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cit v. Sri Surendra Prasad Agrawal - INCOME TAX REFERENCE No. 148 of 1984  RD-AH 710 (1 September 2004)
I.T.R. No. 148 of 1984
Commissioner of Income Tax (Central) Kanpur................Applicant
Sri Surendra Prasad Agrawal, Allahabad .......................Respondent
Hon'ble R.K.Agrawal, J.
Hon'ble K.N.Ojha, J.
( Delivered by R.K.Agrawal, J.)
The Income Tax Appellate Tribunal, Allahabad has referred the following questions of law under Section 256(1) of the Income Tax Act, 1961,hereinafter referred to as the Act, for opinion to this Court:
1. Whether on the facts and circumstances of the case the Tribunal was correct in holding that the assessment order passed by the I.T.O. without initiating penalty proceeding u/s 273(C) for committing breach of section 212 (3A) by the assessee, was not erroneous and prejudicial to the interests of the revenue within the meaning of section 263 of the I.T.Act, 1961 ?
2. Whether on the facts and circumstances of the case, the Tribunal was correct in holding that the C.I.T. exceeded the powers vested in him under Section 263 in cancellation of the entire assessment order to enable the Department to initiate penalty proceeding, while upholding the order of the C.I.T. under Section 263 of the Income Tax Act, regarding direction to the I.T.O. to charge interest u/s 217 (1A) of the Income Tax Act ?
Briefly stated the facts giving rise to the present Reference are as follows :-
The Reference relates to the assessment year 1977-78. The respondent is assessed to income tax as an individual. For the assessment year 1977-78 a notice under Section 210 was issued by the Income Tax Officer on 18.11.1976 calling upon the respondent to pay advance tax of Rs. 1153/- during the financial year 1976-77. The respondent, however, paid a sum of Rs. 600/- only and also did not file any estimate of advance tax as required by section 212 of the Act. He had filed his return showing an income of Rs. 14870/-. However, the income was assessed at Rs. 45140/-. While passing the assessment order the Income Tax Officer omitted to charge interest under Section 217 (1A) and to initiate penalty proceedings under Section 273 (C) of the Act.
The Commissioner of Income Tax on examination of the assessment record was of the opinion that the Assessing Officer's omission to charge interest and initiate penalty proceedings was erroneous and was prejudicial to the interest of the Revenue. After giving notice and opportunity of hearing, the Commissioner in exercise of powers under Section 263 of the Act cancelled the assessment order and directed the Income Tax Officer to reframe the same in accordance with law.
Feeling aggrieved by the order passed by the Commissioner of Income Tax, the respondent preferred an appeal before the Income Tax Appellate Tribunal. The Tribunal relying upon a decision of this Court in the case of Addl. Commissioner of Income Tax Vs. Saraiya Distillery (1978) 115 ITR 34 had held that the Commissioner of Income Tax could revise the order of the Income Tax Officer in respect of not charging interest under Section 217 (1A) of the Act. It however held that the Commissioner of Income Tax had no jurisdiction to cancel the assessment with a view to initiate penalty proceedings. The Tribunal consequently allowed the appeal in part .
We have heard Shri A.N.Mahajan, the learned Standing Counsel for the Revenue and Shri Rishi Raj Kapoor, learned counsel for the respondent.
The learned counsel for the Revenue submitted that the Tribunal was not justified in holding that the Commissioner of Income Tax could not have assumed jurisdiction under Section 263 of the Act in a case in which there was no order passed by the Income Tax Officer under the Act in as much as omission to initiate penalty proceedings while passing the assessment order was erroneous as also prejudicial to the interest of the Revenue. He further submitted that the Commissioner of Income Tax has remanded the matter and if the order was erroneous and prejudicial on two points, the Commissioner had the power to remand the matter and direct for initiation of penalty proceedings also. He relied upon the following decisions :
