Citation Codes

Equivalent Citations

citation codes

Case Number

Miscellaneous Civil Case No. 82 of 1975

Judges

G.P Singh, C.J
U.N Bhachawat, J.

Acts

Section 217 of the 1961 Actor Section 18A(8) of the 1922 Act
provisions of Sub-section (3A) of Section 212.
SECTION 263 INCOME TAX ACT 1961
Section 256(1) of the I.T. Act, 1961,
Sub-section (3A) of Section 212
provisions of Section 217(1A)
provisions of Section 273(c).
Section 216 or Section 217

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Smart Summary

Structured Summary of the Opinion (Reference under Section 256(1) of the I.T. Act, 1961)

Factual and Procedural Background

For the assessment year 1970-71 the assessee filed a return declaring a total income of Rs. 28,942. The Income-tax Officer (ITO) assessed the total income at Rs. 33,650 by an order under Section 143(3) dated 11 December 1970. The assessee appealed to the Appellate Assistant Commissioner (AAC), confining the appeal to the disallowance of certain expenses amounting to Rs. 3,574. By order dated 27 March 1971 the AAC allowed a reduction of Rs. 2,000 in the assessee's total income. The Additional Commissioner (Addl. Commissioner) served a notice under Section 263 on 28 September 1972 seeking to set aside the ITO's assessment as being prejudicial to the revenue. By order dated 7 November 1972 the Addl. Commissioner overruled the assessee's objection and held the ITO's order erroneous and prejudicial because the ITO had not charged interest under Section 217(1A) and had not initiated penalty proceedings under Section 273(c). The assessee's appeal against the Addl. Commissioner's order was allowed by the Income-tax Appellate Tribunal (Tribunal) on 23 February 1974 on the ground that the ITO's order had merged in the AAC's order and, therefore, the Addl. Commissioner had no jurisdiction under Section 263 to revise it. The Tribunal referred the following question of law under Section 256(1) to the court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the order of the Additional Commissioner of Income-tax, passed under Section 263 of the Income-tax Act, 1961, was without jurisdiction and hence invalid in law?"

Legal Issues Presented

Whether the Tribunal was correct in holding that the Addl. Commissioner's order under Section 263 was without jurisdiction and invalid because the ITO's assessment order had merged in the AAC's order of appeal.

Arguments of the Parties

Revenue's (Department's) Arguments

The appeal before the AAC was limited to the disallowance of certain expenses; consequently, it did not effect a merger of the entire ITO assessment order into the AAC's order.
Because the merger (if any) related only to matters taken up in appeal, the Commissioner (Addl. Commissioner) could revise the ITO's order under Section 263 in respect of other matters (for example, charging interest under Section 217(1A) or initiating penalty under Section 273(c)) without disturbing the points decided by the AAC.

