Revision under section 263 cannot rest on failure to initiate penalty proceedings when the assessment has already attained finality.

Non-initiation of penalty proceedings under section 271(1)(c) by itself did not make the assessment order erroneous or prejudicial to the interests of the Revenue for purposes of section 263. Where the addition to income had already attained finality, the Commissioner could not invoke revisionary jurisdiction merely to direct initiation of penalty proceedings. The Madras High Court held that such omission did not confer jurisdiction under section 263, and the reference was answered in favour of the assessee and against the Revenue.

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Issues: Whether, for the assessment year 1984-85, the Commissioner could invoke revisionary jurisdiction under section 263 of the Income-tax Act, 1961, on the ground that penalty proceedings under section 271(1)(c) had not been initiated, and whether such non-initiation rendered the assessment order erroneous or prejudicial to the interests of the Revenue.

Analysis: The assessment had already attained finality on the question of addition to income. The legal issue was whether omission to initiate penalty proceedings could itself justify revision under section 263. It was held, following the view that failure of the assessing authority to initiate penalty proceedings does not confer jurisdiction on the Commissioner to revise the assessment and direct initiation of such proceedings, that the revision was unsustainable.

Conclusion: The reference was answered in favour of the assessee and against the Revenue. The Commissioner was not justified in assuming jurisdiction under section 263 on the stated ground.

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