Pathak, J. - (1.) TWO questions have been referred by the Income-tax Appellate Tribunal: " (1) Whether, on the facts and in the circumstances of the case, it could be said that the Inspecting Assistant Commissioner passed no orders when he wrote on the office note " no penalty" and signed below it on September 25, 1963 ? (2) Whether, on the facts and in the circumstances of the case, it could be said that no order was passed by the Income-tax Officer by his writing on the order sheet on October 3, 1963, and so the order passed by the Commissioner on March 25, 1964, under Section 263(1) was null and void ?"
(2.) THE questions arise out of proceedings for the assessment year 1962-63. THE assessee is a registered firm. While taking assessment proceeding for the year 1961-62 the Income-tax Officer noticed some credit entries in the account of the assessee maintained in the books of M/s. Mirchand Nemichand, Guntur, which appear to relate to the years 1958-59 to 1962-63 and totalled Rs. 70,000. Out of this, he treated a sum of Rs. 12,000 as concealed income relating to the assessment year 1962-63 and made an assessment accordingly. In the assessment order he also noted that penalty proceedings under Section 271(1)(c) would be initiated separately in this respect. THEreafter, he sent a draft penalty order to the Inspecting Assistant Commissioner with the records of the case and proposed a penalty of Rs. 2,000. It seems that the office of the Inspecting Assistant Commissioner put up a note on August 3, 1963, stating: " No penalty on account of cash credit added back as income from undisclosed sources is tenable and may be dropped if approved." Below this office note the Inspecting Assistant Commissioner wrote: " No penalty " and signed his name below it on September 25, 1963. Thereafter, on October 3, 1963, the Income-tax Officer made the following entry in the order sheet of his records: " Penalty dropped vide IAC-P-e. Mo. a-Alld/63-64 dated September 9, 1963. " On the same date the Income-tax Officer wrote to the assessee saying : " This is to inform you that your penalty proceeding started under Section 271(1)(c) for the assessment year 1962-63 has been dropped."
(3.) SUBSEQUENTLY, it appears, the Commissioner of Income-tax issued a notice under Section 263(1) to the assessee calling upon him to show cause why the Income-tax Officer's order dated October 3, 1963, should not be cancelled. After hearing the assessee, the Commissioner made an order dated March 25, 1964, cancelling that order and directing that fresh orders should be passed in accordance with law. The Commissioner took the view that the penal proceedings were dropped by the order of the Income-tax Officer dated October 3, 1963, and he was competent to revise that order under Section 263(1). The note made by the Inspecting Assistant Commissioner, he said, was not an order under Section 271 and it could not be said that he was revising it. The assessee appealed to the Income-tax Appellate Tribunal. The Tribunal held that when the Inspecting Assistant Commissioner wrote " no penalty " on September 25, 1963, he did not pass any order. Before he could pass an order, the Tribunal pointed out, he was bound to comply with all the formalities provided in the Act, that is, a date should have been fixed for hearing the assessee, thereafter an actual hearing on the merits, followed by an order concluding the proceeding and the communication of that order to the assessee. The Tribunal pointed out that, as there was no evidence that these formal requirements had been satisfied, no order could be said to have been made by the Inspecting Assistant Commissioner. In the opinion of the Tribunal, what the Income-tax Officer did was merely to seek administrative instructions from the Inspecting Assistant Commissioner and what the Inspecting Assistant Commissioner did was to give certain administrative instructions to the Income-tax Officer. Proceeding from there, the Tribunal observed that if what was done by the Inspecting Assistant Commissioner did not amount to the passing of an order, what was done by the Income-tax Officer subsequently would equally not amount to the passing of an order. The Income-tax Officer, it said, could not be said to have made an order when he recorded the entry in the order sheet on October 3, 1963, that the penalty proceedings had been dropped and communicated that intelligence to the assessee. Upon the view, then, that the Income-tax Officer had made no order under Section 263(1) the Tribunal held that the Commissioner had no jurisdiction to take proceedings and, therefore, the order passed by him was null and void and was liable to be set aside. In the result, it allowed the assessee's appeal.;