1. This is a reference under Section 66(1) of the IndianIncome-tax Act, 1922.
2. The assessee is a private limited company. In the previous year relevant to the assessment year 1960-61, the assessee had earned a sum of rupees one lakh which in its opinion was exempt from income-tax. Thus, in the return filed for the assessment year 1960-61, the assessee did not include in its taxable income the sum of rupees one lakh and appended the following note in Part D of the return which is meant for showing items of income and gain in respect of which the assessee claims exemption.
'Addition to capital reserve......Rs. 1,00,000.
(i) It is a receipt of casual nature not arising from any business, profession, vocation or occupation ; and
(ii) It is also not taxable as capital gain on account of aggregate capital loss of Rs. 21,09,001 brought forward under Section 24(2B) from 1954-55 and 1956-57.'
3. The Income-tax Officer passed an assessment order on March 7, 1964, but did not deal with the claim of the assessee contained in Part D of the return. Later on he issued a notice under Section 148 of the Income-tax Act, 1961, as in his opinion the sum of Rs. 1,00,000 mentioned by the assessee in Part D had escaped assessment. However, the Income-tax Officer did not pass any assessment order within one year of the service of the notice under Section 148, with the result the proceedings under Section 148 lapsed. Thereafter, the Commissioner of Income-tax issued a notice under Section 33B of the Indian Income-tax Act, 1922. The assessee objected to the notice on the ground that as the proceedings under Section 148 were still pending, the Commissioner was not competent to take any action under Section 33B. This objection of the assessee was overruled by the Commissioner saying that proceedings under Section 148 had become time-barred and could not be said to be pending. The Commissioner of Income-tax accordingly cancelled the assessment order to enable the Income-tax Officer to pass a fresh assessment after taking into consideration the claim of the assessee contained in Part D of the return. The assessee then appealed to the Income-tax Appellate Tribunal, but did not succeed. However, at the instance of the assessee, the Tribunal has referred the following question of law for our opinion :
'Whether, on the facts and in the circumstances of the case, action under Section 33B of the Indian Income-tax Act, 1922, against the assessee was maintainable ?'
4. Sri K.L. Misra, learned counsel for the assessee, has argued only one point. He says that in order that the Commissioner should have exercised his jurisdiction under Section 33B, it was necessary for him to be satisfied that the assessment order passed by the Income-tax Officer was prejudicialto the interests of the revenue, and on the material on the record the assessment order, could not be said to be prejudicial to the interests of the revenue.
5. Under Section 33B of the Indian Income-tax Act, 1922, the Commissioner may call for and examine the record of any proceeding under this Act and if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. It is thus clear that under Section 33B the Commissioner can revise an order passed by the Income-tax Officer only if (i) it is erroneous and (ii) is prejudicial to the interests of the revenue. If the order sought to be revised is not prejudicial to the interests of the revenue the Commissioner has no jurisdiction to revise it. We shall, therefore, examine as to whether the assessment order dated March 7, 1964, could be said to be prejudicial to the interests of the revenue.
6. Now, the argument raised by Sri Misra does not appear to have been raised by the assessee in this form before the Income-tax Appellate Tribunal. There the only argument raised was that as the proceedings under Section 148 of the Income-tax Act, 1961, were pending, the Commissioner was not competent to take proceedings under Section 33B. However, we find that the Tribunal has recorded a finding that the order of the Income-tax Officer was prejudicial to the interests of the revenue. This is what the Tribunal has stated in its penultimate paragraph of the appellate order :
'The position, therefore, is that since a sum of Rs. 1 lakh needed to be processed by the Income-tax Officer in the course of assessment proceedings but the same having not been processed and as such the assessment order having been considered by the Commissioner to be prejudicial to the revenue, in our opinion, the Commissioner was justified in passing the impugned order.'
7. It is now well settled that a question which, even though not raised by the assessee, is dealt with by the Tribunal is a question which arises out of the appellate order of the Tribunal: See Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. : 42ITR589(SC) . Moreover, we find that the argument advanced before us does not raise a new question. It is merely one of the aspects of the question mooted before the Tribunal. The question which has been referred to us is not restricted to the argument raised before the Tribunal, but is widely worded and relates to the validity of the action under Section 33B on the facts and circumstances of the case. We can thus examine this question from all the aspects including the oneraised by the learned counsel for the assessee. We, therefore, reject the preliminary objection of the learned counsel for the department that the question sought to be argued by the assessee does not arise out of the order of the Tribunal.
8. Now, reverting to the merits of the case, we find that the only ground upon which the action was taken by the Commissioner under Section 33-B was that the Income-tax Officer did not apply his mind to the claim of the assessee as contained in Part D of the return. The Commissioner himself did not apply his mind to the merits of the claim. In fact, the Commissioner has specifically refrained from going into the merits. In paragraph 7 of his order, he has observed :
'I consider that it will be in the fitness of things if the Income-tax Officer's order dated March 7, 1964, is cancelled because no attention was paid to the item mentioned in Section D of the return dated September 23, 1960. The question of considering the merits does not arise at this stage, since the Income-tax Officer has not applied his mind and come to any conclusion, one way or the other.'
9. We are of opinion that the approach of the Commissioner is erroneous. The failure of the Income-tax Officer to deal with the claim of the assessee in the assessment order may be an error, but an erroneous order by itself is not enough to give jurisdiction to the Commissioner to revise it under Section 33B. It must further be shown that the order was prejudicial to the interests of the revenue. It is not each and every order passed by the Income-tax Officer which can be revised under Section 33B.
10. Section 33B contemplates a notice to the assessee. In response to the notice the assessee may show to the Commissioner that the order sought to be revised is not prejudicial to the interests of the revenue. In that event, the Commissioner would have no jurisdiction to take any further action. He would be competent to take action only if he rejects the plea of the assessee. It thus becomes necessary for the Commissioner to examine the merits of the objection raised by the assessee. He cannot delegate that power to the Income-tax Officer by setting aside the assessment order and directing him to make a fresh assessment after taking into consideration the objection of the assessee.
11. Now, in the instant case, the assessee claimed that a sum of rupees one lakh was not taxable. The Commissioner should have examined that plea on merits. He could take the action that he did only if he rejected the plea of the assessee. It must not be forgotten that under Section 33B the Commissioner can himself modify or enhance the assessment and that he can only do if he considers and decides on merits the objection raised by the assessed. We are, therefore, of opinion that without going into the merits of the claim of the assessee it was not possible for the Commissionerto say that the order of the Income-tax Officer had caused any prejudice to the interests of the revenue and, as such, he was not competent to set aside the assessment order and remand the matter to the Income-tax Officer.
12. We, accordingly, answer the question in the negative, in favour of the assessee and against the Commissioner of Income-tax, The assessee is entitled to the costs which we assess at Rs. 200.