The Assessee individual filed his return of income for the AY 2017-18. Scrutiny assessment proceedings were initiated for verification of cash deposits during demonetization period and mismatching receipts. The assessment was completed u/s 143(3) by making additions toward interest income received on fixed deposits from IOB & SBI. In the assessment order, the AO had discussed the issue of cash deposits during demonetization period and also interest received on fixed deposits in light of various evidence filed by Assessee. The AO also issued a show cause notice u/s 274 r.w.s 270A seeking to initiate penalty proceedings. However, the same was dropped after considering the relevant submissions of the Assessee. Subsequently, revisionary proceedings were undertaken and notice u/s 263 was issued to Assessee on two grounds viz. (i) the assessment order passed by AO is erroneous in so far as it is prejudicial to the Revenue as the AO had initiated penalty proceedings u/s 270A mechanically without recording satisfaction as required under the law;(ii) the AO completed the assessment without carrying out necessary enquiries he ought to have w.r.t the source of income for deposits made with IOB & SBI which rendered the assessment order to be erroneous as it was prejudicial to the interest of Revenue.

The Hon’ble Tribunal observed that before initiating revision proceedings u/s 263 of the Act, the PCIT must satisfy from the records that an erroneous order passed by the AO caused prejudice to the interest of the Revenue. The Tribunal quashed the order u/s 263 on the following grounds (i) it can be ascertained from the penalty show cause notice issued by AO that the penalty proceedings were initiated with proper satisfaction of the AO; (ii) the very purpose of scrutiny assessment was to verify the interest income, which was verified by the AO during the course of assessment proceedings. Thus, it is clear that the issue of fixed deposits with the banks was within the knowledge of the AO. Although the AO specifically did not discuss the issue of source of fixed deposits, he had considered the submission of the Assessee regarding source of the fixed deposits and accepted the same. (AY. 2017-18)