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  • R.K Agrawal
  • K.N Ojha, JJ.
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  • K.N Ojha, JJ.
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Smart Summary

Structured Summary of the Opinion (R.K. Agrawal, J.)

Factual and Procedural Background

This reference under section 256(1) of the Income-tax Act, 1961 arises from an assessment for the year 1977-78. The respondent, an individual, was served a notice under section 210 on 18 November 1976 calling for advance tax of Rs. 1,153. The respondent paid Rs. 600 and did not file the estimate of advance tax required by section 212. The respondent filed a return reporting income of Rs. 14,870, but the income was assessed at Rs. 45,140. While passing the assessment order, the Assessing Officer omitted to charge interest under section 217(1A) and omitted to initiate penalty proceedings under section 273(c).

The Commissioner of Income-tax examined the record, considered the omissions erroneous and prejudicial to the interests of the Revenue, issued notice and after hearing, exercised powers under section 263 to cancel the assessment order and directed the Assessing Officer to reframe the assessment in accordance with law. The assessee (respondent) appealed to the Income-tax Appellate Tribunal (Tribunal). The Tribunal, relying on this Court's decision in Addl. Commissioner of Income-Tax, Lucknow v. Saraya Distillery, held that the Commissioner could revise the assessment in respect of failure to charge interest under section 217(1A) but did not have jurisdiction to cancel the assessment in order to enable initiation of penalty proceedings. The Tribunal allowed the appeal in part and referred two questions of law to this Court under section 256(1).

Legal Issues Presented

  1. Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the assessment order passed by the Income-tax Officer without initiating penalty proceedings under section 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 Income-tax Act, 1961?
  2. Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the Commissioner of Income-tax exceeded the powers vested in him under section 263 in cancellation of the entire assessment order to enable the Department to initiate penalty proceedings, while upholding the order of the Commissioner regarding direction to the Income-tax Officer to charge interest under section 217(1A)?

Arguments of the Parties

Revenue's Arguments

  • The Tribunal was incorrect in holding that the Commissioner could not assume jurisdiction under section 263 where the Assessing Officer had omitted to initiate penalty proceedings; such omission was erroneous and prejudicial to the Revenue.
  • The Commissioner, having remanded the matter, had the power to direct initiation of penalty proceedings as part of reframing the assessment if the order was erroneous and prejudicial on those points.
  • The Revenue relied on the decisions: Addl. Commissioner Of Income-Tax, Lucknow v. Saraya Distillery and Malabar Industrial Co. Ltd. v. CIT.

