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P.C. Puri Vs. Commissioner of Income-tax, Delhi-ii - Court Judgment

LegalCrystal Citation
Subject Direct Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax References Nos. 119 to 124 and 127 and 128 of 1972
Judge
Reported inILR1984Delhi134; [1985]151ITR584(Delhi)
ActsIncome Tax Act, 1961 - Sections 2(40), 139(8), 143, 143(3), 144, 156, 207, 208, 209, 214, 215, 256, 256(1), 259, 263, 263(1), 263(2), 271(1), 273 and 275
AppellantP.C. Puri
RespondentCommissioner of Income-tax, Delhi-ii
Cases ReferredScott v. Cawsey
Excerpt:
income-tax act, 1961 - section 263--whether failure of the income tax officer to charge interest under section 215 is prejudicial to the interest of the revenue and is the commissioner justified in directing the i.t.o. to levy interest--penalty proceedings not initiated by the i.t.o. under section 273 (a) for filing untrue estimate of advance-tax--whether assessment order could be said to the erroneous or prejudicial to revenue?--penalty proceedings are not part of assessment proceedings; provisions of sections 215 and 273 explained and distinguished; section 259--in case of conflict of decisions of a court--whether reference could be made to a third judge instead of a full bench?;overruling cit v. caxton press (p) ltd. (129, itr 462 delhi),; 1. under section 215 the income tax officer.....chadha, j.1. these eight references under s. 256(1) of the i.t. act, 1961 (hereinafter referred to as 'the act'), four at the instance of the assessed and four at the instance of the commissioner of income-tax, raised two common questions of law for the opinion of the court. the questions are : '1. whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the commissioner of income-tax should have directed the income-tax officer to modify the original assessment order by including any interest under section 215 that the might consider chargeable after duly considering the provisions of that section and of rule 40(1) 2. whether, on the facts and in the circumstances of the case, the commissioner of income-tax was entitled to pass an order under.....
Judgment:

Chadha, J.

1. These eight references under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), four at the instance of the assessed and four at the instance of the Commissioner of Income-tax, raised two common questions of law for the opinion of the court. The questions are :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Commissioner of Income-tax should have directed the Income-tax Officer to modify the original assessment order by including any interest under section 215 that the might consider chargeable after duly considering the provisions of that section and of rule 40(1)

2. Whether, on the facts and in the circumstances of the case, the Commissioner of Income-tax was entitled to pass an order under section 263 to revise the assessment order, to direct the Income-tax Officer to initiate proceedings for the imposition of penalty under section 273(a) of the Income-tax Act, 1961 ?'

2. The assessed in the four sets of references are partners of a firm known as M/s. Parkash Brothers & Co. The cases relate to the assessment year 1964-65. The assessed were served on August 30, 1963, with notices under s. 156 of the Act for the payment of advance tax under s. 210 the assesseds filed on August 31, 1963, their respective estimates of advance tax in terms of the provisions of s. 212(1). The amount demanded by the ITO in the case of Shri Parkash Chand was Rs. 13,841.58, in the case of Shri Roshan Lal - Rs. 16,214.44, in the case of Shri Budh Raj - Rs. 14,301.74, and in the case of Shri Dharam Pal - Rs. 13,859.31. Each of the partners paid advance tax as per their estimates in each case, i.e., Rs. 7,335.75. The assesseds eventually filed their respective returns of income on November 11, 1964, for the assessment year 1964-65. The assesseds had shown considerably higher incomes than those estimated under s. 212. The assessments were completed by the ITO on March 8, 1968. In the case of Shri Parkash Chand, the total income returned was Rs. 77,018 and the total income assessed was Rs. 83,011 on which the tax of Rs. 28,202 was payable. In the case of Shri Roshan Lal, the total income returned was Rs. 78,185, whereas the total income assessed was Rs. 84,183 on which the tax payable was Rs. 29,718. In the case of Shri Budh Raj, the total income returned was Rs. 79,437 and the total income assessed was Rs. 87,472 on which tax payable was Rs. 32,533. In the case of Shri Dharam Pal, the total income returned was Rs. 77,018 and the total income assessed was Rs. 83,087 on which the tax payable was Rs. 28,409. While completing the assessments, the ITO neither charted any interest under s. 215 nor initiated any proceedings for penalty under s. 273(a) of the I.T. Act.