Assessee's Arguments / Contentions Referred to in the Opinion

The effect of the AAC's order was to reduce taxable turnover and thereby modify the ITO's assessment; consequently the ITO's order had merged into the AAC's order and could not be set aside in revision under Section 263.
With respect to interest under Section 217(1A), the assessee's counsel submitted that the phrase "on making the regular assessment" could mean "soon after passing the assessment" and that the ITO may be required to pass a separate judicial order under Section 217(1A) after notifying the assessee; on this basis, the absence of interest in the assessment order would not necessarily make the assessment order one that is prejudicial to the revenue for purposes of revision under Section 263.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Singho Mica Mining Co. Ltd. v. CIT [1978] 111 ITR 231 (Cal)	Held that merger of an assessment order in an appellate order is only in respect of matters taken up in appeal; where a question (e.g., charging interest) was not involved in the appeal the Commissioner could direct the ITO to compute and recover interest without setting aside the assessment order.	The court distinguished this Calcutta decision: in that case the Commissioner did not set aside the assessment order but merely directed computation of interest; in the instant case the Addl. Commissioner set aside the assessment order, which would have the effect of disturbing the AAC's order and thus was not applicable.
CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739 (SC)	Establishes that the satisfaction necessary to confer jurisdiction on the ITO to impose penalty must be reached before passing the assessment order ("in the course of any proceeding").	Relied upon to state the settled principle that an ITO has no jurisdiction to impose penalty under Section 273 if he omits to record the requisite satisfaction before completing the assessment.
D. M. Manasvi v. CIT [1972] 86 ITR 557 (SC)	Also addresses the requirement that the ITO's satisfaction for imposing penalty must be formed before the assessment order.	Used alongside Angidi Chettiar to reinforce that the ITO cannot impose penalty after assessment if the satisfaction was not recorded prior to the assessment order.
Addl. CIT v. Indian Pharmaceutical [1980] 123 ITR 874 (MP)	Example where the Commissioner set aside an assessment order to enable initiation of penalty proceedings because the assessment lacked the required recorded satisfaction.	Cited as a case of the type where revision is appropriate to enable proper penalty proceedings; distinguished here because setting aside the assessment would disturb the AAC's order.
Addl. CIT v. Saraya Distillery [1978] 115 ITR 34 (All)	Held that an assessment which did not charge interest under Section 215 was prejudicial to the revenue and could be interfered with in revision.	Noted, but treated as not decisive because Section 215 is not in pari materia with Sections 216 and 217; furthermore, in that case the assessment had not been appealed to the AAC, so it differs from the instant facts.
CIT v. Cochin-Malabar Estates Ltd. [1974] 97 ITR 466 (Ker)	Commissioner in revision set aside assessment and directed fresh assessment where ITO failed to charge interest under Section 215; proceeds on the basis that Section 215 is part of the assessment order.	Distinguished because Section 215 (and that case) is not directly analogous to Sections 216/217 and because the intervention of an appeal to the AAC in the present case prevents setting aside the assessment without disturbing the AAC's order.

Court's Reasoning and Analysis

The court began from the statutory text and established principle that the revisional power under Section 263 is confined to orders passed by the Income-tax Officer; the Commissioner cannot exercise revision against an order passed by the AAC.

Applying that principle, the court reasoned that if an ITO's order has merged into an appellate order of the AAC, the Commissioner has no jurisdiction under Section 263 to set aside the original ITO order because doing so would necessarily affect the AAC's order (which is outside the revisional jurisdiction).

The court rejected the department's argument that a limited appeal on one point (disallowance of expenses) did not constitute a merger of the entire ITO assessment. The court observed that although the AAC's decision arose from a limited point, its effect was to reduce taxable turnover and thereby modify the ITO's assessment. Therefore, setting aside the ITO order in revision would also have the effect of setting aside the AAC order, which is not permissible under Section 263.

On the question of penalty under Section 273(c), the court relied on the settled Supreme Court authority that the ITO must reach the requisite satisfaction "in the course of any proceeding in connection with the regular assessment" and must record that satisfaction before passing the assessment; otherwise the ITO lacks jurisdiction to impose the penalty after assessment. Ordinarily, where the assessment omits such satisfaction but circumstances clearly exist for penalty, the Commissioner may set aside the assessment in revision to enable the ITO to initiate penalty proceedings. However, in the present case such a setting aside was impermissible because it would disturb the AAC's appellate order.

As to charging interest under Section 217(1A), the court identified two necessary conditions from the statutory language: (i) the ITO must find that the person failed to send the estimate referred to in Sub-section (3A) of Section 212; and (ii) that finding must be given "on making the regular assessment." The court noted that there was disagreement between parties as to whether "on making the regular assessment" requires the finding to be recorded in the assessment order itself or may be construed to allow a subsequent order soon after assessment. The court declined to decide that point because, on the facts of the case, the Addl. Commissioner lacked jurisdiction under either view:

If an order under Section 217(1A) must be part of the assessment order, then the ITO had no jurisdiction to charge interest after assessment and the Addl. Commissioner could not set aside the assessment (because that would unsettle the AAC's order).
If the ITO could validly pass an order under Section 217(1A) after assessment, then the absence of interest in the assessment order would not make the assessment an order prejudicial to the revenue within the meaning of Section 263; therefore revision on that ground would not lie.

The court therefore concluded that in the specific circumstances of the case—where the AAC had modified the assessment in appeal—the Addl. Commissioner had no jurisdiction under Section 263 to set aside the ITO's assessment on the grounds relied upon (failure to charge interest under Section 217(1A) and failure to initiate penalty under Section 273(c)).

Holding and Implications

Holding: The court answered the referred question in the affirmative that the Tribunal was right in law: the order of the Addl. Commissioner passed under Section 263 was without jurisdiction and hence invalid in law.

