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Case Number

I.T.A No. 1033.Del/1986; Asst. yr. 1975-76

Judges

A.M
S. Grover, J.M
S.K Chander

Acts

s. 263 of the IT Act, 1961 (hereinafter referred to as the Act)

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Smart Summary

Summary of the Opinion (S.K. Chander, A.M.)

Factual and Procedural Background

This appeal by the assessee challenges an order of the Commissioner of Income-Tax (Administration), Uttar Pradesh, made under section 263 of the Income-tax Act, 1961 on 29 January 1986 relating to the assessment year 1975–76.

The assessee had not previously been assessed to income-tax and did not file a return under section 139 for the year in question. A notice under section 148 was issued on 7 February 1980 after the ITO found that the assessee and others had invested in the construction of a building of M/s Om Rice Mills. The assessee filed a return declaring nil income on 28 February 1980. After considering the Valuation Officer's report and comparing book entries with the assessee's valuer's estimate, the ITO concluded in an order dated 29 February 1984 (apparently under section 143(3) read with section 147(a)) that an investment of Rs. 1,51,550 had been made while books showed Rs. 1,00,743, leaving Rs. 50,807 unexplained. The ITO rounded this to Rs. 50,800 and brought it to tax under section 69B. Show-cause notices for penalties under sections 271(1)(c) and 273(b) were also issued.

Subsequently the ITO discovered that interest under sections 217 and 139(8) had not been charged and that penalty under section 271(1)(a) had not been initiated. The ITO referred the matter to the Commissioner under section 263. The Commissioner issued a show-cause notice under section 263 and, after considering submissions, found that the ITO's order was erroneous and prejudicial for failure to charge interest under sections 139(8) and 217 and for absence of any recorded application of mind. The Commissioner directed the ITO to verify whether interest was chargeable and to act in accordance with law. The assessee appealed from that section 263 order.

Legal Issues Presented

Whether the Commissioner lawfully assumed jurisdiction under section 263 of the Income-tax Act, 1961 to review the ITO's assessment made under section 143(3) read with section 147(a) for the assessment year 1975–76.
Whether non-charging of interest under sections 139(8) and 217, and the absence of any record showing application of mind by the ITO on the question of levy/waiver/reduction of interest, rendered the assessment order erroneous and prejudicial to the interests of Revenue so as to permit exercise of powers under section 263.
Whether charging of interest under section 139(8) is part of the process of assessment (i.e., whether interest forms part of the assessment proceedings).

Arguments of the Parties

Appellant's (Assessee's) Arguments

The assessment was completed under section 147(a) and was not a "regular assessment" as defined under section 2(40) of the Act; therefore section 263(2) prohibited the Commissioner from revising or reviewing it.
The ITO had applied his mind and in judicial discretion decided not to levy interest under section 139(8); absence of mention in the assessment order indicated exercise of discretion rather than omission.
Failure of the ITO to initiate penalty proceedings under section 271(1)(a) did not empower the Commissioner to assume jurisdiction under section 263; omission to record an opinion about penalty is a minor procedural lapse not justifying section 263 intervention.
Relied upon several authorities (listed in the record) to support the proposition that the Commissioner was barred from assuming jurisdiction in respect of assessments under section 147.
Relied on explanatory notes and circular No. 397 (16 Oct. 1984) regarding the explanation to section 139(8) introduced with effect from 1 April 1985, contending limits on applicability.

