Case Law Details
MC Ponnappa Vs PCIT (ITAT Bangalore)
The Bangalore ITAT quashed the revision order passed under Section 263, holding that the assessment order was neither erroneous nor prejudicial to the interests of Revenue.
On the issue of valuation of property (FMV as on 01.04.2001):
- The AO had examined the sale deed, valuation report of a registered valuer, and supporting documents during assessment.
- The PCIT’s objection that AO failed to refer the matter to DVO u/s 55A was rejected, as such reference is discretionary, not mandatory.
- The Tribunal noted that even as per PCIT, the difference between guidance value (₹1.50 lakh per cent) and adopted value (₹1.55 lakh per cent) was marginal and within reasonable limits.
- PCIT failed to bring any cogent material to prove overvaluation and merely substituted his opinion for that of AO.
Accordingly, the ITAT held that where AO adopts a plausible view after enquiry, Section 263 cannot be invoked merely due to a different opinion.
On the issue of non-initiation of penalty u/s 271(1)(c):
- The Tribunal held that penalty proceedings are independent and separate from assessment proceedings.
- Mere failure to initiate penalty does not render the assessment order erroneous.
- Section 263 cannot be used to compel initiation of penalty.
Final Result:
- Revision order u/s 263 set aside in full
- Assessment order restored
- Appeal allowed in favour of assessee
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The present appeal filed by the assessee is directed against the order of the Learned Pr. Commissioner of Income Tax (Appeal), Bengaluru dated 30-03-2025 for the Assessment Year 2015-16.
2. The effective issue raised by the assessee is that the learned PCIT erred in holding the assessment order as erroneous and prejudicial to the interest of revenue under the provisions of section 263 of the Act.
3. The facts in brief are that the assessee is an individual who did not file return of income in accordance with the provisions of section 139 of the Act for the A.Y. 2015-16. As per the information available with the AO, the income of assessee escaped assessment and accordingly notice under section 148 of the Act was issued after compliance with relevant procedure. In the return filed in response to the notice issued under section 148 of the Act, the assessee declared total income of Rs. 16,62,240/- which comprises following incomes.
– Net profit of Rs. 7,06,000/- on the contract receipt of Rs. 88,25,000/-on account of land development activity carried out on behalf of District Treasury Employee House Building Society.
– Long term capital gain of Rs. 9,44,131/- on sale of jointly held property for Rs. 7 crores in which assessee’s share was of Rs. 1.75 crores.
– Income from other sources of Rs. 12,111/-.
4. During the assessment proceeding under section 147 of the Act, the assessee furnished necessary documents such as copy of sale deed, valuation report, bank statements, Form-26AS and computation sheet etc. The AO after verification of the ITR and documents provided accepted the return income in the assessment order passed under section 147 r.w.s. 143(3) of the Act.
5. Subsequently, the learned PCIT issued notice under section 263 of the Act dated 05-03-2025 proposing to treat the assessment order as erroneous and prejudicial to the interest of the Revenue. The learned PCIT has observed that the assessee has not filed original return of income under section 139(1) of the Act but filed when notice under section 148 was issued declaring income of Rs. 16,62,240/- only. However, the AO failed to initiate penalty proceedings under section 271(1)© of the Act. In reply to the said notice dated 05-03-2025, the assessee objected the initiation of 263 proceeding for not initiation of penalty under section 271(1)(c) of the Act.
6. Thereafter, the learned PCIT issued another notice under section 263 of the Act as on 24-03-2025. The learned PCIT found that property sold during the year was ancestral property inherited by the assessee along with 3 other co-owners. Therefore, the cost of acquisition was taken based on valuation of the property as on 1st April 2001 by the assessee’s valuer vide valuation report dated 22-03-2022. The learned PCIT was of the opinion that the valuation report relied upon by the assessee was prepared much later and was based on certain assumptions without adequate supporting evidence.
6.1 The Ld. PCIT further observed that the AO did not refer the matter to the Departmental Valuation Officer as contemplated under the provisions of the Act, nor was any effort made to verify the correctness of the valuation through third-party enquiries or other reliable sources. It was also noted that the property in question had undergone transfer after a substantial period and the valuation adopted had a direct bearing on the computation of long-term capital gains, which was not properly examined by the AO. Hence, the learned PCIT proposed to hold the assessment order as erroneous and prejudicial to the interest of the Revenue.