Respondent's Arguments

  • Omission to initiate penalty proceedings by the Assessing Officer while passing the assessment order does not constitute an order that can be revised by the Commissioner under section 263.
  • The Tribunal's decision (which limited the Commissioner’s powers not to cancel the assessment for initiating penalty) should be upheld.
  • The respondent relied on decisions including Addl. Commissioner Of Income-Tax, Delhi-I v. J.K D'Costa; Addl. CIT v. Achal Kumar Jain; and CIT v. Nihal Chand Rekyan.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court in this Opinion
Addl. Commissioner Of Income-Tax, Lucknow v. Saraya Distillery, [1978] 115 ITR 34 Defines when an order is "erroneous": where it fails to decide a point, fails to record a finding which ought to have been made, or decides wrongly; applied to omission to charge interest. Cited as authority that an assessment can be erroneous and prejudicial when AO omits to decide an issue such as charging interest; the Court relied on Saraya Distillery in analyzing omissions during assessment proceedings.
Malabar Industrial Co. Ltd. v. CIT, [2000] 243 ITR 83 (SC) Explains the twin conditions under section 263: (i) the order must be erroneous; and (ii) it must be prejudicial to the interests of the Revenue; errors include non-application of mind or breach of natural justice. Used to state the proper test for invoking section 263 and to confirm that both conditions must be satisfied for revision; cited in support of the proposition that omission to initiate penalty may render an order erroneous and prejudicial.
Addl. Commissioner Of Income-Tax, Delhi-I v. J.K D'Costa, [1982] 133 ITR 7 (Delhi) Holds penalty proceedings are independent and separate from assessment proceedings; failure of AO to record satisfaction regarding penalty leviability in assessment order does not vitiate the assessment. Cited by the Tribunal and respondent; Court reviewed and contrasted this view with other High Court decisions and ultimately treated the dismissal of SLP in this case as not binding precedent for the purposes of article 141.
Addl. CIT v. Achal Kumar Jain, [1983] 142 ITR 606 (Delhi) Affirms the view that penalty proceedings do not form part of assessment proceedings and AO's failure to record satisfaction in assessment does not render the assessment erroneous. Noted as one of the Delhi High Court decisions adopting the D'Costa approach; the Court observed the split of authority and stated its analysis aligning with courts that treat omission to initiate penalty as rendering assessment erroneous.
CIT v. Nihal Chand Rekyan, [2000] 242 ITR 45 (Delhi) Listed among Delhi High Court authorities that follow the view that penalty proceedings are separate from assessment proceedings. Identified as part of the line of decisions supporting the Tribunal/respondent position; the Court recorded these authorities in its survey of precedent.
P. C. Puri … Applicant v. The Commissioner Of Income-Tax, New Delhi …, [1985] 151 ITR 584 Listed as one of the Delhi decisions consistent with the view that penalty proceedings are separate from assessment proceedings. Cited in the catalogue of authorities following the D'Costa line; used to show there is a body of High Court decisions supporting that approach.
Addl. CIT v. Precision Metal Works, [1985] 156 ITR 693 Listed as a Delhi High Court decision following the separateness of penalty proceedings. Included in the list of authorities that the Court considered when surveying the precedent landscape.
CWT v. A.N Sarvaria, [1986] 161 ITR 694 Listed among Delhi High Court authorities following the D'Costa reasoning. Noted as one of multiple High Court decisions adopting the view that failure to record penalty satisfaction does not vitiate assessment.
Commissioner Of Income-Tax v. Sudershan Talkies, [1993] 200 ITR 153 Listed as a decision consistent with the D'Costa line from the Delhi High Court. Recorded among the authorities the Court reviewed as part of the divergent judicial approach.
CIT v. Suderskan Talkies, [1993] 201 ITR 289 Another decision in the same vein from the Delhi High Court (listed). Noted in the Court's survey of precedent showing adherence to the separateness principle in some High Courts.
CIT v. Keshrimal Parasmal, [1986] 157 ITR 484 (Rajasthan) Rajasthan High Court took a view similar to the Delhi High Court that penalty proceedings are separate from assessment proceedings. Included as an example of other High Courts endorsing the D'Costa approach; the Court observed that several High Courts followed that view.
Surendra Prasad Singh v. CIT, [1988] 173 ITR 510 (Gauhati) Gauhati High Court decision listed as taking a similar position to D'Costa. Recorded among authorities that treat penalty proceedings as separate from assessment proceedings.
CIT v. Linotype and Machinery Ltd., [1991] 192 ITR 337 (Calcutta) Calcutta High Court decision listing the separateness principle. Cited as part of the body of High Court decisions aligned with the D'Costa view.
CIT v. C.R.K Swamy, [2002] 254 ITR 158 (Madras) Madras High Court decision following the view that penalty proceedings are separate from assessment proceedings. Included to show multiple High Courts had adopted the D'Costa approach; the Court recorded this alignment.
Addl. CIT v. Indian Pharmaceuticals, [1980] 123 ITR 874 (Madhya Pradesh) Madhya Pradesh High Court held that assessment includes consideration of all facts including liability for penalty; omission to notice penalty-liability facts during assessment renders the assessment erroneous and prejudicial. The Court expressly agreed with this Madhya Pradesh line and stated respectful agreement, adopting the view that omission to initiate penalty during assessment renders the assessment order erroneous and prejudicial, and that Commissioner has jurisdiction under section 263.
Addl. CIT v. Kantilal Jain, [1980] 125 ITR 373 (MP) Listed as another Madhya Pradesh decision taking the view that penalty liability consideration forms part of assessment. Cited as part of the Madhya Pradesh line that the Court said it respectfully agreed with in concluding that omission to initiate penalty renders assessment erroneous.
Addl. CWT v. Nathoolal Balaram, [1980] 125 ITR 596 (MP) Another Madhya Pradesh decision supporting inclusion of penalty considerations within assessment proceedings. Recorded among the MP authorities whose approach the Court endorsed on the specific point about omission to initiate penalty proceedings.
CIT v. Narpat Singh Malkhan Singh, [1981] 128 ITR 77 (MP) MP High Court decision taking a similar view that omission on penalty matters can render assessment erroneous. Included as part of the MP line of authority with which the Court aligned on this issue.
C.A Abraham v. ITO, [1961] 41 ITR 425 (referenced by MP HC) Referred to by the Madhya Pradesh High Court in support of its view that 'assessment' includes consideration of facts attracting penalty provisions. Noted by this Court as among authorities relied upon by the Madhya Pradesh High Court; used indirectly in assessing the MP line of reasoning.
CIT v. Bhikaji Dadabhai & Co., [1961] 42 ITR 123 (referenced by MP HC) Referred to by Madhya Pradesh High Court in support of its view on the scope of 'assessment'. Noted as part of the authorities relied upon by the Madhya Pradesh High Court; taken into account in the survey of precedent.
CIT v. Cochin-Malabar Estates Ltd., [1974] 97 ITR 466 (Kerala) Kerala High Court decision referenced in Saraya Distillery regarding prejudicial nature of omission such as not charging interest. Referenced by this Court in discussing Saraya Distillery and the concept of an assessment being prejudicial where AO omitted to charge interest.
Singho Mica Mining Co. Ltd. v. CIT, [1978] 111 ITR 231 (Calcutta) Calcutta High Court decision referenced in the context of Saraya Distillery's approach to prejudicial omissions (interest). Referenced in the Court's recounting of how Saraya Distillery followed other High Court decisions on omissions prejudicial to Revenue.
Kunhayammed v. State of Kerala, [2000] 245 ITR 360; (2000) 6 SCC 359 (Supreme Court) Explains the nature of dismissal of SLP (Article 136) and the limited precedential value of a non-speaking dismissal; clarifies appellate steps under article 136. Used to explain that dismissal of a special leave petition by the Supreme Court in J.K. D'Costa does not make the Delhi High Court view a binding precedent under Article 141; the Court relied on the analysis of the scope of article 136.
Saurashtra Oil Mills Association v. State of Gujarat, [2002] 3 SCC 202 Holds that dismissal of SLP without a speaking order is a simple dismissal and does not merge the High Court view into binding Supreme Court precedent. Relied upon to support the proposition that dismissal of SLP in J.K D'Costa does not convert the Delhi High Court's view into binding law under Article 141.
Justice P. Venugopal v. Union of India, [2003] 7 SCC 726 Holds that a dismissal of SLP does not render the High Court's decision a binding precedent under Article 141. Cited to reinforce the point that dismissal of SLP in J.K. D'Costa cannot be treated as binding precedent of the Supreme Court under Article 141.