1. Additional Commissioner of Income Tax Vs. Saraiya Distillery (1978) 115 ITR 34 (Alld)
2. Malabar Industrial Co.Ltd. Vs. Commissioner of Income Tax (2000) 243 ITR 83 S.C.
Shri R.R.Kapoor learned counsel for the respondent submitted that omission to initiate penalty proceedings under Section 273 (1) of the Act by the Income Tax Officer while passing the assessment order did not amount to an order which could be revised by the Commissioner of Income Tax under Section 263 of the Act. While supporting the decision of the Tribunal he relied upon the following decisions :-
1. Additional Commissioner of Income Tax Delhi -II Vs. J.K. D'Costa, (1982) 133 ITR 7 (Delhi)
2. Additional Commissioner of Income Tax Vs. Achal Kumar Jain ( 1983) 142 ITR 606 (Delhi)
3. Commissioner of Income Tax Vs. Nihal Chand Rekyan (2000) 242 ITR 45 (Delhi)
Having heard the learned counsel for the parties we find that the Delhi High Court in the case of J.K. D'Costa, (supra) has held that the assessment cannot be said to be erroneous or prejudicial to the interest of the revenue because of the failure of the Income Tax Officer to record his opinion about the leviability of penalty in the case. It has held as follows:
"The only question before us is whether the Tribunal was right in revoking the order of the Addl. Commissioner in so far as it pertains to the question of penalties under ss. 271(1)(a) and 273(b). Here, we find ourselves in complete agreement with the view taken by the Tribunal. It is well established that proceedings for the levy of a penalty whether under s. 271(1)(a) or under s. 273(b) are proceedings independent of and separate from the assessment proceedings. Though the expression "assessment" is used in the Act with different meanings in different contexts, so far as s.263 is concerned, it refers to a particular proceeding that is being considered by the Commissioner and it is not possible when the Commissioner is dealing with the assessment proceedings and the assessment order to expand the scope of these proceedings and to view the penalty proceedings also as part of the proceedings which are being sought to be revised by the Commissioner. There is no identity between the assessment proceedings and the penalty proceedings; the latter are separate proceedings, that may, in some cases, follow as a consequence of the assessment proceedings . As the Tribunal has pointed out, though it is usual for the ITO to record in the assessment order that penalty proceedings are being initiated, this is more a matter of convenience than of legal requirement. All that the law requires, so far as the penalty proceedings are concerned, is that they should be initiated in the course of the proceedings for assessment. It is sufficient if there is some record somewhere, even apart from the assessment order itself, that the ITO has recorded his satisfaction that the assessee is guilty of concealment or other default for which penalty action is called for. Indeed, in certain cases it is possible for the ITO to issue a penalty notice or initiate penalty proceedings even long before the assessment is completed though the actual penalty order cannot be passed until the assessment is finalized. We, therefore, agree with the view taken by the Tribunal that the penalty proceedings do not form part of the assessment proceedings and that the failure of the ITO to record in the assessment order his satisfaction or the lack of it in regard to the leviability of penalty cannot be said to be a factor vitiating the assessment order in any respect. An assessment cannot be said to be erroneous or prejudicial to the interest of the revenue because of the failure of the ITO to record his opinion about the leviability of penalty in the case."
The aforesaid decision has been consistently followed by the Delhi High Court in the cases of A.K.Jain (supra), P.C.Puri Vs. Commissioner of Income Tax Delhi (II) (1985) 151 ITR 584, Addl. Commissioner of Income Tax Vs. Precision Metal Works and others (1985) 156 ITR 693, Commissioner of Wealth Tax Vs. A.N.Sarwaria ( 1986) 161 ITR 694, Addl. Commissioner of Income Tax Vs. Sudarshan Talkies (1993) 2000 ITR 153 and (1993) 201 ITR 289 AND Commissioner of Income Tax Vs. Nihal Chand Rekyan (2000) 242 ITR 45.