6.2 In response to the notice dated 24-03-2025, the assessee submitted that during the course of assessment, the AO had issued notices u/s 142(1) of the Act and specifically called for details relating to the sale of immovable property. In response, the assessee had furnished complete details including copy of sale deed, valuation report obtained from a registered valuer, computation of capital gains, and other supporting documents. The assessee had also filed replies explaining the basis of adoption of FMV as on 01.04.2001. After examining the same, the AO, being satisfied, accepted the returned income. Therefore, it cannot be said that there was lack of enquiry or non-application of mind. The assessee further submitted that the valuation of the property as on 01.04.2001 was supported by a report of a registered valuer, who is a qualified professional empanelled with the department. The AO, after considering such expert report, formed a plausible view and accepted the same. It was argued that as per section 55A of the Act, reference to the valuation officer is discretionary and not mandatory. Where the AO is satisfied with the valuation furnished by the assessee, there is no requirement to make a reference. Hence, non-referral to DVO cannot be treated as an error.
6.3 It was also submitted that the Ld. PCIT has merely substituted his own opinion in place of the AO’s view without pointing out any specific defect in the valuation report or any material to show that the value adopted by the assessee was incorrect. The allegation that the valuation was on the higher side or obtained after many years is based on conjectures and surmises. It was argued that the market value as on 01.04.2001 does not change merely because the valuation is obtained at a later point of time.
6.4 The Ld. AR further contended that for invoking jurisdiction u/s 263, both the conditions i.e. the order being erroneous as well as prejudicial to the interest of the Revenue must be satisfied. In the present case, neither condition is fulfilled. The AO has taken a possible view after due enquiry and therefore, the order cannot be held to be erroneous merely because the Ld. PCIT has a different view.
6.5 Reliance was placed on judicial precedents including the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83, wherein it was held that where two views are possible and the AO has adopted one such view, the order cannot be treated as erroneous. Reliance was also placed on the decision of ITAT Bangalore in India Heritage Foundation 138 ITD 28, wherein it was held that section 263 cannot be invoked in cases of inadequate enquiry when the AO has conducted enquiry and taken a conscious decision.
6.6 It was thus submitted that the proceedings-initiated u/s 263 are not sustainable in law as the AO has exercised due diligence and accepted the valuation based on a valid and reliable expert report. Accordingly, the Ld. PCIT was requested to drop the revision proceedings.
6.7 However, the learned PCIT observed that the assessee had not filed the return of income u/s 139(1) of the Act for the relevant A.Y., despite having entered into a significant transaction of sale of immovable property for a consideration of Rs. 7 crores along with co-owners and earning business income. The return was filed only after initiation of proceedings u/s 147 and issuance of notice u/s 148A, which indicates that the computation of income was an afterthought and not subjected to proper scrutiny at the initial stage.
6.8 The Ld. PCIT further observed that the assessee had adopted FMV as on 01.04.2001 based on a valuation report which determined the value at a significantly higher figure. On examination, it was noticed that the guidance value of the property was much lower, i.e., Rs. 50,000 per cent for residential and Rs. 1,50,000 per cent for commercial purposes, whereas the valuer adopted a rate of Rs. 1,55,000 per cent. This, according to the Ld. PCIT, clearly resulted in overvaluation of the property and consequent reduction of taxable capital gains.
6.9 It was also noted that the valuation report contained inconsistencies and lacked proper basis. The valuer had not provided concrete instances of comparable sales in the locality and had merely stated that the value arrived based on local enquiries. Further, the valuation was carried out after a long gap of about 22 years from the base date and similarly at the time of valuation, the property was no longer in the possession of the assessee for several years, thereby raising serious doubts regarding its reliability.
6.10 The Ld. PCIT held that the AO had accepted the valuation report on face value without conducting independent verification. No reference was made to the DVO u/s 55A of the Act, nor were any third-party enquiries carried out through the Verification Unit to ascertain the correctness of FMV. The assessment order itself records that the AO relied only on the submissions and documents furnished by the assessee without undertaking any independent enquiry.