3. The Commissioner, in purported exercise of the powers under s. 263 of the Act, expressed the opinion that since the advance tax paid by the assesseds on their own estimates was less than 75% of the tax determined on the basis of the regular assessment they were liable to pay interest in terms of s. 215, that further this was also a fit case for initiation of proceedings under s. 273(a) for the imposition of a penalty for furnishing a false estimate of advance tax payable and that the ITO failed to charge such interest and to initiate such penalty proceedings at the time of assessment. The Commissioner opined that the omission of the ITO to charge interest under s. 215 and to initiate penalty proceedings under s. 273(a) while completing the assessment was erroneous and prejudicial to the interests of the Revenue. The Commissioner issued notices to the assesseds and, after hearing the assessed's representations, set aside the assessments made by the ITO and directed that the ITO should make fresh assessments in accordance with the provisions of the Act and take action in the course of such proceedings for charging interest under s. 215 and also initiate proceedings for the imposition of penalty under clause (a) of s. 273.

4. The assesseds filed appeals to the Income-tax Appellate Tribunal (for short called the 'Tribunal'). After considering the facts of the case, the terms of the original assessments and the provisions of s. 215 and rule 40, the Tribunal came to the conclusion that when the ITO passed the assessment orders on March 8, 1968, he did so without adverting to the terms of s. 215 and that, thereforee, his order was erroneous and prejudicial to the interests of the Revenue. The Tribunal further expressed the view that even assuming that at the time of the original assessment, the ITO had considered the provisions of s. 215 and the provisions of rule 40, in the absence of any discussion by him as to how the case fell within the terms of the rule, the Commissioner was entitled to revise the order and direct the ITO to consider the provisions of the section and the rule by applying his mind and then come to the conclusion as to whether interest should be charged or not. The Tribunal held that the Commissioner's order in so far as it related to the direction to the ITO to consider the provisions of s. 215 and rule 40 had to the upheld. The omission to consider the applicability of s. 273(a) regarding the imposition of penalty was held as totally extraneous to the scope of the assessment order and this omission could not be said to be an error vitiating the assessment order. The Tribunal set aside the direction of the Commissioner that in the course of the fresh assessment proceedings, the ITO should take steps for initiating proceedings under s. 273. In the result, the order of the Commissioner was upheld in part only and partly modified.

5. As already noticed, the returns of income were filed by the assesseds on November 11, 1964. The assessment orders show that the assessment were made and the total income computed on March 8, 1968. The relevant assessment was completed, to put in the words of rule 40(1) relied upon, more than one year after the submission of the return. The arguments of Shri P. N. Monga, the learned counsel for the assesseds, on the first question is that the ITO must be deemed to have exercised the discretion vested in him under s. 215 read with rule 40(1) in favor of the assesseds waiving penal interest. He urges that the levy of interest was not obligatory upon the ITO. The terms of s. 215 make it clear that the amount of interest has to be calculated at the time of regular assessment and if the ITO failed to make any mention of levy of interest in his assessment orders, then the ITO must be deemed to have exercised his discretion for waiving penal interest. It must be construed, says the counsel, that the ITO had decided to impose no interest on the facts before him. Reliance is placed on the two decisions of the Supreme Court in the case of Chockalingam v. CIT : [1963]48ITR34(SC) , Narayan Row v. Ishwarlal Bhagwandas : [1965]57ITR149(SC) , and one of the Bombay High Court in Shantilal Rawji v. Nair, IV ITO : [1958]34ITR439(Bom) .