Respondent's (Departmental) Arguments

The assessment made by the ITO was an original assessment and not a reassessment; the bar in section 263(2) applies only to reassessments under section 147, not to original assessments under section 147(a).
Charging of interest under section 139(8) is part of the process of assessment, as held by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT (1986), and the Mysore High Court decision in Indian Telephone Industries Co-operative Society Ltd. v. ITO was in line with allowing the Commissioner to act.
Given that charging interest is part of assessment, failure to charge or record consideration of interest could make the assessment erroneous and prejudicial to Revenue.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Addl. Commissioner of Income-Tax, Delhi-I v. J.K. D'Costa, (1981) 25 CTR (Del) 224 : (1982) 133 ITR 7 (Del) (SLP dismissed (1984) 147 ITR 1 (Stat))	Cited by assessee's counsel regarding the limits of the Commissioner's power under section 263 and the effect of failure to initiate penalty proceedings.	The Court recorded that this authority was relied upon by the assessee, but ultimately the Court did not treat failure to initiate penalty proceedings as the substantive basis for the Commissioner's order (the Commissioner had given up this point).
CIT v. Smt. Jagjit Kaur, (1980) 126 ITR 540 (All)	Cited by the assessee in support of the proposition that the Commissioner is barred from assuming jurisdiction in respect of assessments under section 147.	The Court noted this authority as relied upon by the assessee; it considered this jurisprudence in light of subsequent Supreme Court authority but concluded that the Commissioner could lawfully assume jurisdiction in the present facts.
P. C. Puri v. Commissioner of Income-Tax, New Delhi, (1985) 151 ITR 584 (Del)	Cited by the assessee in support of the contention that the Commissioner's powers under section 263 are limited in cases of assessments under section 147.	The Court recorded reliance upon it by the assessee but, after analysis (including later Supreme Court authority), held that the Commissioner lawfully assumed jurisdiction here.
T. Khemchand Tajoomal v. CIT, (1986) 51 CTR (Bom) 81 : (1986) 161 ITR 492 (Bom)	Cited by the assessee among authorities supporting the limit on the Commissioner's power to revise assessments under section 147.	The Court acknowledged the citation but proceeded to apply later and controlling authority (Supreme Court) bearing on the issue of whether interest is part of assessment and on the scope of section 263.
CIT v. Mukand Family Trust, (1987) 29 TTJ (Del) (TM) 549 : (1987) 23 ITD 12 (Del) (TM)	Relied upon by the assessee as authority on limits of the Commissioner's revisional power under section 263.	The Court noted reliance upon this decision but reached its conclusion based on statutory language and the Supreme Court decision (Central Provinces Manganese Ore Co. Ltd.).
Third ITO v. T.R.A. Arunathavaselvan, (1988) 24 ITD 121 (Mad)	Cited by the assessee in support of the contention that Commissioner's jurisdiction is limited in the context of assessments under section 147.	The Court recorded the citation; its ultimate conclusion was that the Commissioner could lawfully call for and examine the record in this case and direct verification of interest leviability.
Central Provinces Manganese Ore Co. Ltd. v. CIT, (1986) 58 CTR (SC) 112 : (1986) 160 ITR 961 (SC)	Held that charging of interest under section 139(8) is part of the process of assessment; cited by the Departmental Representative to support that interest is integral to assessment proceedings.	The Court treated this Supreme Court decision as decisive: it held that levy of interest under section 139(8) is part of assessment and therefore omission to consider or record reasons about interest could render an assessment erroneous and prejudicial, permitting intervention under section 263.
Indian Telephone Industries Co-operative Society Ltd. v. ITO, (1972) 86 ITR 566 (Mysore)	Cited by the Departmental Representative as supporting the Commissioner's action concerning interest being part of assessment.	The Court noted this Mysore High Court decision as supporting the Departmental position and treated the Supreme Court authority (Central Provinces) as the controlling legal development on the point.

Court's Reasoning and Analysis

The Court proceeded by identifying the specific grounds on which the Commissioner assumed jurisdiction under section 263: (i) non-initiation of penalty proceedings under section 271(1)(a); (ii) non-charging of interest under sections 139(8) and 217; and (iii) absence of any recorded application of mind by the ITO on the question of interest. The Commissioner ultimately abandoned reliance on the penalty omission ground, so the Court focused on the interest-related grounds.