6.11 It was further observed that the cost of construction adopted in the valuation report was also excessive when compared to CPWD rates applicable for the relevant period, which again indicated inflation in valuation.
6.12 On the issue of penalty, the Ld. PCIT noted that despite the assessee having failed to file return within the due date and having prima facie concealed income, the AO did not initiate penalty proceedings u/s 271(1)(c) and 271F of the Act. Such omission was held to be a clear case of non-application of mind, rendering the assessment order erroneous and prejudicial to the interest of the Revenue.
6.13 Relying on the decision of the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. vs. CIT(supra), the Ld. PCIT held that failure of the AO to make necessary enquiries, to verify the correctness of valuation, and initiate penalty proceedings constitutes an error which has resulted in prejudice to the Revenue. Accordingly, the Ld. PCIT concluded that the assessment order passed u/s 147 r.w.s. 144B of the Act is erroneous in so far as it is prejudicial to the interest of the Revenue and set aside the same with a direction to the AO to make proper enquiries, ascertain the correct FMV of the property, and re-compute the income after providing due opportunity to the assessee.
7. Being aggrieved by the order of the learned PCIT, the assessee is in appeal before us.
8. The learned AR before us filed submission of various dated along the relevant annexures & supporting document. Inter-alia, the learned AR contended that the property sold was a commercial property. The impugned property was leased out since 28th March 1984 till year 2003, to the hotel called Bombay Zenith Hotel which is evident from lease agreement entered into between assessee’s mother and hotel proprietor. From year 2003 to 2007 the property was rented out to Ex-serviceman Contributory Health Scheme, Dept of ESW, ministry of defence. Hence the impugned property was commercial property.
8.1 The learned PCIT itself has observed that the guidance value of the commercial property per cent was of Rs. 1,50,000.00 only. Hence considering the guidance value of Rs. 1,50,000/-, the value adopted by the valuer at Rs. 1,55,000/- is not on higher side as alleged by the learned PCIT. As such the difference was less than 10% only.
9. On the other hand, the learned DR supported the order of the learned PCIT and submitted that the AO failed to conduct proper enquiry regarding the valuation adopted as on 01.04.2001. It was argued that the valuation report relied upon by the assessee was prepared much later and lacked supporting comparable instances. The AO accepted the same without verification or reference to the DVO, which renders the order erroneous and prejudicial to the interest of the Revenue. The learned DR further contended that failure to initiate penalty proceedings also reflects non-application of mind. Accordingly, the order passed under section 263 was justified.
10. We have heard the rival contention of both the parties and carefully considered the materials available on record. At the outset, we note that the learned PCIT observed that the assessment order is erroneous on two aspects. First being non proper varication of valuation of the property sold during the year as 1st April 2001 for computing index cost of acquisition. The second aspect is that the AO erred in not initiating the penalty proceeding under section 271(1)(c) of the Act.
10.1 First, we proceed to deal with the issue of verification of valuation report. At the outset, it is an undisputed fact that during the course of assessment proceedings, the AO had called for details in respect of the sale of immovable property and computation of capital gains. In response, the assessee furnished the sale deed, valuation report of a registered valuer, computation of income and other supporting evidence. The AO, after examining these documents, accepted the computation of capital gains. Thus, it cannot be said that the AO has passed the order without any enquiry.
10.2 The basis for invoking jurisdiction by the Ld. PCIT is that the AO did not refer the matter to the DVO u/s 55A and accepted the valuation report without independent verification. In our considered view, such reasoning is not sufficient to invoke section 263 of the Act. The reference to DVO u/s 55A is discretionary in nature. Where the AO is satisfied with the valuation furnished by the assessee, he is not bound to make such reference. Therefore, non-reference to DVO, by itself, cannot render the assessment order erroneous.