Similar view has been taken by the Rajasthan High Court in the case of Commissioner of Income Tax Vs. Kesari Lal Paras Lal (1986) 157 ITR 484, Gauhati High Court in the case of Surendra Prasad Singh and others Vs. Commissioner of Income Tax (1988) 173 ITR 510, Calcutta High Court in the case of Commissioner of Income Tax Vs. Linotype and Machinery Ltd. (1991) 192 ITR 337 and Madra High Court in the case of Commissioner of Income Tax Vs. Shri R.K.Swami (2002) 254 ITR 158.
On the other hand the Madhya Pradesh High Court has taken a contrary view in the case of Addl. Commissioner of Income Tax Vs. Indian Pharmaceuticals ( 1980) 123 ITR 875, Addl. Commissioner of Income Tax M.P. Vs. Kanti Lal Jain (1980) 125 ITR 373, Addl. Commissioner of Income Tax, Bhopal Vs. Natthu Lal Bala Ram (1980) 125 ITR 596 and Commissioner of Income Tax M.P. Vs. Narpat Lal (1981) 128 ITR 77.
This Court in the case of Saraiya Distillery (supra) has held that an order can be said to be erroneous either when it does not decide a point or record a finding on an issue which ought to have been done or decides it wrongly. In the aforesaid case the Assessing Officer had not charged interest while passing the assessment order. This Court following the decision of Kerala High Court in the case of Commissioner of Income Tax Vs. Cochin Malabar estates Ltd. (1974) 97 ITR 466 and Calcutta High Court in the case of Singho Mica Mining Co.Ltd. Vs. Commissioner of Income Tax (1978) 111 ITR 231 has held that the order passed by the ITO being prejudicial to the interest of the revenue, the Additional Commissioner had jurisdiction under Section 263 to pass the order. The Madhya Pradesh High Court in the case of Indian Pharmaceuticals after referring to the decision of the Apex Court in the case of C.A.Abraham Vs. ITO (1961) 41 ITR 425 and Commissioner of Income Tax Vs. Bheekha Bhai Dada Bhai , (1961) 42 ITR 123 has held that the assessment does not mean only computation of income but consideration of all facts including the liability for penalty that may attract the provisions contained in Section 271 (1)(a) of the Act. It has further held that if in any proceeding for assessment the Income Tax Officer fails to take notice of the facts attracting the provisions contained under Section 271 (1) (a) of the Act, it could not be said that his failure to take notice of the facts which were before him attracting the provisions of Section 271 (1)(a) of the Act does not amount to an error prejudicial to the interest of the Revenue. It concluded that if therefore the ITO during the pendency of the proceedings has omitted to take notice of facts attracting section 271 (1)(a) of the Act during the pendency of the proceedings which ultimately ended in an order of assessment , the order would be erroneous and in this view of the matter, the Commissioner was right in exercising jurisdiction conferred on him under Section 263 of the Act. The other decision of the M.P.High Court has followed its earlier decision in the case of Indian Pharmaceutical (supra).The Delhi High Court in the case of A.K.Jain (supra) had considered the decision of the Madhya Pradesh High Court in the case of Indian Pharmaceuticals, Shri Kanti Lal Jain, Nathu Lal Balaram and Narain Singh Malkhan Singh and while disagreeing has held as follows :
"On a cursory examination, it appeared to us that the view of the Madhya Pradesh High Court as indicated in the abovementioned decisions is correct, but on closer scrutiny we respectfully disagree with the same. In any case, the matter is not res integra as far as this court is concerned. In Addl. CIT V. J.K.D'Costa, Income-tax Reference No.82 of 1974, disposed of by us on 27th April, 1981--reported in  133 ITR 7, we held on similar facts that the Commissioner could not pass an order pertaining to penalty under s. 263 of the Act. We held that the penalty proceedings do not form part of the assessment proceedings . Further, the failure of the ITO to record his satisfaction or the lack of it in the assessment order, with regard to the leviability of penalty cannot be a factor vitiating the assessment orders."