The Court analysed the statutory language of section 263(2)(a) and concluded that the bar on the Commissioner assuming powers to review or revise is explicitly limited to orders of reassessment made under section 147. The Court distinguished an "order of reassessment" from an "original assessment" made under section 147(a) and read the statute as specifically using "reassessment" to limit the bar. Consequently, the Court held there was no statutory bar preventing the Commissioner from calling for and examining the record of an original assessment made under section 147(a).

On the substantive point of interest, the Court relied on the Supreme Court's decision in Central Provinces Manganese Ore Co. Ltd. v. CIT (1986) to hold that charging of interest under section 139(8) is part of the process of assessment. Given that interest is integrally connected to assessment, any omission by the assessing officer to charge interest, or to record a reasoned application of mind for not charging/waiving/reducing interest, could render the assessment order erroneous and prejudicial to the interest of the Revenue. The Court emphasized that the ITO's discretion regarding waiver or reduction of interest is quasi-judicial and requires reasons; interest cannot be waived by mere inaction.

Applying these principles to the facts, the Court observed that the ITO had neither recorded satisfaction that interest under sections 139(8) and 217 was not chargeable nor issued directions for charging interest, and there was no evidence on the record of any deliberated application of mind by the ITO to this aspect. As such, the Commissioner had jurisdictional facts to assume lawful jurisdiction under section 263 and to direct the ITO to verify the leviability of the interest and charge it according to law.

The Court also clarified that while the Commissioner was entitled to call for and examine the record and to direct verification of interest leviability, it would be a different matter if the Commissioner proceeded to decide the issue himself on the merits. In the present case, the Commissioner did not direct charging as a fait accompli but instructed the ITO to ascertain and act as per law; the assessee remained free to put forward legal and factual contentions before the ITO.

Holding and Implications

Holding: The Court upheld the Commissioner's order under section 263 and dismissed the assessee's appeal. The Court held that the Commissioner lawfully assumed jurisdiction and that his directions to the ITO to verify and, if leviable, charge interest under sections 139(8) and 217 were reasonable and in accordance with law.

Implications:

Direct effect on the parties: The ITO is required to verify whether interest under sections 139(8) and 217 is leviable and, if so, to charge the interest in accordance with law. The assessee may present legal or factual submissions (including relevant amendments) before the ITO in that process.
Jurisdictional clarification: The Court interpreted section 263(2)(a) as barring the Commissioner only in respect of reassessments under section 147; original assessments under section 147(a) are not thereby statutorily insulated from the Commissioner's power to call for and examine records under section 263 when an order appears erroneous and prejudicial to Revenue.
Substantive tax law principle: The Court accepted the Supreme Court's view in Central Provinces Manganese Ore Co. Ltd. that charging of interest under section 139(8) is part of the assessment process; absence of consideration or recorded reasons on that issue may render an assessment vulnerable to revision under section 263.
No overbroad substitutive action by Commissioner: The Court emphasized that the Commissioner did not himself decide the levy of interest on merits but directed the ITO to verify leviability; therefore the Commissioner's direction was limited and procedural in nature rather than substituting his own adjudication on the substantive point.

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Om Rice Mills v. Income Tax Officer

S.K Chander, A.M:— This appeal by the assessee is directed against the order of the CIT (Administration), Uttar Pradesh, made under s. 263 of the IT Act, 1961 (hereinafter referred to as “the Act”) on 29th Jan., 1986 for the asst. yr. 1975–76. Before we record the submissions of the rival parties before us, we bring into focus the background from which the appeal arises.