Implications:

Direct effect: The Addl. Commissioner's revision order under Section 263 (which set aside the ITO's assessment on the grounds of non-charging of interest under Section 217(1A) and non-initiation of penalty under Section 273(c)) is invalid and cannot stand because it would have the effect of disturbing the AAC's appellate order.
No wider or novel rule was laid down beyond the application of existing principles: the decision rests on the established limitation that Section 263 revisional power does not extend to disturbing appellate orders of the AAC where the ITO's order has merged therein. The opinion does not purport to establish a new precedent beyond these applications.
Costs: The court ordered that there shall be no order as to costs for the reference.

This summary is confined to and strictly derived from the text of the provided opinion. No facts or conclusions beyond those present in the opinion have been added.

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Commissioner Of Income-Tax, M.P v. Narpat Singh Malkhan Singh

1. This is a reference made by the Income-tax Appl-late Tribunal under Section 256(1) of the I.T. Act, 1961, referring for our answer the following question of law :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the order of the Additional Commissioner of Income-tax, passed under Section 263 of the Income-tax Act, 1961, was without jurisdiction and hence invalid in law?"

2. The facts, briefly stated, are that for the assessment year 1970-71, the assessee filed the return declaring a total income of Rs. 28,942. The ITO, however, assessed the total income at Rs. 33,650 under Section 143(3) of the Act by his order dated 11th December, 1970. The assessee filed an appeal to the AAC confining his objection to the disallowance of certain expenses amounting to Rs. 3,574 by the ITO. The AAC, by his order dated 27th March, 1971, accepted the assessee's appeal in part and allowed a reduction of Rs. 2,000 in the total income of the assessee. The Addl. Commissioner thereafter served a notice under Section 263 of the Act on 28th September, 1972, on the assessee to show cause why the assessment be not set aside as it was prejudicial to the revenue. The assessee objected. By his order dated 7th November, 1972, the Addl. Commissioner overruled the objection and held that the order of the ITO under Section 143(3) was erroneous and prejudicial to the revenue as it was passed without charging interest under Section 217(1A) and without initiating penalty proceedings under Section 273(c). The assessee filed an appeal against the order of the Addl. Commissioner which was allowed by the Tribunal on 23rd February, 1974, on the reasoning that the order of assessment passed by the ITO merged in the order of the AAC and, therefore, the Addl. Commissioner had no jurisdiction to interfere in revision under Section 263 of the Act.

3. The power of revision conferred on the Commissioner by Section 263 of the Act to call for and examine the record of any proceeding under the Act and to interfere

"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"

does not empower the Commissioner to interfere with any order passed by the AAC. Therefore, if any order of the ITO had merged in the order passed in appeal by the AAC, the same cannot be set aside in revision by the Commissioner. The argument of the learned standing counsel for the department, however, is that in the instant case the appeal before the AAC against the order of assessment passed by the ITO was on the limited ques- tion of disallowance of certain expenses and it cannot, therefore, be said that the entire order of assessment had merged with the order of the AAC and, therefore, the Commissioner could revise the order of the ITO without disturbing the points decided by the AAC. In our opinion, there is no merit in this argument. It is true that the only point raised by the assessee before the AAC against the order of assessment passed by the ITO related to the disallowance of certain expenses but the effect of the order of the AAC was to reduce the taxable turnover and thereby to modify the order of assessment passed by the ITO. Setting aside of the order of assessment as was done in the revision by the Addl. Commissioner necessarily resulted in the setting aside of the order of the AAC and, as the power of revision was not available against the order of the AAC, the order of assessment could not be set aside by the Addl. Commissioner. The learned standing counsel relied upon the case of Singho Mica Mining Co. Ltd. v. CIT [ 1978] 111 ITR 231 (Cal). In this case, the ITO had omitted to charge interest under Section 217 and the Commissioner in revision directed the ITO to compute and recover interest although in the meantime the order of assessment had been the subject-matter of appeal before the AAC. The Calcutta High Court held that the merger of the order of assessment was only in respect of matters which were taken up in appeal and as the question of charging interest was not involved in the appeal, the Commissioner could direct the ITO to charge interest under Section 217. It will be noticed that in this case the Commissioner had not set aside the order of assessment passed by the ITO which was the subject-matter of appeal. The order of the Commissioner directing the ITO to compute and recover interest was passed without disturbing the order of assessment. In the instant case, the Addl. Commissioner in revision set aside the order of assessment passed by the ITO. The case of the Calcutta High Court is, therefore, distinguishable and is not applicable. We will again refer to the decision of the Calcutta High Court for examining the question whether the Commissioner can pass an order in revision directing the ITO to compute and recover interest without disturbing the order of assessment.

