2004 (9) TMI 45 - HC - Income Tax

Jurisdiction of CIT to revise an order - Whether Tribunal was correct in holding that the assessment order passed by the Income-tax Officer without initiating penalty proceeding under section 273(c) for committing breach of section 212(3A) by the assessee, was not erroneous and prejudicial to the interests of the Revenue within the meaning of section 263 of the Income-tax Act, 1961? - If AO fails to initiate or record his satisfaction for the initiation of the penalty proceedings during the course of the assessment proceedings it would be a case where the assessment order can be said to be erroneous Thus, we answer this question of in the negative, i.e., in favour of the Revenue and against the assessee.

Issues Involved:
1. Whether the Tribunal was correct in holding that the assessment order passed by the Income-tax Officer without initiating penalty proceeding under section 273(c) was not erroneous and prejudicial to the interests of the Revenue within the meaning of section 263 of the Income-tax Act, 1961?
2. Whether the Tribunal was correct in holding that the Commissioner of Income-tax exceeded the powers vested in him under section 263 in canceling the entire assessment order to enable the Department to initiate penalty proceedings?

Issue-wise Detailed Analysis:

Issue 1: Correctness of Tribunal's Decision on Assessment Order
The Tribunal held that the omission of the Income-tax Officer to initiate penalty proceedings under section 273(c) did not render the assessment order erroneous and prejudicial to the interests of the Revenue. The Tribunal relied on the decision in Addl. CIT v. Saraya Distillery [1978] 115 ITR 34, which allowed the Commissioner to revise the order for not charging interest under section 217(1A) but did not extend this to initiating penalty proceedings. The Delhi High Court in J. K. D'Costa [1982] 133 ITR 7 supported this view, stating that penalty proceedings are independent of assessment proceedings and failure to record the satisfaction for penalty does not vitiate the assessment order. This view was consistently followed by other High Courts including Rajasthan, Gauhati, Calcutta, and Madras.

However, the Madhya Pradesh High Court in Indian Pharmaceuticals [1980] 123 ITR 874 held that failure to consider facts attracting penalty provisions during assessment renders the order erroneous and prejudicial to Revenue interests. The Allahabad High Court in Saraya Distillery [1978] 115 ITR 34 also supported this, stating that an order is erroneous if it fails to decide a point or record a finding on an issue which ought to have been done.

The Supreme Court in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 emphasized that an order is erroneous if it involves incorrect assumptions of facts or law, or lacks application of mind. The High Court concluded that the omission to initiate penalty proceedings during assessment makes the order erroneous and prejudicial to Revenue interests, agreeing with the Madhya Pradesh High Court's view.

Issue 2: Exceeding Powers under Section 263
The Tribunal held that the Commissioner of Income-tax exceeded his powers under section 263 by canceling the entire assessment order to enable the initiation of penalty proceedings. The Tribunal allowed the appeal in part, upholding the direction to charge interest under section 217(1A) but not the initiation of penalty proceedings.

The High Court, referencing the Supreme Court's ruling in Malabar Industrial Co. Ltd., reiterated that an erroneous order prejudicial to Revenue interests justifies the exercise of powers under section 263. The High Court found that the failure to initiate penalty proceedings during assessment rendered the order erroneous and prejudicial, thus within the Commissioner's jurisdiction to revise.

Conclusion:
The High Court concluded that the Tribunal was incorrect in holding that the failure to initiate penalty proceedings did not render the assessment order erroneous and prejudicial to Revenue interests. The Commissioner of Income-tax had the jurisdiction to revise such an order. Hence, the first question of law was answered in the negative, in favor of the Revenue and against the assessee. The second question was deemed unnecessary to answer in light of the first conclusion. No order as to costs was made.

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