Noninitiation of penalty after unexplained income assessment under sections 69/69A; revision u/s 263 confirms need for penalty inquiry

Assessment determined unexplained income and investments under the Act but the assessing officer made no prima facie inquiry into compliance with penal provisions or whether penalty proceedings should be initiated. The Tribunal held that the assessing officer must conduct at least a preliminary inquiry and verification when unexplained income is assessed to decide whether initiation of penalty proceedings is warranted; absence of any such inquiry renders the assessment erroneous and prejudicial to revenue. On that basis the revision of the assessment was upheld and the impugned assessment order was set aside, decision against the taxpayer.

---

---

Issues: Whether the Principal Commissioner's revision under section 263 setting aside the assessment order dated 31.03.2023 is valid insofar as the Assessing Officer failed to record satisfaction/initiate proceedings under section 271AAC(1) after deeming surrendered amounts to be income under sections 69/69A and taxing under section 115BBE.

Analysis: The Assessing Officer's assessment recorded deemed income arising from surrendered amounts discovered during survey and applied section 115BBE in computing tax. The revision assessed whether the assessment order was erroneous and prejudicial to the interests of revenue because there was no record of inquiry or satisfaction regarding initiation of penalty under section 271AAC(1). Authorities and competing High Court views on whether non-initiation of penalty during assessment renders an order erroneous were considered. The jurisdictional position and precedent of the jurisdictional High Court were applied to determine whether, given the admitted surrender and deemed income, the absence of any prima facie inquiry or recording about penalty initiation amounted to an error prejudicial to revenue.

Conclusion: The revision under section 263 is valid; the assessment order is erroneous and prejudicial to the interests of the revenue to the extent that the Assessing Officer did not make any prima facie inquiry or record satisfaction regarding initiation of penalty under section 271AAC(1). The Assessing Officer is to reframe the assessment de novo to that extent.

---