10.3 Further, the Ld. PCIT has alleged that the valuation adopted by the assessee was on the higher side. However, from the record, it is evident that even as per the Ld. PCIT, the guidance value for commercial property was Rs. 1,50,000 per cent, whereas the valuer has adopted Rs. 1,55,000 per cent. The difference is marginal and within a reasonable range. No material has been brought on record by the Ld. PCIT to demonstrate that the value adopted by the assessee is factually incorrect or excessive.
10.4 It is also noticed that the Ld. PCIT has proceeded on general observations such as valuation being obtained after several years, absence of comparable instances, etc. These observations are based on suspicion and do not establish that the view taken by the AO is unsustainable in law. It is settled law that for invoking section 263 of the Act, the order of the AO must be both erroneous and prejudicial to the interest of the Revenue. Where the AO has taken a plausible view after examining the material on record, the same cannot be revised merely because the Ld. PCIT holds a different opinion. This principle has been laid by the Hon’ble Supreme court in the landmark judgment in the case of Malabar Industrial Co. Ltd (supra).
10.5 In the present case, the AO has accepted the valuation report of a registered valuer, which is a recognised method under the Act. The Ld. PCIT has not brought any cogent evidence to dislodge the correctness of such valuation. Therefore, the action of the Ld. PCIT amounts to substituting his opinion for that of the AO, which is not permissible u/s 263 of the Act.
10.6 Accordingly, we hold that the assessment order cannot be treated as erroneous and prejudicial to the interest of the Revenue on the issue of valuation of cost of acquisition. The revisionary order passed u/s 263 of the Act on this issue is liable to be quashed.
10.7 Coming to the next issue i.e. non-initiation of penalty under section 271(1)(c) of the Act. On this issue, the Ld. PCIT has held that the AO failed to initiate penalty proceedings despite the assessee did not file return u/s 139(1) of the Act and therefore the order is erroneous and prejudicial to the interest of the Revenue.
10.8 In our considered view the initiation of penalty proceedings is a separate and independent proceeding. The AO, while completing the assessment, has to form a satisfaction based on facts whether the case warrants initiation of penalty. Such satisfaction is subjective and depends upon appreciation of facts and explanations furnished by the assessee.
10.9 In the present case, the assessee has filed return in response to notice issued u/s 148 of the Act and the income has been assessed accordingly. There is nothing on record to show that the AO has ignored any material or failed to consider relevant facts while not initiating penalty. The mere non-initiation of penalty proceedings cannot be said to render the assessment order erroneous.
10.10 It is well settled that section 263 cannot be invoked for directing the AO to initiate penalty proceedings, as penalty proceedings are distinct from assessment proceedings. The Ld. PCIT has not demonstrated how non-initiation of penalty has resulted in an error in the assessment order itself. The requirement of section 263 is that the assessment order must be erroneous. Omission to initiate penalty does not affect the correctness of income assessed. In holding so we draw support and guidance from the judgment of Hon’ble Delhi High Court in the case of ACIT vs. J.K.D Costa reported in 133 ITR 7 wherein it was held as under:
Though the expression “assessment” is used in the Act with different meaning in different contexts, so far as section 263 is concerned, it refers to a particular proceedings 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 proceeding also as part of the proceedings which are being sought to be revised by the Commissioner. Therefore, penalty proceedings do not form part of the assessment proceedings and 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. Hence, an assessment cannot be said to be erroneous or prejudicial to the interests of the revenue because of the failure of the ITO to record his opinion about the leviability of the penalty in the case.
10.11 Further, whether penalty is leviable or not depends on various factors such as bona fide explanation, disclosure of facts, and surrounding circumstances, which can only be examined in independent penalty proceedings. Therefore, directing revision on this ground is not sustainable.
10.12 Accordingly, we hold that the Ld. PCIT was not justified in invoking section 263 of the Act on the issue of non-initiation of penalty proceedings. The revisionary order on this ground is also liable to be set aside. In view of the above findings, we hold that the order passed by the Ld. PCIT u/s 263 of the Act is not sustainable on both the issues, namely valuation of cost of acquisition and non-initiation of penalty proceedings. The same is hereby quashed and the assessment order passed by the AO is restored. Hence, the ground of appeal of the assessee is allowed.
11. In the result, the appeal of the assessee is allowed.
Order pronounced in court on 15th day of April, 2026
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