2. The assessee had not been, hitherto, assessed to income-tax. For the assessment year under appeal no return under s. 139 of the Act had been filed. Finding that the assessee alongwith others had made investment in the construction of a building of M/s Om Rice Mills, the ITO issued notice under s. 148 calling for a return from the assessee. This notice was issued on 7th Feb., 1980. The assessee filed a return declaring ‘nil’ income on 28th Feb., 1980. However, after taking into consideration, the report of the Valuation Officer, regarding the cost of construction for the period Diwali, 1974 to Diwali, 1975 and for the period for Diwali, 1976 to Diwali, 1977, the ITO compared the cost of construction declared as recorded in the books of accounts and the cost of construction estimated by the assessee's valuer. Finally, he concluded, as recorded in his impugned order dt. 29th Feb., 1984, apparently made under s. 143(3) read with s. 147(a), that the assessee had made investment of Rs. 1,51,550 in the construction of the building as against the amount debited in the books of accounts at Rs. 1,00,743. According to the ITO, the balance of Rs. 50,807 remained unexplained. He rounded it off to Rs. 50,800 and brought it to tax under s. 69B of the IT Act, 1961. While completing the assessment, the ITO also issued show cause notices for imposition of penalties under ss. 271(1)(c) and 273(b) of the Act.

3. After the assessment had been so completed, it appears, it was found by the ITO that interest under s. 217 and 139(8) had not been charged and penalty action under s. 271(1)(a) had not been initiated. He, therefore, made a reference to the Commissioner under s. 263 of the Act. The CIT called for the record and issued a notice under s. 263 of the Act to the assessee to show cause why an order under s. 263 need not be made, the order of the ITO being erroneous and prejudicial on account of non-initiation of penalty and non-charging of interest. In response to this show cause notice, the learned counsel for the assessee, Shri B.S Vaish, Advocate appeared before the Commissioner and contended that the impugned assessment had been completed under s. 147(a) of the Act and this being, thus, not a regular assessment, interest under s. 139(8) etc. could not be charged because explanation to s. 139(8) had been introduced w.e.f 1st April, 1985 and it was applicable for and from the asst. yr. 1985–86 onwards. “It was also contended that failure of the ITO to initiate penalty proceedings under s. 271(1)(a) did not empower the Commissioner to assume jurisdiction under s. 263 of the Act. It was projected to the Commissioner that an assessment made by the ITO could not be held to be erroneous and prejudicial to the interest of Revenue merely because of the failure of the ITO to record his opinion about the penalty, if any, leviable upon the assessee. In any case, it was argued that such a minor omission or mistake could not justify the action the Commissioner under s. 263.

4. The Commissioner considered the submissions made on behalf of the assessee before him. According to him, though the assessment had been made under s. 143(3) read with s. 147 yet, it was the first assessment for the asst. yr. 1975–76 because the assessee had not submitted a return under s. 139(1) of the Act. The Commissioner pointed out that it was, thus, not a case of re-assessment and as such, he was not debarred under s. 263 from reviewing such an assessment. Thereafter, the learned Commissioner observed that it is mandatory on the part of the ITO to charge interest under s. 139(8) and s. 217 of the Act. According to him, the ITO committed an error in not charging interest under s. 217 and s. 139(8) and since, the ITO had not left any note as to why such interest was not charged or was not chargeable, there was no application of mind by the ITO. Hence, according to the Commissioner, non-charging of interest under s. 139(8) and s. 217 was erroneous and prejudicial to the interests of Revenue. He, therefore, directed the ITO to verify whether interest in accordance with the law under the above sections was chargeable or not. In support of his view, the Commissioner cited some authorities as recorded in his impugned order.

5. From the order of the Commissioner, it appears, that whereas he proceeded to examine the possibility of action under s. 263 taking into consideration non-charging of interest under s. 139(8) and s. 217 of the Act and non-initiation of penalty proceedings under s. 271(1)(a) but in final terms while making the impugned order, he did not mention anything about initiation of penalty proceedings under s. 271(1)(a). Thus, it would be seen that the order of the ITO was held to be erroneous and prejudicial to the interest of the Revenue because, the ITO neither recorded his opinion anywhere in his record of the proceedings about charging of interest under s. 139(8)/217, nor he actually levied any interest under these sections.

