Shri Barfani Dadaji Buildcon Vs PCIT (Central) (ITAT Ahmedabad)
AO Cannot Be Faulted for Failing to Exercise a Power He Never Possessed: Section 263 Revision for Non-Initiation of Penalty u/s 271D Quashed
The Ahmedabad ITAT has held that an assessment order passed before 01.04.2025 cannot be revised u/s 263 merely because the AO failed to initiate penalty proceedings u/s 271D for an alleged violation of Section 269SS. Prior to 01.04.2025, the statutory jurisdiction to impose penalty u/s 271D was vested in the Joint Commissioner and not in the AO. Therefore, the AO’s failure to initiate proceedings which he had no jurisdiction to undertake could not render the assessment order erroneous and prejudicial to the interests of the Revenue.
In the present case, the assessment for AY 2022-23 was completed u/s 143(3) on 23.03.2024 by the ACIT, Central Circle-2(3), Ahmedabad. The PCIT subsequently invoked his revisionary jurisdiction u/s 263 and observed that the AO had failed to initiate penalty proceedings u/s 271D in respect of an alleged contravention of Section 269SS.
The disputed amount of ₹1,70,11,000 had been treated by the AO as undisclosed business income. According to the assessee, once the amount was treated as business income, the same could not simultaneously assume the character of a loan or deposit for invoking Sections 269SS & 271D. The AO had already initiated penalty proceedings u/s 270A in respect of the addition. Nevertheless, the PCIT held that the assessment order was erroneous and prejudicial to the Revenue because penalty proceedings u/s 271D had not been initiated.
The PCIT accordingly set aside the assessment order for the limited purpose of directing the AO to initiate penalty proceedings u/s 271D and take consequential action.
Before the Tribunal, the assessee contended that the very assumption of jurisdiction u/s 263 was invalid. The AO could not have initiated or imposed penalty u/s 271D when the assessment order was passed on 23.03.2024 because, under the law then prevailing, the authority competent to impose such penalty was the Joint Commissioner. The power was conferred upon the AO only with effect from 01.04.2025.
The assessee relied upon the jurisdictional Gujarat High Court decision in Dilip Patel v. PCIT (Central) [2026] 186 taxmann.com 165 (Gujarat). The High Court had examined the scope of Sections 269SS, 271D & 263 and held that, prior to 01.04.2025, the AO had no jurisdiction to impose penalty u/s 271D. Consequently, the Commissioner could not initiate revisionary proceedings on the allegation that the AO had failed to initiate such penalty proceedings.
Section 271D provides for a penalty equal to the amount of loan, deposit or specified sum accepted in contravention of Section 269SS. Under the provision applicable to the year concerned, any penalty u/s 271D was required to be imposed by the Joint Commissioner. The proviso authorising the AO to impose such penalty became operative only from 01.04.2025.
Following the Gujarat High Court, the ITAT observed that the controversy was no longer res integra. The assessment order in the present case was passed on 23.03.2024, which was clearly before 01.04.2025. On that date, the AO did not possess jurisdiction to initiate and impose penalty u/s 271D. Therefore, the failure of the AO to initiate those proceedings could not constitute an error in the assessment order.
For invoking Section 263, both statutory conditions must coexist: the assessment order must be erroneous, and the error must be prejudicial to the interests of the Revenue. Where the alleged error consists of the AO’s failure to exercise a power which the statute had not conferred upon him, the first and foundational requirement itself is absent.
The Tribunal accordingly set aside the order dated 26.03.2026 passed by the PCIT u/s 263 and allowed the assessee’s appeal.
Author’s Comment
The ruling reiterates a simple but significant jurisdictional principle: an AO cannot be blamed for not exercising a jurisdiction that he did not possess on the date of assessment. Section 263 is a corrective power, but it cannot be employed to compel an authority to perform an act which the law then reserved for another statutory authority.
The date of the assessment order becomes crucial. For orders passed before 01.04.2025, the failure of the AO to initiate penalty proceedings u/s 271D cannot, by itself, justify revision u/s 263 because the statutory power under Section 271D(2) was then vested in the Joint Commissioner. The subsequent amendment authorising the AO from 01.04.2025 cannot retrospectively convert an earlier lawful omission into an error.
Interestingly, the assessee had also raised a substantive contention that an amount already assessed as undisclosed business income could not simultaneously be treated as a loan or deposit for invoking Section 269SS. However, the Tribunal did not find it necessary to adjudicate that issue because the revision itself failed on the jurisdictional ground.
The ruling can be summed up in one sentence: Section 263 cannot be used to revise an assessment for the AO’s failure to initiate a penalty which, on the relevant date, only the Joint Commissioner was legally competent to impose.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal has been filed by the Assessee against the order dated 26.03.2026 passed by the Income Tax Department, PCIT (Central), Ahmedabad (hereinafter referred to as ‘Ld. PCIT’ in short), under Section 263 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’ in short) for Assessment Year 2022-23.
2. The Assessee has raised following grounds of Appeal:-
“1. The Learned PCIT (Central), Ahmedabad, erred in law and on the facts in considering the assessment order dated 23.03.2024 passed by the Learned AO under section 143(3) of the Income Tax Act, 1961, as erroneous insofar as it was prejudicial to the interests of the Revenue. It is submitted that in the facts and circumstances of the case, the order passed by the Learned PCIT (Central), Ahmedabad, u/s. 263 of the Income Tax Act, 1961, may please be quashed.
2. The Learned PCIT (Central), Ahmedabad, erred in law and on the facts of the case in assuming jurisdiction under section 263 of the Income-tax Act, 1961, merely on the ground that the Learned AO had not initiated penalty proceedings, whereas such non-initiation does not render the assessment order erroneous insofar as it is prejudicial to the interests of the Revenue, particularly in the absence of any substantive error in the assessment order itself.
