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 writingon 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.'
3. 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. '
4. 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.'
5. 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.
6. 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 hecould 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.
7. Two reference applications were filed under Section 256(1) of the Act, one by the Commissioner of Income-tax and the other by the assessee. Of the two questions set out above, the first has been referred at the instance of the assessee and the second at the instance of the Commissioner.
8. The Income-tax Officer was of the view that penalty proceedings should be taken under Section 271(1)(c). He proposed to levy a penalty of Rs. 2,000. As the amount of the penalty exceeded the limit up to which he had jurisdiction, he referred the case to the Inspecting Assistant Commissioner for the purpose of imposing penalty. When he made this reference, he acted within the terms of Section 274(2), which provides:
' (2) Notwithstanding anything contained in Clause (iii) of Sub-section (1) of Section 271, if in a case falling under Clause (c) of thatsub-section, the minimum penalty imposable exceeds a sum of rupees onethousand, the Income-tax Officer shall refer the case to the InspectingAssistant Commissioner who shall, for the purpose, have all the powersconferred under this Chapter for the imposition of penalty.'
9. The Tribunal has observed that the Income-tax Officer, when sending the papers to the Inspecting Assistant Commissioner, was seeking administrative instructions. We do not see how that inference is possible upon thefacts of the case. There could he no question of seeking administrative instructions because the Income-tax Officer had no jurisdiction at all to impose a penalty exceeding Rs. 1,000 in a case falling under Section 271(1)(c). What the Income-tax Officer did was to refer the case to the Inspecting Assistant Commissioner, who alone had jurisdiction to levy the penalty proposed. It appears to be the practice in the office of the Inspecting Assistant Commissioner to put up a note on such a reference, suggesting whether it was a case for penalty. When the papers with the note were pat up before the Inspecting Assistant Commissioner, he wrote ' no penalty ' and appended his signature and the date thereto. When regard is had to the circumstance that the case was referred to him by the Income-tax Officer for the exercise of his jurisdiction under Section 274(2), no other conclusion is possible but that what was done by the Inspecting Assistant Commissioner was to make an order under Section 274(2). He considered the matter as not calling for the imposition of a penalty, and accordingly made that order. The Tribunal has been impressed by what it considers to be the formal requisites of a proceeding before an order can be made. It points to the necessity of a date being fixed for hearing the assessee, an actual hearing, concluded by an order and communication of that order. We think it is open to the Inspecting Assistant Commissioner, and indeed desirable, that when a reference is made to him by the Income-tax Officer he should apply his mind to the question whether or not it is a case for penalty before notice is issued to the assessee requiring him to show cause against the imposition of a penalty. Where the Inspecting Assistant Commissioner comes to the opinion that no penalty is called for, he will drop the proceeding rendering it wholly unnecessary to issue notice to the assessee to appear in the matter. The formal requirements contemplated by the Tribunal are those which attend a proceeding in which it is proposed to pass an order against the assessee. It is then that the assessee has a right to be heard, and proceedings for hearing him must be taken.
10. We hold that the words ' no penalty ' written by the Inspecting Assistant Commissioner on September 25, 1963, constituted an order made under Section 274(2) of the Act. The view taken by the Tribunal to the contrary is erroneous. We, therefore, answer the first question in the negative.
11. The order dated September 25, 1963, was communicated by the Inspecting Assistant Commissioner to the Income-tax Officer as was required by Section 274(2) of the Act. On October 3, 1963, therefore, the Income-tax Officer made an entry in the order sheet noting that the penalty proceeding had been dropped, and he referred in that behalf to the communication received from the Inspecting Assistant Commissioner. When he made that entry, the Income-tax Officer cannot be considered to havemade an order. Indeed, he had no jurisdiction to do so. The imposition of the penalty rested entirely within the jurisdiction of the Inspecting Assistant Commissioner, and when he made the order which he did, there was nothing more to be done. The Income-tax Officer could not by a subsequent order limit or extend the order made by the Inspecting Assistant Commissioner. When he made the entry of October 3, 1963, it was merely for the purpose of completing the record before him. Thereafter, he wrote to the assessee informing him that the penalty proceeding had boon dropped. When he did so it was not because the statute compelled him to do so but because it was only right that the assessee should know what had Happened in the proceeding, especially as after the proceeding had been initiated under Section 271(1)(c) the assessee was on no occasion privy to the proceeding before the Inspecting Assistant Commissioner. We are clear in our mind that the entry made by the Income-tax Officer in the order sheet on October 3, 1963, cannot be construed as an order made by him. It was not an order within the meaning of Section 263(1) of the Act and, therefore, the Commissioner had no jurisdiction to take proceedings under that provision. So far as this order is concerned, we are of opinion that the Tribunal was right in the view which it took. Accordingly, we answer the second question in the affirmative.
12. In the result, the questions are answered as follows:
Question No. 1 : In the negative.
Question No. 2 : In the affirmative.
13. The assessee is entitled to its costs, which we assess at Rs. 200. Counsel's fee is assessed in the same figure.