Sabyasachi Mukharji, J. - (1.) This reference relates to the assessment for the assessment year 1961-62. The assessee is a firm, M/s. Lalit Prasad Rohini Kumar. The assessee filed return of income on 7th August, 1963, disclosing an income of Rs. 68,046. The ITO, following the finding reached in the earlier year's assessment, held that the income which was declared by the assessee firm actually belonged to a HUF, of which Sri Ram Narayan Agarwalla was the karta at the material times. He, however, made an assessment on the assessee as a protective measure, and in doing so, he also charged interest under Section 215 of the I.T. Act, 1961. In the assessment order, he observed, inter alia, as follows: "Charge interest under Section 18A(8) as the assessee did not file an estimate voluntarily under Section 18A(3), being a person not hitherto assessed. Issue penalty notices (i) for failure to furnish the return of income within the time prescribed under Section 22(1), (ii) for failure to furnish estimate under Section 18A(3) and pay tax in accordance therewith."
(2.) The assessee went up in appeal before the AAC. In the appeal, two contentions were raised. The first was that the ITO having found that the income belonged to the appellant should not be heard to say that the same belonged to some other person. The second ground was that the levy of interest under Section 215 of the I.T. Act, 1961, was illegal. It was urged that the return was filed on 7th August, 1963, and the assessment was completed on 27th December, 1965, and, under Rule 48 of the 1922 Rules or under Rule 40 of the 1961 Rules, the ITO should have exercised his discretion to reduce or waive the interest, if any. The AAC held against the assessee on the first point, saying that the protective assessment was in order. With regard to the second point, it was contended before the AAC that as the return was filed on 7th August, 1963, and the assessment was completed only on 27th December, 1965, the ITO should have exercised his discretion to reduce or waive the interest under the provisions of Rule 48 of the Indian I.T. Rules, 1922, or under Rule 40 of the I.T. Rules, 1962. The AAC accepted the second contention and directed the ITO to consider whether penal interest could be waived or reduced and to recompute the penal interest.
(3.) The revenue went up in appeal to the Tribunal against the aforesaid direction of the AAC. It was contended that as Section 246 of the I.T. Act, 1961, did not provide for any appeal to the AAC against the levy of interest under Section 215, the AAC was in error in entertaining the ground and on adjudicating upon it. It was urged further that the ITO had exercised his discretion against the assessee. The Tribunal held otherwise as it was of the view that the contention raised before the AAC with regard to the assessment involving a substantial question went to the very root of the assessment and, as pointed out by the assessee, if, upheld, there would have been no question of levying any penal interest. In such an appeal the AAC was justified in entertaining the ground on the question of interest. The Tribunal also felt that merely because the ITO had given such direction for levy of interest it could not be presumed that he had exercised his discretion vested in him under Rule 48 of the 1922 Rules or under Rule 40 of the 1962 Rules. Exercise of such discretion should be apparent from the records.;