COMMISSIONER OF INCOME-TAX M.P. Vs. NARPAT SINGH MALKHAN SINGH, JABALPUR
LAWS(MPH)-1980-7-28
HIGH COURT OF MADHYA PRADESH
Decided on July 26,1980

Commissioner Of Income -Tax M.P. Appellant
VERSUS
Narpat Singh Malkhan Singh, Jabalpur Respondents

JUDGEMENT

G .P.SINGH - (1.)This is a reference made by the Income -tax Appellate Tribunal under section 256 (1) of the Income -tax 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 Income -tax Officer, 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 Appellate Assistant Commissioner confining his objection to the disallowance of certain expenses amounting to Rs. 3,574/ - by the Income -tax Officer. The Appellate Assistant Commissioner 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 Additional Commissioner of Income -tax thereafter served a notice under section 263 of the Act on 28th September 1972 on the assessee to show cause why the assessment be net set aside as it was prejudicial to the revenue. The assessee objected By his order dated 7th November 1972 the Additional Commissioner overruled the objection and held that the order of the Income -tax Officer under section 143 (3) was erroneous and prejudicial to the revenue as it was passed without charging interest under section 217 (I -A) and without initiating penalty proceedif1gs under section 273 (c). The assessee filed an appeal against the order of the Additional Commissioner which was allowed by the Tribunal on 23rd February 1974 on the reasoning that the order of assessment passed by the Income -tax Officer merged in the order of the Appellate Assistant Commissioner and, therefore, the Additional Commissioner had no jurisdiction to interfere in revision under section 263 of the Act.
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 Income tax Officer 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 Appellate Assistant Commissioner. Therefore, if any order of the Income -tax Officer had merged in the order passed in appeal by the Appellate Assistant Commissioner, 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 Appellate Assistant Commissioner against the order of assessment passed by the Income tax Officer was on the limited question of disallowance of certain expenses and it cannot, therefore, be said that the entire order of assessment had merged with the order of the Appellate Assistant Commissioner and, therefore the Commissioner could revise the order of the Income -tax Officer without disturbing the points decided by the Appellate Assistant Commissioner. In our opinion, there is no merit in this argument. It is true that (he only point raised by the assessee before the Appellate Assistant Commissioner against the order of assessment passed by she Income -tax Officer related to the disallowance of certain expenses but the effect of the order of tile Appellate Assistant Commissioner was to reduce for taxable turnover and thereby to modify the order of assessment passed by the Income -tax Officer setting aside of the order of assessment as was done in the revision by the Additional Commissioner necessarily resulted in setting aside of the order of the Appellate Assistant Commissioner and as the power of revision was not available against the order of the Appellate Assistant Commissioner, the order of assessment could not be set aside by the Additional Commissioner. The learned Standing Counsel relied upon the case of Singho Mica Mining Ca. Ltd v. Commissioner of Income -tax, Central, Calcutta 111 ITR 231, in this case, the Income -tax Officer had omitted to charge interest under section 217 and the Commissioner in revision directed the Income -tax Officer to compute and recover interest although in the mean time the order of assessment had been the subject matter of appeal before the Appellate Assistant Commissioner. 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 of interest was not involved in appeal, the Commissioner could direct the Income -tax Officer to charge interest under section 217. It will be noticed that in this case the Commissioner had not set side the order of assessment passed by the Income -tax Officer which was the subject -matter of appeal. The order of the Commissioner directing the Income tax Officer to compute and recover interest was passed without disturbing the order of assessment. In the instant case, the Additional Commissioner in revision set aside the order of assessment passed by the Income -tax Officer. 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 Income -tax Officer to compute and recover interest without disturbing the order of assesment.

(3.)THE Income -tax Officer'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 (3 -A) 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 Income tax Officer to impose penalty has to be reached before passing the order of assessment [see Commissioner of Income -tax Madras and another v. S.V. Angidi Chattiar 44 ITR 739, and D.M. Manasvi v. Commissioner of Income -tax, Gujarat II 86 ITR 557 To put it differently, the Income -tax Officer 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 Income -tax Officer 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 Income -tax Officer 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 Income -tax Officer 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 Income -tax Officer to initiate penalty proceedings. The case of Additional Commissioner of Income -tax Bhopal v. Indian Pharmacueticals, Indore is a case of this type. The difficulty in the instant case, however, is that the order of assessment passed by the Income -tax Officer cannot be set aside in revision for the reason that it would result in setting aside the order of the Appellate Assistant Commissioner -passed in appeal. It necessarily follows that it was not open to the Additional Commissioner to set aside the assessment order passed by the Income -tax Officer and to direct him to make a fresh assessment keeping in mind the provisions of section 273 (c). The Additional Commissioner could not have also directed the Income -tax Officer to initiate proceedings for _ imposition of penalty under section 273 (c) without setting aside the order of assessment for the reason that the Income -tax Officer 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 the assessment that the circumstances existed which made out a case for initiation of penalty proceeding.


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