6. Another argument is that an assessment cannot be said to be erroneous or prejudicial to the interests of the Revenue because of the failure of the ITO to record his opinion about the leviability of penal interest. He urges that an assessment can be erroneous if there is a finding of default of the assessed, i.e., the delay attributable to the assessed. The counsel refers to the finding of the Commissioner that 'it may well be the case that the delay in the completion of the assessment was not attributable to the assessed' and urges that the foundation of the Commissioner's jurisdiction to revise the order under s. 263 does not exist. The contention is that 'erroneous' means imperfect and the Commissioner must express the opinion that it is erroneous in some point of law or at least in some sense. The records of the case before the ITO were before the Commissioner, who read the noting and the orders passed by the ITO in the record of the relevant assessment proceedings. As to what transpired between the filing of the return and the assessment also formed part of the assessment and no further investigation of fact was required to be made. The Commissioner while considering the record of the proceedings and exercising his revisional power under s. 263 had to review the record and come to a conclusion that the rights of the Revenue had been injuriously affected by the order. The counsel concludes that an opinion is not expressed by the Commissioner in this case that there is a fair likelihood that but for the error there would have been a different result in regard to the imposition of penal interest. Reliance is heavily placed on the decision of a Bench of this court in CIT v. Caxton Press (P.) Ltd. : [1981]129ITR462(Delhi) .

7. Let me first make a review of the relevant provisions of the Act. The procedure for assessment is provided in Chapter XIV. Section 143 confers power on the ITO to make an assessment. The collection and recovery of tax is provided in Chapter XVII. Advance payment of tax is provided in Part C of this Chapter. Under s. 210, where a person has been previously assessed by way of regular assessment under the Act or under the Indian I.T. Act, 1922, the ITO may, on or after the 1st day of April in the financial year, by order in writing, require him to pay to the credit of the Central Government advance tax determined in accordance with the provisions of ss. 207, 208 and 209. The notice of demand issued under s. 156 in pursuance of such order has to specify the Installments in which the advance tax is payable under s. 211. The assesseds in these cases were served with notices under s. 156 for payment of advance tax under s. 210. They were required by the said notices to pay specified Installments during the financial year 1963-64 of advance tax amounting to the figure mentioned in each notice in relation to their income assessable for the assessment year 1964-65. The notices were duly received. Section 212(1) makes it obligatory on the assessed to file an estimate at any time before the last Installment is due in his case if his case falls within the four corners of s. 212. Section 212(1) to (5) and (3A) deal with the estimate by a person previously assessed. Section 212(3) deals with the estimate by a person not previously assessed. The assesseds had filed their estimates of income for the previous year ending March 31, 1964, relevant to the assessment year 1964-65. The advance tax was paid in accordance with the said estimates. The return of income was also filed by the assesseds. The ITO completed the assessment under s. 143(3) of the Act. The total income is assessed and the tax payable determined under s. 143 of the Act. Section 215(1) of the Act requires that where, in any financial year, an assessed has paid advance tax under s. 212 on the basis of his own estimate, and the advance tax so paid is less than 75% of the assessed tax, simple interest at the rate of 12% per annum from the 1st day of April following the said financial year up to the date of regular assessment shall be payable by the assessed upon the amount by which the advance tax so paid falls short of the assessed tax. Thus, interest is payable and has to be charged under s. 215(1), where the assessed had underestimated his income liable to advance tax. Regular assessment is defined by s. 2(40) as meaning the assessment made under s. 143 or s. 144. The ITO is thus obliged in law to assess the total income and to determine the tax payable under s. 143 or s. 144 and the interest payable under s. 215(1) up to the date of regular assessment and upon the basis of the tax determined by the regular assessment. Section 215(1) casts a statutory obligation on the ITO to levy penal interest. Omission to do so would constitute a violation of statutory duty and the order of the ITO would be clearly erroneous. If an ITO who is required in law to calculate the interest in the manner provided in the Act, does not levy and calculate interest and then make a demand of it, the consequence is that the Revenue is inevitably deprived of the interest payable. Such an order adversely affects the legal right of the Revenue and, hence, prejudicial to the interests of the Revenue. Prejudicial to the interests of the Revenue means, though not defined, that the lawful revenue due to the State has not been realised.

8. Section 215 of the Act provides that in the circumstances set therein, interest shall be payable by the assessed. The rigour of the law is, however, mitigated by a discretion given to the ITO to reduce or waive the interest payable by the assessed under s. 215. Sub-s. (4) of s. 215 provides that in such cases and under such circumstances as may be prescribed, the ITO may reduce or waive the interest payable by the assessed under this section. Rule 40 is the relevant rule reading as follows :

'Waiver of interest. - The Income-tax Officer may reduce or waive the interest payable under section 215 or section 217 in the cases and under the circumstances mentioned below, namely :-

(1) When the relevant assessment is completed more than one year after the submission of the return, the delay in assessment not being attributable to the assessed......