Court's Reasoning and Analysis

The Court conducted a structured analysis of the competing lines of authority and the statutory test under section 263.

  1. The Court recited the twin conditions from Malabar Industrial Co. Ltd. v. CIT: the Commissioner can exercise section 263 only where the Assessing Officer's order is (i) erroneous and (ii) prejudicial to the interests of the Revenue.
  2. The Court observed the factual omission by the Assessing Officer in the present case: failure to charge interest under section 217(1A) and failure to initiate penalty proceedings under section 273(c) while completing assessment.
  3. The Court reviewed the jurisprudential split: (a) Delhi High Court line (beginning with D'Costa and followed by several decisions) holding that penalty proceedings are independent from assessment proceedings and AO's failure to record satisfaction on penalty does not vitiate an assessment; and (b) Madhya Pradesh High Court line (Indian Pharmaceuticals and related decisions) holding that assessment includes consideration of penalty liability and omission to take notice of facts attracting penalty provisions during assessment renders the order erroneous and prejudicial.
  4. The Court examined Saraya Distillery which defines when an order is erroneous (failure to decide/record or deciding wrongly) and had applied that notion to omissions such as not charging interest.
  5. The Court considered the effect of the Supreme Court's dismissal of a special leave petition against the D'Costa decision and, relying on authority (Kunhayammed, Saurashtra, Justice P. Venugopal), explained that a dismissal of SLP without a speaking order does not convert a High Court decision into binding Supreme Court precedent under Article 141.
  6. Applying these principles, the Court concluded that where an Assessing Officer fails to initiate or record satisfaction for initiation of penalty proceedings during the course of assessment, such omission amounts to failure to decide or record a point which ought to have been done and thus renders the assessment order erroneous and prejudicial to the interests of the Revenue (drawing on Saraya Distillery and the Madhya Pradesh line of authority).
  7. On this basis, the Court disagreed with the Tribunal's conclusion that omission to initiate penalty proceedings did not render the assessment order erroneous; the Court held that the Commissioner had jurisdiction under section 263 to revise such an order.