4. The ITO's jurisdiction to impose penalty under Section 273(c) of the Act arises if he "in the course of any proceeding in connection with the regular assessment" is satisfied that the assessee has without reasonable cause failed to furnish an estimate of the advance tax payable by him in accordance with the provisions of Sub-section (3A) of Section 212. The words "in the course of any proceeding "have been the subject-matter of interpretation by the Supreme Court and it is settled that the necessary satisfaction conferring jurisdiction on the ITO to impose penalty has to be reached before the passing of the order of assessment [See CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739 (SC) and D. M. Manasvi v. CIT [1972] 86 ITR 557 (SC)]. To put it differently, the ITO has no jurisdiction to impose penalty under Section 273 if he omits to record his satisfaction before completing the assessment. If an order of assessment is passed without recording the satisfaction that circumstances exist for imposition of penalty when such a satisfaction should have been recorded, the Commissioner can, in the exercise of his power of revision under Section 263, set aside the assessment and direct the ITO to make a fresh assessment after taking into account the circumstances which make out a case for imposition of penalty. An order of assessment which does not record the satisfaction of the ITO regarding the existence of circumstances making out a case for imposition of penalty when it, is clear that such circumstances do exist will be an order prejudicial to the interest of the revenue because, after the order of assessment, the ITO will have no jurisdiction to impose penalty. The Commissioner in such a case, in exercise of his revisional power, has to set aside the order of assessment to enable the ITO to initiate penalty proceedings. The case of Addl. CIT v. Indian Pharmaceutical [1980] 123 ITR 874 (MP) is a case of this type. The difficulty in the instant case, however, is that the order of assessment passed by the ITO cannot be set aside in revision for the reason that it would result in setting aside the order of the AAC passed in appeal. It necessarily follows that it was not open to the Addl. Commissioner to set aside the assessment order passed by the ITO and to direct him to make a fresh assessment keeping in mind the provisions of Section 273(c). The Addl. Commissioner could not have also directed the ITO to initiate proceedings for imposition of penalty under Section 273(c) without setting aside the order of assessment for the reason that the ITO had no jurisdiction after the order of assessment to initiate penalty proceedings as he had not recorded his satisfaction at or before the passing of the order of assessment that circumstances existed which made out a case for the initiation of penalty proceedings.