(5) Any case in which the Inspecting Assistant Commissioner considers that the circumstances are such that a reduction or waiver of the interest payable under section 215 or section 217 is justified.'

9. Waiver means abandonment of a right and it may be either express or implied from conduct, but its basic requirement is that it must be an intentional act with knowledge. The ITO must direct himself properly to the statutory provisions. He must call to his attention all relevant matters which he is bound to consider. He must exclude from his consideration all irrelevant matters. There must be some indication of the application of mind to these considerations. The ITO is given a discretion under the law to reduce or waive the interest. The reduction can only be by an overt act of first determining the interest payable and then reducing it in the quantum or the period. The Commissioner went into the record of the relevant assessment proceedings. There is no noting or order by the ITO indicating that he had at all applied his mind to the question of waiver or reduction of interest payable by the assessed under s. 215. The question of delay in the assessment being attributable to the assessed was not found against the assessed or in his favor, as the record is bereft of any application of mind. There is no indication in the noting or order of the ITO that he had addressed himself to the question of reduction or waiver of interest payable under s. 215. The discretion vested in the ITO ranges between a right to waive interest completely or to reduce it. The order being quasi-judicial in nature, it must state some reason for the waiver or reduction of interest. The interest cannot automatically be waived altogether by inaction. Mere silence, without more, on the part of the ITO cannot give rise by any stretch of imagination to an inference of waiver of interest payable under s. 215 In these cases, the ITO has omitted to exercise his jurisdiction and, consequently, it was necessary for the Commissioner to act under s. 263. He rightly directed the ITO to consider the question of levy of interest in the context of rule 40.

10. In Shantilal Rawji v. Nair : [1958]34ITR439(Bom) , by an assessment order dated March 10, 1953, the total income of the assessed there was assessed. Later on, the ITO discovered that the assessed had not paid tax in advance on the proper amount. He, thereforee, made an order on October 9, 1956, under s. 35 of the Indian I.T. Act, 1922, adding interest on unpaid tax due under s. 18A(6) and issued a notice of demand. The assessed invoked the writ jurisdiction of the High Court to challenge the validity of the order of rectification. A contention raised was that there was no mistake in the order of the ITO as a result of the omission to charge interest livable under s. 18A(6) by reason of the fifth proviso to s. 18A(6) which was inserted in the 1922 Act on May 24, 1953, with retrospective effect from April 1, 1952, and which vested a discretion in the ITO to reduce or waive the interest payable by the assessed. What was decided in that case was that the omission to change interest cannot constitute an apparent error, because the ITO could, under the law in force (though retrospectively), have waived the interest. Mr. Palkhivala in that case did not put his case on the basis that the court must assume that the ITO had waived the penal tax, because under the proviso, he had the power to do so (see page 446). The argument which had found acceptance with the Bombay High Court was an entirely different argument that on the record as it stands, it cannot be clearly predicated of the action of the ITO that it constituted a violation of a statutory duty or obligation.

11. Reliance on Chockalingam's case : [1963]48ITR34(SC) is misplaced. What was decided in that case is that if the ITO proceeds under s. 35 to rectify an assessment in which no penal interest for failure to pay advance tax was added and orders the levy of penal interest without sending any notice to the assessed, then there will be a clear breach of the principles of natural justice. It is no authority for the proposition that as the order of the ITO was absolutely silent as regards the reduction or waiver of interest, it was permissible to infer that the ITO had, in fact, considered the matter and exercised his discretion in favor of the assessed. Narayan Row's case : [1965]57ITR149(SC) , is again on appeal from the judgment of the Bombay High Court in which the earlier judgment in Shantilal Rawji's case : [1958]34ITR439(Bom) , was followed. The Supreme Court upheld the order of the High Court in setting aside the order passed by the ITO and the Commissioner. It was observed that in assuming that the Amendment Act of 1953 had no retrospective operation and rejecting the claim of the assessed on the ground that on the date when the order of assessment was made, the Amendment Act of 1953 had not come into operation, but became effective as from December, 1953, when the rules were framed, the Commissioner committed an error apparent on the face of the record. An order passed without considering the proviso to s. 18A(6) inserted by retrospective amendment and applicable to the facts of the facts of the assessed was regarded as defective. It is, thus, no authority for the proposition that there was waiver of interest chargeable, when the ITO did not levy interest at the time of completion of the assessment. Apart from it, none of these cases consider the question of the scope of s. 263.

