Translate
Text Highlighter

Bookmark

PDF

Share

Report a problem
AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • S. Ranganathan
  • Leila Seth, JJ.
Acts
  • s. 271(1)(a) of the 1961 Act
Are you a practicing lawyer?
Enhance your digital presence and reach by creating a Casemine profile.
Upload pleading to use the new AI search
Click here to upload
Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • S. Ranganathan
  • Leila Seth, JJ.
Acts
  • s. 271(1)(a) of the 1961 Act
See more information ...
Smart Summary

Judgment Summary — Ranganathan, J. (Income-tax Act, 1961)

Factual and Procedural Background

The proceedings arise from two references under the Income-tax Act, 1961 at the instance of the Additional Commissioner of Income-tax (Addl. CIT) concerning assessment years 1965–66 and 1966–67 (the corresponding previous years).

The ITO completed assessments on 28 March 1969 but, in those assessment orders, omitted to take one or more of the following actions: (i) make any mention about charging interest under s.139(1) for delay in filing returns; (ii) deal with chargeability of interest under s.217 for failure to file an estimate of advance tax and pay tax thereon (relevant to 1965–66); (iii) mention initiation of penalty proceedings under s.271(1)(a) though returns were filed late; and (iv) (for 1965–66) mention initiation of penalty proceedings under s.273(b) for non-payment of advance tax.

The Addl. CIT considered these assessment orders erroneous and prejudicial to the revenue's interest and issued notices under s.263 calling for records and proposing revision. After hearing the assessee's representative, he set aside the assessment orders and directed the ITO to make fresh assessments.

The assessee appealed to the Tribunal. The Tribunal held that the Commissioner could not, under s.263, give directions relating to penalty proceedings (ss.271(1)(a) and 273(b)), but that the directions as regards charging interest were within s.263. The Tribunal modified the Addl. Commissioner’s orders: it upheld directions relating to interest but disallowed directions relating to penalties and further held that the Commissioner should not, on these facts, have set aside the entire assessments; instead the ITO should be directed to consider interest on merits.

The Commissioner sought a reference to this Court. The Tribunal referred two specific questions for the Court's decision.

Legal Issues Presented

  1. “Whether, on the facts and in the circumstances of the case, the Tribunal was right in coming to the conclusion that the Additional Commissioner could not pass an order under section 263 relating to penalties?”
  2. “Whether, on the facts and in the circumstances of the case, the Tribunal was right in modifying the order of the Additional Commissioner passed under section 263 setting aside the assessments in question?”

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court's analysis proceeds from the scope of s.263 of the Income-tax Act, 1961 and the nature of assessment and penalty proceedings under the Act. The reasoning follows these principal steps, as reflected in the opinion:

  1. Scope of s.263: The Court reiterates the statutory power under s.263 — the Commissioner may call for and examine records of proceedings under the Act and, if an ITO's order is found to be erroneous and prejudicial to the revenue, may after hearing the assessee and making necessary enquiries pass such orders as the circumstances justify.
  2. Confined jurisdiction: The Tribunal (and the Court) construe that the Commissioner's jurisdiction under s.263 is confined to the assessment proceedings and the assessment order being reviewed; the Commissioner cannot expand the subject-matter of those proceedings when exercising revisionary powers.
  3. Interest vs. penalty — distinct character of proceedings:
    • The Court accepts the Tribunal's conclusion that the question of charging interest (under provisions such as s.139(1) and s.217) is an integral part of the assessment proceedings and therefore falls within the subject-matter that s.263 may legitimately address.
    • By contrast, the Court holds that proceedings for the levy of penalties under ss.271(1)(a) and 273(b) are independent and separate proceedings distinct from the assessment proceedings. There is no identity between assessment proceedings and penalty proceedings; penalty proceedings may follow as a consequence of assessment but are not components of the assessment order itself.
    • Accordingly, the failure of the ITO to record a view about penalty leviability in the assessment order does not in itself vitiate the assessment or render the assessment order erroneous or prejudicial to the revenue for purposes of s.263.
  4. On the proper remedy under s.263: Even where an error within the assessment proceedings is found (for example, omission to consider levy of interest), the Commissioner must pass an order justified by the circumstances. Minor omissions or mistakes do not justify setting aside the entire assessment. Wholesale cancellation and direction for a fresh assessment are warranted only where there is something fundamentally or basically wrong with the assessment that cannot be remedied by amendment.
  5. Application to the facts: The Addl. Commissioner was entitled to direct reconsideration of interest, but was not entitled, under s.263, to set aside the entire assessments on the ground that the ITO had not recorded any view on penalty in the assessment orders. The Tribunal's modification — limiting the remedy to directing the ITO to consider the levy of interest on merits and in accordance with law — was held to be correct.
  6. Conclusion drawn: The Court agrees with the Tribunal’s analysis and outcome: penalty matters are outside the ambit of s.263 revision of assessment orders, and the remedy of setting aside whole assessments was excessive on these facts.

