. Special leave petition against the said decision was dismissed by the Apex Court ((1984) 147 ITR (St) 1. The same view was reiterated by the Delhi High Court in CIT vs. Sudershan Talkies (1993) 112 CTR (Del) 165 : (1993) 201 ITR 289 (Del) and followed in CIT vs. Nihal Chand Rekyan (1999) 156 CTR (Del) 59 : (2000) 242 ITR 45 (Del). The Rajasthan High Court in CIT vs. Keshrimal Parasmal (1985) 48 CTR (Raj) 61 : (1986) 157 ITR 1984 (Raj), Gauhati High Court in Surendra Prasad Singh & Ors. vs. CIT (1988) 71 CTR (Gau) 125 : (1988) 173 ITR 510 (Gau) and Calcutta High Court in CIT vs. Linotype & Machinery Ltd. (1991) 192 ITR 337 (Cal) have followed the judgment of Delhi High Court in J.K.D’s Costa’s case (supra).
11. However, Madhya Pradesh High Court in Addl. CIT vs. Indian Pharmaceuticals (1980) 123 ITR 874 (MP) which has been followed by the same High Court in Addl. CIT vs. Kantilal Jain (1980) 125 ITR 373 (MP) and Addl. CWT vs. Nathoolal Balaram (1980) 125 ITR 596 (MP) has adopted diametrically opposite approach.
12. We are in agreement with the view taken by the High Courts of Delhi, Rajasthan, Calcutta and Gauhati, and express our inability to subscribe to the view of Madhya Pradesh High Court.
13. Accordingly, it is held that the initiation of proceedings under s. 263 was not justified. The Tribunal was right in holding that after examining the record of the assessment in exercise of powers under s. 263, where the CIT finds that the AO had not initiated penalty proceedings, he cannot direct the AO to initiate penalty proceedings under s. 271(1)(c) of the Act.”
7. In view of the above, equally we are unable to subscribe to the view adopted by Allahabad High Court in Surendra Prasad Aggarwal’s case (supra) where judgment of Madhya Pradesh High Court in Indian Pharmaceuticals’ case (supra) noticed hereinbefore has been concurred with.
8. Accordingly, it is held that the initiation of proceedings under Section 263 of the Act was not justified and we uphold the order of the Tribunal cancelling the revisional order passed by the CIT. 9. Consequently, the appeal is dismissed.”
6. When the power of the Ld. PCIT in the revision order u/s 263 of the Act is curtailed to even direct the ld. AO to initiate penalty proceedings, obviously the Ld. PCIT could not have any power, as authorized by law, in directing the ld. AO to initiate penalty proceedings under the correct section. The assessee’s case stand in a much better footing than the facts of the case that prevailed before the Hon’ble Jurisdictional High Court referred supra.
7. In the case of Addl. Commissioner of Income Tax v. J.K.D’s Costa [1982]9 taxman 88 (Delhi) the Hon’ble High Court held that the penalty proceedings do not from part of the assessment proceedings and that the failure of the ITO to record in the assessment order his satisfaction or the lack of it in regard to the leviability of penalty cannot be said to be a factor vitiating the assessment order in any respect. An assessment cannot be said to be erroneous or prejudicial to the interest of the revenue because of the failure of the ITO to record his opinion about the leviability of penalty in the case. In the case of Commissioner of Income Tax v. Nihal Chand Rekyan [2002] 123 Taxman 353 (Delhi) the Hon’ble Delhi High Court also held that ld. PCIT cannot direct initiation of penalty proceedings because penalty proceedings are not a part of assessment proceedings.
8. In view of the aforesaid observations and respectfully following the judicial precedent relied upon hereinabove, we have no hesitation in quashing the revision order passed by the Ld PCIT u/s 263 of the Act in the instant case. Accordingly, grounds raised by the assessee are allowed.
9. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 28.09.2026.