3. The Learned PCIT (Central), Ahmedabad, erred in law and on the facts of the case in holding that the addition, which had been treated by the Learned Assessing Officer as undisclosed business income in the assessment order dated 23.03.2024, can take the character of a loan or deposit within the meaning of section 269SS of the Income- tax Act, 1961, and in consequently invoking section 271D to levy penalty of ₹ 1,70,11,000/-. It is submitted that the impugned order passed under section 263 of the Income-tax Act, 1961, on such a wrong interpretation of the provisions of the Act, deserves to be quashed, particularly when the Learned AO, having considered these amounts as undisclosed business income and has already initiated penalty u/s. 270A of the Act
4. The Learned PCIT (Central), Ahmedabad, erred in law and on the facts of the case in invoking section 263 of the Income-tax Act, 1961 by treating the assessment order dated 23.03.2024 as erroneous insofar as it was prejudicial to the interests of the Revenue, even though the Learned Assessing Officer had neither recorded any finding of violation of section 269SS by the Appellant. It is submitted that the impugned order passed under section 263 of the Income-tax Act, 1961, deserves to be quashed.
5. The Learned PCIT (Central), Ahmedabad, erred in law and on the facts of the case in exercising powers under section 263 of the Income-tax Act, 1961 for directing to levy of penalty under section 271D of the Act, although such power is beyond the scope of revisionary jurisdiction under section 263 and, in any case, the statutory jurisdiction to levy penalty under section 271D is discretionary and vested only in the Joint Commissioner of Income Tax and not with the Principal Commissioner of Income Tax. It is therefore submitted that the impugned order passed under section 263 of the Income-tax Act, 1961, deserves to be quashed.
6. The Appellant reserves the right to add, alter or amend any of the grounds of appeal.”
3. The Assessment Order in this case was passed on 23.03.2024 by the Assistant Commissioner of Income Tax, Central Circle-2(3), Ahmedabad, u/s 143(3) of the Act. The said order was subjected to revision u/s 263 of the Act by the Ld. PCIT (Central), Ahmedabad. The Ld. PCIT, vide order dated 26.03.2026, held that the Assessment Order dated 23.03.2024 for Assessment Year 2022-23 is erroneous and prejudicial to the interest of Revenue for failing to initiate penalty u/s 271D of the Act. The operative portion of the impugned order reads as under:
“… In view of all the above, considering the facts of the case as discussed in preceding paragraphs, it is hereby hold that the Assessment Order passed by the A.O. u/s. 143(3) on 23.03.2024 for A.Y. 2022-23 is erroneous and prejudicial to the interest of revenue. Accordingly, the same are set-aside to the file of the A.O. for the limited purpose of initiating penalty proceedings u/s. 271D of the I.T. Act, after following due procedure laid down and to take consequential action. Needless to say that the assessee should be afforded proper opportunity of being heard during the assessment proceedings taken up in consequence of this order. The assessee is at liberty to furnish necessary evidence, if any, to the Assessing Officer during the proceedings being taken up in consequence to this order.”
4. Ld. AR submits that the issue is squarely covered by the judgment of the Hon’ble jurisdictional Gujarat High Court in the case of Dilip Patel vs. PCIT, Central, reported as (2026) 186 taxmann.com 165 (Gujarat).
5. Per contra, the Ld. CIT-DR supported the order of Ld. PCIT.
6. We have heard the parties and perused the material on record. The only controversy in this case is whether the failure of the AO to initiate penalty proceedings u/s 271D of the Act will make the order liable for revision u/s 263 of the Act. As rightly pointed out by the Ld. AR, the said issue is no longer res integra. The Hon’ble jurisdictional Gujarat High Court in the case of Dilip Patel (supra) held as under:
“5.5 With regard to the observations recorded by the Commissioner in the impugned notice regarding failure of the Assessing Officer to initiate proceedings in the Assessment Order in view of the violation of provision of Section269SS of the Act is concerned, we find that the Assessing Officer had no jurisdiction to initiate the proceedings against the petitioner in view of the provision of Section 271D of the Act, which mentions about the imposition of penalty for failure to comply with the provision of Section269SS of the Act. The same reads as under.
“Penalty for failure to comply with the provisions of Section 269SS:
271D. [(1)] If a person takes or accepts any loan or deposit [or specified sum] in contravention of the provisions of Section269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit [or specified sum] so taken or accepted.
(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.”
Provided that any penalty under sub-section(1), on or after 1st day of April, 2025, shall be imposed by the Assessing Officer.”
5.6 A perusal of the provision of Section 271D of the Act reveals that the Assessing Officer is authorized or has the jurisdiction to impose the penalty only on or after 1st Day of April, 2025 and hence, when the Assessment Order was passed on 19.06.2023, the Assessing Officer could not have passed any order or to even initiate proceedings against the assessee for violation of provision of Section269SS of the Act and thereby imposing the penalty under Section 271D of the Act. Thus, the respondent has manifestly erred in not examining the provision of Section269SS read with Section 271D of the Act and, hence, the issuance of the notice for alleged inaction of the Assessing Officer to initiate and impose the penalty under Section 271D of the Act is erroneous and illegal. Hence, the revision proceedings under Section263 of the Act become vulnerable”
7. The aforesaid judgment squarely covers the controversy involved in the present appeal, as the Assessment Order for Assessment Year 2022-23 was passed in this case on 23.03.2024, i.e., prior to 01.04.2025. Respectfully following the above order of the Hon’ble jurisdictional Gujarat High Court, we set aside the impugned order dated 26.03.2026 passed by Ld. PCIT u/s 263 of the Act.
8. In the result, the appeal filed by the Assessee is allowed.
The order pronounced on 10.09.2026.