Holding and Implications

Both referred questions were answered in the affirmative and in favour of the assessee.

Holding (concise):

  • The Commissioner, under s.263, cannot pass an order revising an assessment order so as to give directions relating to penalty proceedings (ss.271(1)(a) and 273(b)), because penalty proceedings are independent and separate from assessment proceedings.
  • The Tribunal was right to modify the Addl. Commissioner’s order: where the ITO has failed to consider the levy of interest, the appropriate remedy under s.263 is to direct the ITO to consider the question on merits and in accordance with law (after affording the assessee an opportunity to be heard), not to set aside the whole assessment unless the assessment is fundamentally defective.

Implications and consequences:

  • Direct effect on the parties: The Addl. Commissioner’s directions relating to penalties were negatived; directions relating to interest were upheld only to the extent of ordering reconsideration by the ITO. The assessee succeeded before the Court and was awarded costs; counsel's fee of Rs. 350 was directed to be paid.
  • Broader legal implication (as stated in the opinion): The judgment emphasizes the separate character of penalty proceedings and the limited, remedial nature of s.263 powers. It cautions against use of s.263 to effect wholesale cancellations of assessments for minor defects.
  • The opinion does not purport to lay down any new expansive principle beyond these applications of s.263 and the separate nature of penalty proceedings; it confines itself to the facts and statutory construction presented.

Costs: The assessee succeeded and was awarded costs; counsel's fee ordered: Rs. 350.

Show full summary ...

    Addl. Commissioner Of Income-Tax, Delhi-I v. J.K D'Costa.

    Ranganathan, J.:— These are two references under the I.T Act, 1961, at the instance of the Addl. CIT. They relate to the assessment years 1965–66 and 1966–67, the corresponding financial year being the previous year. A very short common question is involved in both the references.

    2. For the above assessment years, the ITO completed the assessment on 28th March, 1969. While so doing, however, he did not take any one of the following actions:

    (i) he did not say anything in the order about the charging of interest under s. 139(1) for the delay in the submission of the returns by the assessee;

    (ii) he did not deal with the question of the chargeability of interest under s. 217 for the failure of the assessee to file an estimate of advance tax and pay the tax thereon in so far as the assessment year 1965–66 was concerned;

    (iii) he did not mention anything in the assessment orders regarding the initiation of penalty proceedings under s. 271(1)(a) of the 1961 Act though the returns had been filed beyond time; and

    (iv) so far as the assessment year 1965–66 is concerned, he did not mention anything in the assessment order about the initiation of penalty proceedings under s. 273(b) for non-payment of advance tax for the above year.

    3. The Addl. Commissioner of Income-tax was of the opinion that the assessment orders passed by the ITO for the two years in question were erroneous and prejudicial to the interest of the revenue. Actually, he also simultaneously proceeded to take similar action in respect of the assessment which had been completed for the assessment year 1964–65 also on March 31, 1969.

    4. He, thus, issued notices under s. 263 in respect of all the three years calling upon the assessee to show cause why the above omissions in the three assessment orders should not be remedied by revising the assessment orders in question. After hearing the assessee's representative he came to the conclusion that the failure of the ITO to charge interest under s. 139(1) for both the years, to charge interest under s. 217 for the assessment year 1965–66, to initiate penalty proceedings for both the assessment years under s. 271(1)(a) and to initiate penalty proceedings under s. 273(b) in relation to the assessment year 1965–66 was erroneous and prejudicial to the interest of the revenue. In this view, he passed orders setting aside the assessment orders dated March 31, 1969, and directed the ITO to make fresh assessments in accordance with law.

