The Judgment of the Court was delivered by

Govindan Nair, C.J:— These references relate to the assessments to income-tax for the three years 1964-65, 1965-66 and 1966-67 of the same assessee. The question is whether the assessee is liable for interest as provided by section 215(1) of the Income-tax Act, 1961, for short, “the Act”. The Income-tax Officer did not charge interest under the section. His orders which are annexures “A”, “A-1” and “A-2” to the paper book are absolutely silent in this regard. The Commissioner of Income-tax purporting to act suo motu under section 263 of the Act took the view that this was clearly due to oversight and inadvertence to section 215 of the Act. He, therefore, set aside the assessment orders, annexures “A”, “A-1” and “A-2” to the extent those orders impliedly failed to charge interest under section 215 of the Act. The arguments that were advanced before the Commissioner by counsel for the assessee to establish that no interest was chargeable in view of rule 40(1) of the Income-tax Rules, 1962, for short, “the Rules”, framed in accordance with section 215(4) of the Act, were not considered by the Commissioner as he was of the view that those matters were in the first instance to be considered by the Income-tax Officer. The order of the Commissioner is annexure “B”. From this order, appeals were taken for the three years to the Income-tax Appellate Tribunal, Cochin Bench, and the Tribunal allowed those appeals and set aside the order of the Commissioner in relation to all the three years. The view taken by the Tribunal was that it has to be inferred in view of section 215(4) read with rule 40(1) that the Income-tax Officer exercised his discretion to waive or reduce the interest in favour of the assessee and that, therefore, the assessment orders of the Income-tax Officer cannot be said to be erroneous and prejudicial to the interests of the revenue. Such a view has been taken by the Tribunal mainly on the basis of the decision of the Supreme Court in S.A.L Narayan Row v. Ishwarlal Bhagwandas [1965] 57 I.T.R 149 S.C. and the observations of the Bombay High Court in Shantilal Rawji v. N.C Nair* [1958] 34 I.T.R 439 Bom.., which has been followed by the same court in the judgment which was appealed against and which gave rise to the judgment in S.A.L Narayan Row v. Ishwarlal Bhagwandas.

2. At the instance of the Commissioner of Income-tax, the following two questions have been referred before us:

“(1) Whether, on the facts and in the circumstances of the case, the presumption made by the Appellate Tribunal that the Income-tax Officer had exercised his discretion and decided not to levy the penal interest for the assessment year 1964-65 under section 215 of the Income-tax Act, 1961, is supported by any material?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the Commissioner of Income-tax was not justified in modifying the assessment order of the Income-tax Officer for the assessment year 1964-65 under section 263 of the Income-tax Act, 1961?”

3. At this stage, it will be useful to read sub-sections (1) and (4) of section 215 of the Act:

“215. (1) Where, in any financial year, an assessee has paid advance tax under section 212 on the basis of his own estimate, and the advance tax so paid is less than seventy-five per cent, of the assessed tax, simple interest at the rate of twelve per cent, per annum from the 1st day of April next following the said financial year up to the date of the regular assessment shall be payable by the assessee upon the amount by which the advance tax so paid falls short of the assessed tax……….

(4) In such cases and under such circumstances as may be prescribed, the Income-tax Officer may reduce or waive the interest payable by the assessee under this section.”

4. The power of the Commissioner to revise the orders passed by the Income-tax Officer is contained in section 263. This section empowers the Commissioner, if he considers the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue, to pass such orders as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. We shall extract section 263(1):

“The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.”

5. The question that arises for determination relates to the power of the Commissioner under section 263(1) of the Act. This in its turn depends on the interpretation of the section and particularly of the words of the section “erroneous in so far as it is prejudicial to the interests of the revenue”. The Tribunal has referred to a number of decisions but as we understand the gist of the order of the Tribunal, the view of the Tribunal is based on the observations of the Bombay High Court in Shantilal Rawji v. N.C Nair*, at page 443. These are the observations:

“Now, let us first of all consider what the position would have been if this proviso was in force on the 10th March, 1953. In fact it came into force on the 24th May, 1953, but for the purpose of testing the argument advanced before us by Mr. Palkhivala we must first consider what the effect of this proviso being in force at the date the assessment order was made would be. If this proviso was in force, it is clear that the Income-tax Officer had the discretion to reduce or waive the interest payable by the assessee. Therefore, looking at the record and looking at the assessment order, it could not be said that the Income-tax Officer had failed to discharge his statutory obligation. A discretion having been vested in the Income-tax Officer by the proviso, it was open to the Income-tax Officer not to impose the penalty, and there is nothing on the record to show that the failure to impose the penalty was due to a failure to discharge his obligation under section 18A(6) and not to the exercise of the discretion under the proviso. If a particular position is arrived at which can be explained by one or other action being taken by the Income-tax Officer, it is impossible to contend that for the purpose of section 35 we must assume that that position was arrived at by the Income-tax Officer having taken one particular action and that that action was contrary to law. Rather the assumption should be that the Income-tax Officer acted in accordance with law rather than contrary to law. The assumption should also be that the Income-tax Officer knew the law and not that he was ignorant of the law. Therefore, if the proviso was in force and the Income-tax Officer did not impose a penalty, the court would rather lean in favour of the view that the Income-tax Officer had exercised his discretion under the proviso rather than the view that he had overlooked the law. Therefore, it would be impossible to suggest that the absence of any mention in the assessment order with regard to the levying of penal interest must necessarily be ascribed to an error of law on the part of the Income-tax Officer. In our opinion, therefore, there does not seem to be much difficulty in holding that if the proviso was in force, the power of rectification could not have been exercised under section 35 because there was no error apparent on the face of the record.”