12. The question referred in Caxton Press' case : [1981]129ITR462(Delhi) was whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the ITO must be deemed to have exercised his discretion and waived levy of penal interest and that the Commissioner had no jurisdiction under s. 33B of the Indian I.T. Act, 1922, to revise the order of the ITO. Another Division Bench of this court expressed that either the Appellate Tribunal was right in holding that the ITO must be deemed to have exercised his discretion and waived penal interest or it must be held that he had omitted to say anything on this question, that if it was an order waiving the penal interest, then the Commissioner clearly had no jurisdiction under s. 33B, that if it was an omission, then only the ground on which the interest should have been imposed under rule 48(1) of the Indian I.T. Rules, 1922, was on the ground that the delay in the assessment was attributable to the assessed and that this is not the finding of the Commissioner in his order under s. 33B. The ratio recorded does support the case of the assesseds, but they were made in the context of the facts and circumstances of the case and the question posed for answer. With great respect to the learned judges, I am unable to persuade myself to agree to the view expressed that unless the Commissioner records a finding that the delay is attributable to the assessed, there is no jurisdiction to revise the order.

13. In the case before me, there is no doubt no finding that the delay in completion of the assessment was not attributable to the assessed. The Commissioner noticed when he said that it may well be the case. There was no decision rendered by the Commissioner as to whether or not the delay in the completion of the assessment was attributable to the assessed. The Commissioner went into the record of the assessment proceedings and recorded a finding that there is no noting or order by the ITO in the record of the relevant assessment proceedings indicating that he had at all applied his mind to the question of waiver or reduction of the interest payable by the assessed under s. 215 of the Act. It was held that there was no basis for holding that the omission of the ITO to charge interest was due to the fact that he had waived it under rule 40(1). The ITO has power to waive or reduce the interest, but this power is exercisable subject to certain conditions and limitations as prescribed in rule 40. As the ITO has failed to advert to the provisions regarding interest, the order is certainly erroneous and prejudicial to the interests of the Revenue.

14. In Addl. CIT v. D'Costa : [1982]133ITR7(Delhi) , one of the questions raised was that the ITO did not deal with the question of the chargeability of interest under s. 217 for the failure of the assessed to file an estimate of advance tax and pay the tax thereon in so far as the assessment year 1965-66 was concerned. The Commissioner was of the opinion that the assessment order passed by the ITO was erroneous and prejudicial to the interests of the Revenue. The Tribunal was satisfied that the circumstances of the case justified the direction to the ITO to consider the levy of interest under s. 217. Another Division Bench of this court held that having come to the conclusion that there was a defect in the assessment order in so far as the question of levy of interest was not considered by the ITO, all that the Commissioner had to do was to direct the ITO to consider the question on merits and in accordance with law after giving the assessed an opportunity of being heard. Though there is no detailed reasoning in support of the opinion expressed, I am in respectful agreement with the view expressed by the Division Bench of this court. I regret to note that the counsel did not bring the Caxton's case : [1981]129ITR462(Delhi) , to the notice of the Division Bench.

15. For the above reasons, I would have answered question No. 1 in the affirmative, i.e., against the assesseds and in favor of the Revenue but for the contra view taken by another Division Bench in Caxton Press' case : [1981]129ITR462(Delhi) . It would, thereforee, be necessary to resolve the conflict.