6. The learned counsel for the assessee submitted before us that under the provisions of s. 263, as applicable to the assessment year under appeal, there is prohibition provided in sub-s. (2) ibid that no order shall be made under sub-s. (1)(a) either to revise an order of reassessment made under s. 147 or (b) after the expiry of two years from the date of the order sought to be levied. Since, the impugned order made by the ITO was not a regular assessment order as defined under s. 2(40) of the Act, the CIT was barred from assuming jurisdiction to review or revise the same. It was further contended that the Commissioner had proceeded to assume jurisdiction, inter alia, on the basis that the ITO had not initiated penalty proceedings under s. 271(1)(a), but it is apparent from the impugned order that he had given up that as the basis for assumption of jurisdiction. With regard to charging of interest under s. 139(8)/217, the learned counsel submitted that the ITO had applied his mind and had in his judicial discretion decided not to levy interest as conspicuous absence of any mention of it in the assessment order indicates. On such facts, it was submitted, the Commissioner could not invoke s. 263 to issue directions to the ITO to charge interest under these sections.

7. The learned counsel, nevertheless, argued that in case all the points on which the Commissioner started proceedings under s. 263 were to be considered as to whether he had lawful assumption of jurisdiction, then lack of initiation of penalty proceedings could not be considered by the Commissioner as one of the reasons making the order of assessment] erroneous as well as prejudicial to the interest of Revenue in the light of Hon'ble Delhi High Court case of Addl. Commissioner Of Income-Tax, Delhi-I v. J.K D'Costa., (1981) 25 CTR (Del) 224 : (1982) 133 ITR 7 (Del). He emphasised that against the judgement of the Delhi High Court, even Special Leave Petition filed before the Supreme Court was dismissed by their Lordships as reported in (1984) 147 ITR 1 (Stat).

8. Regarding the other points, on which the Commissioner projected to the assessee that action under s. 263 was required, the learned counsel reiterated that the assessment made by the ITO not being a regular assessment and having been made under s. 147(1), the jurisdiction of the CIT under s. 263 was statutorily ousted. For this proposition he relied upon the following authorities:

1. CIT v. Smt. Jagjit Kaur, (1980) 126 ITR 540 (All);

2. P. C. Puri…Applicant v. The Commissioner Of Income-Tax, New Delhi…, (1985) 151 ITR 584 (Del);

3. T. Khemchand Tajoomal v. CIT, (1986) 51 CTR (Bom) 81 : (1986) 161 ITR 492 (Bom);

4. CIT v. Mukand Family Tst., (1987) 29 TTJ (Del) (TM) 549 : (1987) 23 ITD 12 (Del) (TM).

5. Third ITO v. T.R.A Arunathavaselvan, (1988) 24 ITD 121 (Mad).

He also reiterated the arguments made on behalf of the assessee before the Commissioner with regard to explanation to s. 139(8) introduced w.e.f 1st April, 1985. He also relied upon the explanatory notes contained in circular No. 397 dt. 16th Oct., 1984 issued by the C.B.D.T, appearing at page 1.070 of III Volume of 1988 Direct Taxes Circular by Taxman.

9. Replying to the above submissions, the learned Departmental Representative, on the other hand, submitted that the assessment made by the ITO was an original assessment and not a reassessment. The bar under sub-s. (2) of s. 263 upon the powers of the Commissioner is in relation to a reassessment and not regarding an original assessment made under s. 147. The arguments advanced by the learned counsel for the assessee are therefore, not relevant and may not be accepted. It was contended by the learned Departmental Representative that it is now well settled that charging of interest under s. 139(8) is a part of the process of assessment as laid down by the Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT, (1986) 58 CTR (SC) 112 : (1986) 160 ITR 961 (SC) and the ratio decidendi of the Mysore High Court judgement in the case of Indian Telephone Industries Co-operative Society Ltd. v. ITO, (1972) 86 ITR 566 (Mys) clearly supports the action of the Commissioner.