    5. The assessee preferred appeals to the Tribunal. The Tribunal came to the conclusion that the Commissioner could not, while assuming jurisdiction under s. 263 by reference to the assessment order, give directions relating to penalty whether under s. 273(b) or s: 271(1)(a) but that there was nothing wrong with the directions given by the Addl. Commissioner so far as the levy of interest was concerned. The Tribunal pointed out that the powers of the Commissioner under s. 263 were hedged in by certain conditions and limitations. Under that section his jurisdiction was to call for the records of certain proceedings and to revise an order passed by the ITO in those proceedings. The Commissioner could not travel beyond the subject-matter of the order passed by the ITO nor could he travel beyond the proceedings in the course of which the order had been passed. In this view of the matter, the Tribunal upheld only that portion of the order of the Addl. Commissioner which related to the question of interest but held that the direction, so far as the question of penalty was concerned, could not be upheld. The Tribunal also pointed out that though the powers of the Addl. Commissioner were quite wide, he could pass only such orders as the circumstances of the case would justify. He had to pass an order which would effectively rectify the defect which he proposes to set right, but it would not be appropriate for the Commissioner to proceed to set aside the assessment in toto unless there is something which goes to the root of the assessment or the very basis adopted by the ITO is wrong or the dispute before him concerns such a large area of the assessment that the assessment could not feasibly be amended in part. From this point of view the Tribunal was not satisfied that the circumstances of the present case justified the setting aside of the whole assessment by the Commissioner. The Tribunal, therefore, modified the orders of the Addl. Commissioner for the assessment years 1965–66 and 1966–67 by stating that he will merely direct the ITO to consider for both the years the levy of interest under s. 139 and to consider the question of the levy of interest under s. 217 for the assessment year 1965–66 on merits and in accordance with law.

    6. Aggrieved by the order of the Tribunal, the Commissioner applied for reference to this court seeking a reference of a large number of questions, but the Tribunal has referred for our decision the following two questions:

    “1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in coming to the conclusion that the Additional Commissioner could not pass an order under section 263 relating to penalties?

    2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in modifying the order of the Additional Commissioner passed under section 263 setting aside the assessments in question?”

    7. We have heard Mr. Wazir Singh, learned counsel for the department, but we are of opinion that the conclusion reached by the Tribunal is the only possible conclusion that can be arrived at in the circumstances of the case. Section 263 enables the Commissioner to call for and examine the record of any proceedings under the Act and if he considers that any order passed therein by the ITO is erroneous, in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such enquiries as he deemed necessary, pass such orders thereon as the circumstances of the case justify. In the present case, the Addl. Commissioner called for the record of the assessment proceedings and it is also clear from this order that in his view the assessment orders passed by the ITO on 28th March, 1969, were erroneous and prejudicial to the interest of the revenue. As the Tribunal has rightly pointed out, his jurisdiction was confined to the proceedings of assessment and the assessment orders, and he had full powers to revise the assessment order in regard to any error he may discover therein which is prejudicial to the interest of the revenue. In the present case, the com-plaint of the Addl. Commissioner is that while completing the assessment and passing the assessment orders, the ITO had failed to take steps to charge interest and that he had also failed to initiate penalty proceedings against the assessee. The question, therefore, is whether these two aspects of the matter formed part of the proceedings which were being examined by the Commissioner and, also whether these are two aspects which form an integral part of the assessment orders which the Commissioner is seeking to revise. The Tribunal has held, so far as the question of interest is concerned, that it is a part of the proceedings of assessment and that the direction to charge interest can also be said to be an integral part of the assessment order. So far as this part of the Commissioner's order is concerned, it has not been challenged by the assessee in the reference and we are not concerned with this part of the Commissioner's order. 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 penal-ties 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 finalised. 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. We, therefore, answer the first question referred to us in the affirmative and in favour of the assessee.

    8. The second question, in our opinion, is also capable of the same simple answer. Though the language of s. 263 is quite wide, it only empowers the Commissioner to pass an order which the circumstances of the case will justify. As the Tribunal has rightly pointed out, the mere fact that there is some minor omission or mistake in the assessment order cannot justify the action of the Commissioner in setting aside the whole of the assessment order. Such a wholesale cancellation of the assessment with a direction to make a fresh assessment is called for only in cases where there is something totally or basically wrong with the assessment which is not capable of being remedied by amendments to the assessment order itself. In the present case, having come to the conclusion that there was a defect in the assessment order in so far as the question of levy of interest was not considered by the ITO, all that the Commissioner had to do was to direct the ITO to consider the question on merits and in accordance with law after giving the assessee an opportunity of being heard. It was not further necessary for him, nor did the circumstances of the case justify, that the whole assessment should be set aside. We need hardly point out that the setting aside of assessment wholesale will have far-reaching consequences under the Act and that the jurisdiction under s. 263 should not be extended so as to result in such far-reaching consequences except where the circum-stances call for such a remedial action.

    9. We, therefore, also answer the second question in the affirmative and, in favour of the assessee. As the assessee has succeeded, he will be entitled to costs. Counsel's fee, Rs. 350.

    Use AI to get other relevant cases.
    Try AI Pro free for 7 days Upgrade to AI Pro

    Comments

    Addl. Commissioner Of Income-Tax, Delhi-I v. J.K D'Costa.
    (Apr 27, 1981)