The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has quashed a revisional order passed under Section 263 of the Income-tax Act, 1961, holding that proceedings concerning the initiation of penalty under Section 271AAC could not survive after the underlying addition under Section 69 had itself been deleted.
The Division Bench of Amit Shukla (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) observed that the distinction between assessment and penalty proceedings cannot preserve a penal consequence once the income forming the foundation of the proposed penalty has ceased to exist.
The assessment was completed under Section 143(3), read with Section 153C of the Income-tax Act, through an order dated March 30, 2024.
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During the assessment, the Assessing Officer made an addition of ₹1.50 lakh under Section 69 relating to unexplained investments. The amount was also subjected to tax under Section 115BBE, which prescribes a special rate of taxation for certain incomes covered by Sections 68 to 69D.
While completing the assessment, however, the Assessing Officer recorded satisfaction for initiating penalty proceedings under Section 270A and issued a notice under Section 274, read with Section 270A.
Section 270A deals with penalties for under-reporting and misreporting of income. In contrast, Section 271AAC specifically provides for the imposition of a penalty in respect of certain incomes determined under Sections 68 to 69D and taxed under Section 115BBE.
After examining the assessment record, the Assessing Officer issued a corrigendum dated September 15, 2024. The officer stated that Section 270A had been mentioned inadvertently instead of Section 271AAC.
Through the corrigendum, the references to Section 270A in the relevant paragraphs of the assessment order were directed to be read as references to Section 271AAC. The earlier show-cause notice issued under Section 270A was also directed to be treated as a notice issued under Section 271AAC.
Despite this correction, the Principal Commissioner initiated revisional proceedings under Section 263. The PCIT maintained that because the addition had been made under Section 69 and taxed under Section 115BBE, the applicable penalty provision was Section 271AAC and not Section 270A.
According to the PCIT, the Assessing Officer’s invocation of an inapplicable penalty provision demonstrated non-application of mind. The assessment order was consequently considered erroneous and prejudicial to the interests of the Revenue.
The assessee informed the PCIT that the incorrect statutory reference had already been corrected through the corrigendum. Therefore, no error capable of causing prejudice to the Revenue survived when the revisional proceedings were initiated.
It was also brought to the PCIT’s notice that the substantive addition under Section 69 had been challenged before the Tribunal.
The PCIT nevertheless rejected the assessee’s explanation. It was held that a subsequent corrigendum could not cure the defect contained in the original assessment order. The PCIT further observed that the pendency of the quantum appeal did not prevent the exercise of revisional jurisdiction because assessment and penalty proceedings were separate.
On that basis, the PCIT declared the assessment order erroneous and prejudicial to the interests of the Revenue and directed the Assessing Officer to take consequential action under the applicable penalty provision.
Before the ITAT, the assessee argued that the entire basis of the revisional proceedings had disappeared because the Section 69 addition of ₹1.50 lakh had subsequently been deleted by the Tribunal in the quantum appeal.
Reference was made to the Tribunal’s order dated April 20, 2026, through which the additions under Section 69 for Assessment Years 2017-18, 2018-19 and 2019-20 were deleted on merits.
The assessee also pointed out that the Assessing Officer had issued the corrigendum much before the PCIT initiated proceedings under Section 263. Therefore, neither an operative error nor any prejudice to the Revenue existed when the PCIT assumed revisional jurisdiction.
The Revenue argued that the validity of the revision had to be examined with reference to the assessment order as it existed on the date it was passed. Since the Assessing Officer originally invoked Section 270A instead of Section 271AAC, the assessment order allegedly suffered from an incorrect application of law.
It was also submitted that the corrigendum could not retrospectively cure the absence of proper satisfaction in the original assessment order.
The Tribunal noted that the sole foundation of the Section 263 proceedings was the Assessing Officer’s reference to Section 270A instead of Section 271AAC while initiating penalty proceedings concerning the Section 69 addition.
It was undisputed that, much before the issuance of the Section 263 notice, the Assessing Officer had issued a specific corrigendum declaring that Section 270A had been mentioned inadvertently. The penalty proceedings and the notice were consequently directed to be read as having been initiated under Section 271AAC.
The ITAT observed that when the PCIT assumed revisional jurisdiction, the perceived error had already been identified and addressed by the Assessing Officer.
The Tribunal clarified that whether the corrigendum could ultimately support a valid penalty was a separate question. Such an issue would arise only if a penalty were actually imposed and subsequently challenged in accordance with law.
For the limited purpose of Section 263, however, the Tribunal held that prejudice to the Revenue could not be founded upon a defect which, according to the Assessing Officer, had already been corrected before the revisional proceedings began.
The ITAT also took note of the subsequent and more fundamental development in the case—the deletion of the substantive Section 69 addition.
In the quantum proceedings, the Tribunal had found that the additions were based on third-party statements and electronic data without supplying the complete underlying material to the assessee.
The Revenue had also failed to establish a reliable year-wise connection between the material and the additions. No corroborative evidence had been brought on record to substantiate the alleged cash payments.
Consequently, the Tribunal deleted the additions under Section 69, including the ₹1.50 lakh addition made for Assessment Year 2017-18.
The Bench acknowledged that penalty proceedings are ordinarily distinct from assessment proceedings. However, it emphasised that where a penalty is inseparably founded upon a specific addition, the very foundation of the penalty disappears when that addition is deleted.
Section 271AAC applies with reference to income determined under Sections 68 to 69D and taxed under Section 115BBE. Once the Section 69 addition was deleted, no income of the nature contemplated by Section 115BBE remained on which the penalty mechanism under Section 271AAC could operate.
“The distinction between assessment and penalty proceedings cannot preserve a penalty consequence after the very income which was to sustain such consequence has ceased to exist,” the Tribunal observed.
The direction issued by the PCIT was, therefore, left without any surviving foundation. Without deciding the wider question concerning the legal validity of the corrigendum, the ITAT quashed the revisional order passed under Section 263 and allowed the assessee’s appeal.
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