10. We have carefully considered the rival submissions. We find that the Commissioner proceeded to assume jurisdiction on the grounds as projected in the narration of facts above. Out of the three points he took up for consideration he appears to have himself given up the point regarding the failure of the ITO to initiate proceedings under s. 271(1)(a) of the Act. Therefore, for all intents and purposes, we have to consider whether non-charging of interest under s. 139(8) and s. 217 by the assessing officer and his failure to indicate his mind about it anywhere on the record of the proceedings could render his order as erroneous as well as pre-judicial to the interest of Revenue so as to clothe the Commissioner with lawful jurisdiction under s. 263 of the Act. In determining this issue, we have not only considered the facts of the case but have also very carefully gone through all the authorities cited from both the sides.

11. We are of the opinion that in view of the abovementioned judgement of the Hon'ble Supreme Court in the case of Central Provinces Manganese Ore Company Ltd. (supra) the law is now well settled that levy of interest under s. 139(8) is part of the process of assessment. In fact, Supreme Court laid down this law in a case where the issue for consideration was of waiver or reduction in the levy of interest. In view of this development in law, the judgements of various High Courts, which preceded this judgement, regarding the levy of interest oil the assessee being a part of the process of assessment or not, no longer can be said to hold the field. Therefore, we have to proceed on the premise that charging of interest under s. 139(8) and under s. 217is part of the process of assessment proceedings and anything done about that will form part of the assessment, which if otherwise open for review to the Commissioner under s. 263 would come in for consideration for lawful assumption of jurisdiction. Therefore, in this case, since, the ITO neither recorded that he was satisfied that interest under s. 139(8) and s. 217 was not chargeable nor he issued any directions for charging of interest, there was no deliberated application of his mind to the issue. In fact, the statute provides for waiver or reduction of interest. The discretion vested in the ITO ranges between a right to waive interest or to reduce it. His order being quasi-judicial in nature, it must state some reason for the waiver or reduction of interest. Interest cannot altogether be waived by inaction.

12. However, the question is whether, when the ITO makes an original assessment under s. 147(a) there is any bar provided under the law to prohibit the Commissioner from assuming lawful jurisdiction within the meaning of s. 263(2)(a) of the Act. In this context, we do not find any difficulty in determining the issue because the language of s. 263(2)(a) is very clear that the Commissioner is debarred from assuming powers of review or revision only in a case, where an order of reassessment (emphasis italicised in print added) has been made under s. 147. An order of re-assessment under s. 147 is different from an order of original assessment under s. 147. Therefore, it is clear that the legislature in its wisdom has specifically used the word reassessment to debar the Commissioner from reviewing or revising such an assessment.

13. In our considered opinion, the law applicable as on the statute book for the assessment year in appeal did not debar the Commissioner from calling for and examining the record of any proceedings under the Act in a case, where proceedings had been taken for an original assessment under s. 147(a) if he considers that any order passed thereon by the assessing officer is erroneous, in so far as it is prejudicial to the interest of Revenue. However, it will be a matter entirely different if the Commissioner were to proceed to decide the issue himself on merits also. Thus, we find that in this case, the ITO had made an order, which was open for revision or review by the Commissioner. We also find that in the process of assessment, the ITO was to consider the levy of interest under s. 139(8) and under s. 217 of the Act. In the absence of any evidence, whatsoever, on record to show that the ITO had made deliberated application of his mind to these aspects of assessment, the Commissioner had jurisdictional facts to assume lawful jurisdiction to make the impugned order. We uphold his order as having been made after assumption of lawful jurisdiction on the basis of jurisdictional facts. We also find that the Commissioner did not direct the ITO to charge interest under the above sections. He merely directed the ITO to verify about the leviability of the interest and charge the same as per law. If interest is not leviable as per law the ITO will not be able to do so. The assessee is at liberty to project any legal or factual situation before the ITO including amendment in relevant law. Hence with the directions of the learned Commissioner the assessee cannot find any fault, as these are reasonable and fair directions issued in accordance with law. We, therefore, confirm the order of the Commissioner and dismiss the appeal of the assessee.

Om Rice Mills v. Income Tax Officer

Summary of the Opinion (S.K. Chander, A.M.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Assessee's) Arguments

Respondent's (Departmental) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Om Rice Mills v. Income Tax Officer

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