Holding and Implications

Holding: The Court answered the first question of law in the negative, i.e., in favour of the Revenue and against the assessee. In other words, the Court held that omission by the Assessing Officer to initiate penalty proceedings during the assessment renders the assessment order erroneous and prejudicial to the interests of the Revenue and the Commissioner had jurisdiction under section 263 to revise such an order.

Because of the answer to question No. 1, the Court found it unnecessary to answer question No. 2. The Court ordered that there shall be no order as to costs.

Implications

  • Direct effect on the parties: The Tribunal's view that omission to initiate penalty proceedings cannot render an assessment order erroneous was disapproved; the Commissioner has jurisdiction under section 263 to revise an assessment where the AO omitted to initiate penalty proceedings during assessment.
  • On precedential effect: The Court expressly surveyed conflicting High Court authorities, aligned with the Madhya Pradesh line (which treats penalty-liability consideration as part of assessment for purposes of section 263) and explained why dismissal of special leave in D'Costa does not make that decision binding as Supreme Court precedent under Article 141. The opinion therefore resolves the referred questions in favour of the Revenue on the facts and law considered.
  • No costs were ordered between the parties.

Note: This summary is confined to the content and reasoning contained in the provided opinion. No information beyond the text of the opinion has been added or inferred.

Show full summary ...

    Commissioner Of Income-Tax v. Surendra Prasad Agrawal

    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 Income-tax Officer without initiating penalty proceeding under section 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 Income-tax Act, 1961?

    2. Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the Commissioner of Income-tax 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 Commissioner of Income-tax under section 263 of the Income-tax Act, regarding direction to the Income-tax Officer to charge interest under section 217(1A) of the Income-tax Act ?”

    2. 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 November 18, 1976, calling upon the respondent to pay advance tax of Rs. 1,153 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. 14,870. However, the income was assessed at Rs. 45,140. 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.

    3. 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 interests 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, Lucknow v. Saraya 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.

    4. We have heard Shri A.N Mahajan, learned standing counsel for the Revenue and Shri Rishi Raj Kapoor, learned counsel for the respondent.

    5. 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 inasmuch as omission to initiate penalty proceedings while passing the assessment order was erroneous as also prejudicial to the interests 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) Addl. Commissioner Of Income-Tax, Lucknow v. Saraya Distillery, [1978] 115 ITR 34 (All); and

    (2) Malabar Industrial Co. Ltd. v. CIT, [2000] 243 ITR 83 (SC).

    6. 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) Addl. Commissioner Of Income-Tax, Delhi-I v. J.K D'Costa., [1982] 133 ITR 7 (Delhi);

    (2) Addl. CIT v. Achal Kumar Jain, [1983] 142 ITR 606 (Delhi); and

    (3) CIT v. Nihal Chand Rekyan, [2000] 242 ITR 45 (Delhi).

    7. Having heard learned counsel for the parties, we find that the Delhi High Court in the case of K. D'Costa, [1982] 133 ITR 7 has held that the assessment cannot be said to be erroneous or prejudicial to the interests 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 (page 11):

    “The only question before us is whether the Tribunal was right in revoking the order of the Additional Commissioner in so far as it pertains to the question of penalties under sections 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 section 271(1)(a) or under section 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 section 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 Income-tax Officer 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 Income-tax Officer 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 Income-tax Officer 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 Income-tax Officer 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 Income-tax Officer to record his opinion about the leviability of penalty in the case.”

    8. The aforesaid decision has been consistently followed by the Delhi High Court in the cases of Achal Kumar Jain, [1983] 142 ITR 606; P. C. Puri…Applicant v. The Commissioner Of Income-Tax, New Delhi…, [1985] 151 ITR 584; Addl. CIT v. Precision Metal Works, [1985] 156 ITR 693; CWT v. A.N Sarvaria, [1986] 161 ITR 694; Commissioner Of Income-Tax v. Sudershan Talkies., [1993] 200 ITR 153; CIT v. Suderskan Talkies, [1993] 201 ITR 289 and CIT v. Nihal Chand Rekyan, [2000] 242 ITR 45.

    9. A similar view has been taken by the Rajasthan High Court in the case of CIT v. Keshrimal Parasmal, [1986] 157 ITR 484 the Gauhati High Court in the case of Surendra Prasad Singh v. CIT, [1988] 173 ITR 510, the Calcutta High Court in the case of CIT v. Linotype and Machinery Ltd., [1991] 192 ITR 337 and the Madras High Court in the case of CIT v. C.R.K Swamy, [2002] 254 ITR 158.