5. The next question is whether the Addl. Commissioner in revision could have directed the ITO to charge interest under Section 217(1A) without disturbing the assessment order. Interest under Section 217(1A) can be charged "where, on making the regular assessment, the ITO finds that any such person as is referred to in Sub-section (3A) of Section 212 has not sent the estimate referred to therein". Two things are thus necessary for the exercise of the power to charge interest: (1) the ITO has to find that any such person as is referred to in Sub-section (3A) of Section 212 has not sent the estimate referred to therein; and (2) this finding has to be given on making the regular assessment. There has been some debate before us as to the meaning of the words "on making the regular assessment". It was submitted by the learned standing counsel that these words mean that the requisite finding has to be reached at the time of making the assessment in the assessment order itself and the computation of interest chargeable under Section 217(1A) becomes part of the assessment order under Section 143(3). The learned counsel for the assessee, however, submitted that the words "on making the regular assessment "mean" soon after passing the assessment order". It was also pointed out that under r, 40 read with Section 215(4) the ITO has not only to find that there is a failure to send the estimate but also to see whether there are circumstances which require reduction or waiver of interest. According to the learned counsel, the ITO is required to pass a separate judicial order under Section 217(1A) after notifying the assessee. It was submitted by the learned counsel for the assessee on this basis that as the assessment order was not a bar for passing an order under Section 217(1A) it could not be said that the order of assessment which does not charge interest is an order prejudicial to the revenue revisable on this ground under Section 263. Having regard to the circumstances of this case, it is not necessary for us to decide whether an order charging interest under Section 217(1A) is a part and parcel of the order of assessment or whether the ITO can pass such an order even after passing the order of assessment, for, on either view, in our opinion, the Addl. Commissioner had no jurisdiction to interfere. We may, however, point out that a separate provision for appeal in Section 246 against an order under Section 216 shows that an order under that section does not form part of the order of assessment under Section 143(3) which is separately appealable. Section 217 is similar to s, 216. Section 216 applies when the income has been underestimated for purposes of advance tax and Section 217 applies when no estimate has been sent at all. If an order under Section 216 is different and distinct from an order of assessment passed under Section 143(3), it would be logical to hold that an order under Section 217 is also of the same nature and different and distinct from the order of assessment under Section 143(3). However, as stated earlier, it is not necessary to decide this point. Assuming first that an order under Section 217 is a part of the order of assessment made under Section 143(3) and the finding that the assessee has not sent the estimate referred to in Sub-section (3A) of Section 212 has to be given at the time of making the assessment order, the ITO will have no jurisdiction to charge interest unless the assessment order is set aside. As earlier stated by us; the assessment order could not be set aside by the Addl. Commissioner in revision in the instant case because that would also result in setting aside the order of the AAC passed in appeal. In this view of the matter, the Addl. Commissioner could not in revision set aside the order of assessment and direct the ITO to make reassessment after taking into account the provisions of Section 217(1A) as was done in the instant case. Now, assuming that the ITO is competent to pass an order under Section 217(1A) even after the making of the order of assessment and that the necessary finding that the assessee has failed to submit the estimate for purposes of advance tax need not be recorded in the assessment order, the position then would be that the order of assessment would not be a bar for taking action under Section 217(1A) and, therefore, it would not be possible to say that the order is prejudicial to the revenue on the ground that interest has not been charged therein. We have earlier pointed out that the jurisdiction in revision under Section 263 arises only when the Commissioner finds that an order of the ITO is erroneous in so far as it is prejudicial to the interest of the revenue. The existence of an order prejudicial to the revenue is the very foundation of the revisional jurisdiction exercisable by the Commissioner. A complete absence of any order under Section 217(1A) will not bring the case within the revisional jurisdiction. So, in either view, the Addl. Commissioner, on the facts and in the circumstances of the instant case, was not competent to direct the charging of interest under Section 217(1A).

6. In the Calcutta case, Singho Mica Mining Co. Ltd. v. CIT [1978] 111 ITR 231, to which reference has already been made, the question, that in the absence of an order under Section 217 of the 1961 Actor Section 18A(8) of the 1922 Act there could be no revision, was not decided as this question was not agitated earlier. In Addl. CIT v. Saraya Distillery [1978] 115 ITR 34 (All) it was held that an order of assessment which did not charge interest under Section 215 was prejudicial to the revenue and could be interfered in revision by directing the ITO to charge interest. Section 215 is not in pari materia with Sections 216 and 217. This case, therefore, cannot be taken to be decisive on the question whether an order under Section 216 or Section 217 is an order separate and distinct from the order of assessment under Section 143(3). Moreover, in the Allahabad case, the order of assessment had not been subjected to appeal before the AAC. In CIT v. Cochin-Malabar Estates Ltd. [1974] 97 ITR 466 (Ker), another case relied upon by the learned standing counsel, the Commissioner in revision set aside the assessment order and directed fresh assessment as the ITO had failed to charge interest under Section 215. This case also proceeds upon the basis that an order under Section 215 is a part of the assessment order. We have already pointed out that we are not concerned in the instant case with Section 215. Further, because of the intervention of the appeal to the AAC, in the instant case, the assessment order cannot be set aside. The Kerala case also, therefore, has no application.

7. For the reasons given above, our answer to the question referred is that the Tribunal was right in law in holding that the order of the Addl. Commissioner passed under Section 263 of the Act was without jurisdiction and hence invalid in law. There shall be no order as to costs of this reference.

Commissioner Of Income-Tax, M.P v. Narpat Singh Malkhan Singh

Structured Summary of the Opinion (Reference under Section 256(1) of the I.T. Act, 1961)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue's (Department's) Arguments

Assessee's Arguments / Contentions Referred to in the Opinion

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax, M.P v. Narpat Singh Malkhan Singh

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