Revision under section 263 and penalty under section 271AAC: AO's discretion on penalty upheld, revision quashed.

Revision under section 263 challenged the non-initiation of penalty proceedings for income surrendered during a survey; tribunal reasoned that penalty under the relevant provision is discretionary ("may direct") and Ao's choice not to impose penalty was not an erroneous order prejudicial to revenue. The tribunal applied the Malabar Industrial precedent that loss of revenue alone does not establish an erroneous order and that where two reasonable views exist the AO's view cannot be set aside as unsustainable in law; consequence: the revision was quashed and the assessee's appeal allowed.

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Issues: (i) Whether the Principal Commissioner of Income-Tax rightly invoked revisionary jurisdiction under section 263 to set aside the Assessing Officer's assessment for failure to initiate penalty proceedings under section 271AAC(1) in respect of surrendered income during survey.

Analysis: Section 271AAC(1) provides that the Assessing Officer or Commissioner (Appeals) "may" direct imposition of penalty in respect of income covered by specified sections and clause (i) of subsection (1) of section 115BBE, indicating exercise of discretion rather than a mandatory duty. The question whether an assessment order is "erroneous and prejudicial to the interests of the revenue" under section 263 must be assessed in light of whether the AO's course was impermissible or legally unsustainable. The principle that a choice of one of the courses permissible in law, even if resulting in loss of revenue, does not render an order erroneous was applied. The Supreme Court's guidance in Malabar Industrial Co. Ltd. establishes that differing but legally sustainable views taken by the AO do not make the order erroneous under section 263. Applying these legal tests, the non-initiation of penalty under a provision framed in discretionary terms cannot be treated as an error rendering the assessment prejudicial to revenue where the AO acted within permissible legal discretion.

Conclusion: The invocation of revisionary jurisdiction under section 263 to set aside the AO's order solely because AO did not initiate penalty proceedings under section 271AAC(1) was incorrect. The revision order is quashed and the AO's assessment order is restored; appeal allowed in favour of the assessee.

Ratio Decidendi: Where a statutory provision confers discretion to impose penalty, the Assessing Officer's lawful exercise of that discretion, including non-initiation of penalty, does not render the assessment order "erroneous and prejudicial to the interests of the revenue" for purposes of section 263.

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