    10. On the other hand the Madhya Pradesh High Court has taken a contrary view in the case of Addl. CIT v. Indian Pharmaceuticals, [1980] 123 ITR 874; Addl. CIT v. Kantilal Jain, [1980] 125 ITR 373 (MP); Addl. CWT v. Nathoolal Balaram, [1980] 125 ITR 596 (MP) and CIT v. Narpat Singh Malkhan Singh, [1981] 128 ITR 77 (MP).

    11. This court in the case of Saraya Distillery, [1978] 115 ITR 34 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 the Kerala High Court in the case of CIT v. Cochin-Malabar Estates Ltd., [1974] 97 ITR 466 and the Calcutta High Court in the case of Singho Mica Mining Co. Ltd. v. CIT, [1978] 111 ITR 231 has held that the order passed by the Income-tax Officer being prejudicial to the interests 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, [1980] 123 ITR 874 after referring to the decision of the apex court in the case of C.A Abraham v. ITO, [1961] 41 ITR 425 and CIT v. Bhikaji Dadabhai and Co., [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 interests of the Revenue. It concluded that if therefore the Income-tax Officer 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 Madhya Pradesh High Court has followed its earlier decision in the case of Indian Pharmaceuticals, [1980] 123 ITR 874. The Delhi High Court in the case of Achal Kumar Jain, [1983] 142 ITR 606 had considered the decisions of the Madhya Pradesh High Court in the cases of Indian Pharmaceuticals, [1980] 123 ITR 874; Kantilal Jain, [1980] 125 ITR 373; Nathoolal Balaram, [1980] 125 ITR 596 and Narpat Singh Malkhan Singh, [1981] 128 ITR 77 and while disagreeing has held as follows (page 611):

    “On a cursory examination, it appeared to us that the view of the Madhya Pradesh High Court as indicated in the above mentioned 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. Commissioner Of Income-Tax, Delhi-I v. J.K D'Costa., Income-tax Reference No. 82 of 1974, disposed of by us on April 27, 1981— reported in [1982] 133 ITR 7 (Delhi), we held on similar facts that the Commissioner could not pass an order pertaining to penalty under section 263 of the Act. We held that the penalty proceedings do not form part of the assessment proceedings. Further, the failure of the Income-tax Officer 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.”

    12. The other High Courts, namely, Rajasthan, Gauhati, Calcutta and Madras High Court have followed the view taken by the Delhi High Court in the cases of J.K D'Costa, [1982] 133 ITR 7 and Achal Kumar Jain, [1983] 142 ITR 606. 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.

    13. So far as the dismissal of the special leave petition by the hon'ble Supreme Court is concerned it may be 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 Kunhayammed v. State of Kerala, [2000] 245 ITR 360; (2000) 6 SCC 359 : AIR 2000 SC 2587; [2000] 119 STC 505; [2000] 97 FJR 213. The hon'ble Supreme Court has held as follows (page 368):

    “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 the 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 article 136 is available to be exercised in an appropriate case. It is an untrammelled 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 the 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 or 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 or 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 special leave petition. 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 of the 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 the 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.”

    14. In the case of Saurashtra Oil Mills Association v. State of Gujarat, [2002] 3 SCC 202 the apex court has held that repeatedly it has been held that dismissal of special leave petition without a 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, [2000] 245 ITR 360 (SC) after exhaustive consideration of the entire case law this court has reaffirmed this position.

    15. The apex court in the case of Justice P. Venugopal v. 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 Ganguly 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 the dismissal of the special leave petition by the apex court in the case of J.K D'Costa, [1984] 147 ITR (St.) 1 cannot be treated as a binding precedent under article 141 of the Constitution of India.

    16. In the case of Malabar Industrial Co. Ltd., [2000] 243 ITR 83, 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 motu 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.”

    17. 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 Saraya Distillery, [1978] 115 ITR 34. 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 interests of the Revenue.

    18. 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, [1980] 123 ITR 874, 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 interests of the Revenue. The Commissioner of Income-tax had the jurisdiction to revise such an order.

    19. 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 asses-see. In view of our answer to question No. 1 referred to above, there is no necessity to answer question No. 2. However, there shall be no order as to costs.

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    Commissioner Of Income-Tax v. Surendra Prasad Agrawal
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