6. As is seen from paragrph 4 of the judgment of the Supreme Court in S.A.L Narayan Row v. Ishwarlal Bhagwandas, it is this decision that had been relied on by the Bombay High Court in the subsequent decision the appeal from which was disposed of by the Supreme Court in the decision reported in [1965] 57 I.T.R 149. The question therein was whether the Income-tax Officer acting under section 35 of the Indian Income-tax Act, 1922, had the power to rectify an alleged mistake in the order of assessment passed by the Income-tax Officer in that he omitted to charge interest under section 18A(6) of that Act. At the time when the Income-tax Officer passed the order, section 18A stood unqualified casting an obligation on the part of the Income-tax Officer to charge interest. Later the section was amended and a proviso was added vesting a discretion in the Income-tax Officer similar to the discretion now vested under rule 40 of the rules framed under section 215(4) of the Act. This proviso was given retrospective operation. It was held that in view of the retrospective operation given to the proviso it must be assumed that the proviso was in the statute book when the order was passed, In those circumstances, it was held by the High Court that the rectification order was not justified. The revision taken before the Commissioner against the order had been dismissed on the ground that the proviso was not in force at the time when the order was passed by the Income-tax Officer. The Supreme Court emphasised this aspect and held that this was an error, a clear and patent error, which the Commissioner had committed and, therefore, the High Court was justified in setting aside the order of the Commissioner confirming the order of the Income-tax Officer rectifying the supposed order in proceedings under article 226 of the Constitution. This is all that has been decided by the Supreme Court. But, as we said, the Bombay decision in Shantilal Rawji v. N.C Nair*, and the passage which we have read therefrom had been relied on for the purpose of the contention that by the orders of the Income-tax Officer in these cases, annexures “A”, “A-1” and “A-2”, he must be taken to have clearly exercised the discretion in favour of the assessee and that that is the proper inference to be drawn even if two views are possible. If that is the proper inference to be drawn, it has been assumed by the Tribunal that the Commissioner had no jurisdiction under section 263 of the Act to set aside those orders.

7. We think that the question that arose before the Supreme Court and the observations of the Bombay High Court in Shantilal Rawji v. N.C Nair*, have nothing to do with the question of jurisdiction of the Commissioner under section 263 of the Act. If an order is prejudicial to the interests of the revenue and if it is erroneous, the Commissioner can set aside that order. An order which does not charge interest is on the face of it and prima facie prejudicial to the interests of the revenue, and whether it is erroneous or not will depend upon the grounds, if any, on the basis of which the omission to charge interest is sought to be supported. If these are seen in an assessment order, the Commissioner, before setting aside the order must consider whether those grounds can support the waiver or reduction of interest. He cannot in those circumstances set aside the order refusing to charge interest without at the same time finding that the grounds stated are unrelated or inadequate to support the waiver or reduction of interest. If, on the other hand, the order is silent and does not mention any ground at all, the Commissioner with his wide jurisdiction under section 263 of the Act will be left helpless; he will not be able to decide whether the discretion vested in the Income-tax Officer has been properly or improperly exercised. In such circumstances two courses, we conceive, are open to the Commissioner under section 263. He can himself decide in revision whether interest should be charged or not and revise the order of the Income-tax Officer or more properly he may set aside the order in that regard and remit it for fresh consideration by the Income-tax Officer. This is what has been done by the order of the Commissioner which is annexure “B” in the paper book. The order has specifically reserved a right to the assessee to urge such grounds that he may have to support the position that no interest should be charged by virtue of rule 40. The Commissioner is certainly entitled to know on what grounds interest had been waived. The discretion vested in the Income-tax Officer ranges between a right to waive interest completely or to reduce it. Naturally, interest cannot be automatically waived altogether. We conceive, a judicial exercise of discretion is necessary to find out what interest should be charged or whether any interest at all should be charged, and naturally being a quasi-judicial act, the order must state the reasons for the waiver or the reduction of interest. The orders, annexures “A”, “A-1” and “A-2”, are completely unsatisfactory and unsupportable as a quasi-judicial pronouncement and can, therefore, legitimately be set aside by the Commissioner as they are on the face of the orders prejudicial to the interests of the revenue. We see no reason why such an order should be set aside by the Tribunal.

8. In the light of the above, we have to answer question No. 1 in the negative that no material has been relied on by the Tribunal for the presumption it had drawn. What the Tribunal had done was to assume, as the Bombay Hight Court indicated, that if an order is capable of two meanings, an inadvertence to the provision in section 215(1) of the Act and an exercise of discretion under section 215(4) read with rule 40, it will be proper to draw an inference that the order will fall under the latter category, namely, of the exercise of the discretion as provided by the Act in which case it will be a legal act as against an illegal one as in the Case of an omission to advert to section 215(1) of the Act. We accordingly answer the question in the negative.

9. The second question referred to us has to be answered also in the negative, that is in favour of the department and against the assessee. The Commissioner was justified in modifying the assessment orders in directing a reassessment as far as the question of interest is concerned. The question is answered in the negative.

10. We direct the parties to bear their respective costs.

11. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.