The other High Courts namely Rajasthan, Gauhati, Calcutta and Madras High Court have followed the view taken by the Delhi High Court in the case of J.K. D'Costa and A.K.Jain . We also find that the Hon'ble Supreme Court had dismissed the Special Leave Petition filed by the Revenue against the decision of the Delhi High Court in J.K. D'Costa [(1984) 147 ITR (St.1)].
So far as the dismissal of Special Leave Petition by the Hon'ble Supreme Court is concerned it may mentioned here that the nature and the jurisdiction exercised by the Hon'ble Supreme Court under Article 136 of the Constitution of India came up for consideration before the Apex Court in the case of Kun-Hayammed and others v. State of Kerala and others, reported in AIR 2000 Supreme Court 2587. The Hon'ble Supreme Court has held as follows :
" 13. The appellate jurisdiction exercised by the Supreme Court is conferred by Articles 132 to 136 of the Constitution. Articles 132, 133 and 134 provide when an appeal thereunder would lie and when not. Article 136 of the Constitution is a special jurisdiction conferred on the Supreme Court which is sweeping in its nature. It is a residuary power in the sense that it confers an appellate jurisdiction on the Supreme Court subject to the special leave being granted in such matters as may not be covered by the preceding articles. It is an overriding provision conferring a special jurisdiction providing for invoking of the appellate jurisdiction of Supreme Court not fettered by the sweep of preceding articles. Article 136 opens with a non-obstante clause and conveys a message that even in the field covered by the preceding articles, jurisdiction conferred by Articles 136 is available to be exercised in an appropriate case. It is an untrammeled reservoir of power incapable of being confined to definitional bounds the discretion conferred on the Supreme Court being subjected to only one limitation, that is, the wisdom and good sense or sense of justice of the Judges. No right of appeal is conferred upon any party, only a discretion is vested in Supreme Court to interfere by granting leave to an applicant to enter in its appellate jurisdiction not open otherwise and as of right.
The exercise of jurisdiction conferred on this Court by Article 136 of the Constitution consists of two steps: (i) granting special leave to appeal and (ii) hearing the appeal. This distinction is clearly demonstrated by the provision of Order XVI of the Supreme Court Rules framed in exercise of the power conferred by Article 145 of the Constitution. Under Rule 4, the petition seeking special leave to appeal filed before the Supreme Court under Article 136 of the Constitution shall be in form No. 28. No separate application for interim relief need be filed, which can be incorporated in the petition itself. If notice is ordered on the Special Leave Petition, the petitioner should take steps to serve the notice on the respondent. The petition shall be accompanied by a certified copy of the judgment and order appealed from and an affidavit in support of the statement of facts contained in the petition. Under Rule 10 the petition for grant of special leave shall be put up for hearing ex-parte unless there be a caveat. The Court if it thinks fit, may direct issue of notice to the respondent and adjourn the hearing of the petition. Under Rule 13, the respondent to whom a notice in Special Leave Petition is issued or who had filed a caveat, shall be entitled to oppose the grant of leave of interim orders without filing any written objections. He shall also be at liberty to file his objections only by setting out the grounds in opposition to the questions of law or grounds set out in the S.L.P. On hearing the Court may refuse the leave and dismiss the petition for seeking special leave to appeal either ex parte or after issuing notice to the opposite party. Under Rule 11. on the grant of special leave, the petition for special leave shall, subject to the payment of Additional Court fee, if any, be treated as the petition of appeal and it shall be registered and numbered as such. The appeal shall then be set down for hearing in accordance with the procedure laid down thereafter. Thus, a petition seeking grant of special leave to appeal and the appeal itself, though both dealt with by Article 136 of the Constitution are two clearly distinct stages. In our opinion the legal position which emerges is as under :
(1) While hearing the petition for special leave to appeal, the Court is called upon to see whether the petitioner should be granted such leave or not. While hearing such petition, the Court is not exercising its appellate jurisdiction ; it is merely exercising its discretionary jurisdiction to grant or not to grant leave to appeal. The petitioner is still outside the gate of entry though aspiring to enter the appellate arena to Supreme Court. Whether he enters or not would depend on the fate of his petition for special leave:
(2) If the petition seeking grant of leave to appeal is dismissed. It is an expression of opinion by the Court that a case for invoking appellate jurisdiction of the Court was not made out :
(3) If leave to appeal is granted the appellate jurisdiction of the Court stands invoked; the gate for entry in appellate arena is opened. The petitioner is in and the respondent may also be called upon to face him, though in an appropriate case, in spite of having granted leave to appeal, the Court may dismiss the appeal without notifying the respondent ;
(4) In spite of a petition for special leave to appeal having been filed, the judgment, decree or order against which leave to appeal has been sought for continues to be final, effective and binding as between the parties. Once leave to appeal has been granted, the finality of the judgment, decree or order appealed against is put in jeopardy though it continues to be binding and effective between the parties unless it is a nullity or unless the Court may pass a specific order staying or suspending the operation or execution of the judgment, decree or order under challenge. "
In the case of Saurashtra Oil Mills Association, Gujrat Vs. State of Gujrat (2002)3 SCC 220 the Apex Court has held that repeatedly it has been held that dismissal of Special Leave Petition without speaking order would only mean that the Court was not inclined to exercise its discretion in granting leave to file the appeal. It does not attract the doctrine of merger and the view expressed in the impugned order does not become the view of this court. The dismissal of the special leave petition by a non-speaking order would remain a dismissal simpliciter in which permission to file the appeal to this Court is not granted. This may be because of various reasons. It would not mean to be the declaration of law by this Court. In a recent judgment of a three-Member Bench in Kunhayammed v. State of Kerala after exhaustive consideration of the entire case law this Court has reaffirmed this position.
The Apex Court in the case of Justice P.Venugopal Vs. Union of India (2003) 7 SCC 726 has held that it may be treated that this Court did not grant special leave petition from the judgment of Justice Nand Lal Ganguli but the same by itself would not render the decision as a binding precedent in terms of Article 141 of the Constitution of India . Thus dismissal of the special leave petition by the Apex Court in the case of J.K. D'Costa cannot be treated as a binding precedent under Article 141 of the Constitution of India .
In the case of Malabar Industrial Co.Ltd. (supra) the Apex Court has held as follows:
"Under Section 263 of the Act order passed without applying the principles of natural justice or without application of mind would also be erroneous. It has held that a bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income Tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent- if the order of the Income Tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to section 263 (1) of the Act.
There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind."
It is well established that the Assessing Officer has to initiate proceedings for imposition of penalty during the course of the assessment itself. If he fails to initiate or record his satisfaction for the initiation of the penalty proceedings during the course of the assessment proceedings it would be a case where the assessment order can be said to be erroneous as he has not decided a point nor recorded a finding on an issue which ought to have been done or decides it wrongly as held by this Court in the case of Saraiya Distillery Supra. Thus the omission of the Income Tax Officer to initiate penalty proceedings during the course of the assessment renders the assessment order erroneous and prejudicial to the interest of the Revenue.
In this view of the matter, we are in respectful agreement with the view taken by the Madhya Pradesh High Court in the case of Indian Pharmaceuticals and other cases.
In view of the foregoing discussions we are of the considered opinion that the Tribunal was not justified in holding that the failure to initiate penalty proceedings in the course of the assessment did not render the assessment order erroneous and prejudicial to the interest of the revenue. The Commissioner of Income Tax had the jurisdiction to revise such an order.
In this view of the matter, we answer the first questions of law referred to us in the negative i.e. in favour of the Revenue and against the assessee. In view of our answer to question No.1 referred to above, there is no necessity to answer the question No.2. However there shall be no order as to costs.
Dt. September 1, 2004
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