16. Mr. Wazir Singh, the learned counsel for the Revenue, urges that an order of the ITO which does not levy penalty without stating any reasons thereforee is on the face of it an order erroneous and prejudicial to the interests of the Revenue. He submits that as penalty proceedings can be initiated only in the course of the assessment proceedings, the failure to do so by the ITO can be the subject-matter of a direction by the Commissioner while examining the assessment record in exercise of the powers conferred under s. 263 of the Act. Reliance is placed on three cases of the Madhya Pradesh High Court in support of this contention. These are Addl. CIT v. Indian Pharmaceuticals : [1980]123ITR874(MP) , Addl. CIT v. Kantilal Jain : [1980]125ITR373(MP) and Addl. CIT v. Nathoolal Balram : [1980]125ITR596(MP) . The ratio in the first case is that if the ITO during the pendency of the assessment proceedings omitted to take notice of the facts attracting penalty under s. 271(1)(a) which ultimately ended in an order of assessment, the order would be erroneous and the Commissioner would be entitled to exercise the jurisdiction conferred on him under s. 263 of the Act. The other two cases have followed the law laid down in the first case.

17. So far as this court is concerned, the matter is not rest integra. A Bench of this court in Addl. CIT v. D'Costa : [1982]133ITR7(Delhi) , held on similar facts as are before us that the Commissioner could not pass an order pertaining to penalty under s. 263 of the Act. An assessment cannot be said to be erroneous or prejudicial to the interest of the Revenue because of the failure of the ITO to record his opinion about the leviability of the penalty in the case. The penalty proceedings do not form part of the assessment proceedings. The question came to be considered once again by this court in Addl. CIT v. Achal Kumar Jain : [1983]142ITR606(Delhi) , when the rule of law laid down earlier was reiterated by the same Bench with additional reasons. The Bench expressed respectful disagreement with the view expressed by the Madhya Pradesh High Court.

18. The counsel for the Revenue has relied upon Abraham v. ITO : [1961]41ITR425(SC) and CIT v. Bhikaji Dadabhai & Co. : [1961]42ITR123(SC) , wherein the Supreme Court held that under s. 28 of the Indian I.T. Act, 1922, liability to pay additional tax, which is designated as penalty, is imposed in view of the dishonest and contumacious conduct of the assessed. In my view, these observations made by the Supreme Court should be considered in the context in which they were made. The Supreme Court was construing the expression 'assessment' occurring in s. 44 of the 1922 Act, in order to find out whether 'assessment' included procedure for the imposition of penalty on the dissolved firm. The I.T. Act makes a distinction between tax and penalty. Tax and penalty are distinct and different concepts under the Act. Penalty is in addition to the tax determined as payable by the assessed. Penalty cannot be taken as additional tax for all purposes. Under s. 273(a), a penalty may be imposed for deliberately furnishing an untrue estimate. It is also true that it is in the course of the proceedings in connection with the regular assessment that the ITO should be satisfied regarding the default of the assessed, but the proceedings for the levy of a penalty are proceedings independent of and separate from the assessment proceedings. There is no identity between the assessment proceedings and penalty proceedings, the latter are separate proceedings, that may, in some cases, follow as a consequence of the assessment proceedings. I am in respectful agreement with the view expressed by the Division Bench of this court that the Commissioner, while dealing with the assessment proceedings in assessment order, cannot extend his powers to deal with penalty proceedings when they are not before him.

19. I would have answered question No. 2 against the Department but for the fact that they my learned brother holds a different view.

GOEL, J.

20. I agree with the reasoning and conclusion of my learned brother S. S. Chadha J. on question No. 1. As regards question No. 2, S. S. Chadha J. proposes to follow the two decisions of an earlier Bench of this court consisting of S. Ranganathan and Ms. Leila Seth JJ. in the cases, Addl. CIT v. D'Costa : [1982]133ITR7(Delhi) and Addl. CIT v. Achal Kumar Jain : [1983]142ITR606(Delhi) . There are four prior decisions of different Benches of the Madhya Pradesh High Court in which a contrary view has been taken. None of these decisions was brought to the notice of the Bench of this court in the case of D'Costa case : [1982]133ITR7(Delhi) . In the later case of Achal Kumar Jain : [1983]142ITR606(Delhi) , the Bench noticed these decisions of the Madhya Pradesh High Court, but followed its earlier decision in the case of D'Costa and the decisions of the Madhya Pradesh High Court were impliedly dissented from. With respect, I find myself unable to accept the view taken by the Bench of this court in the said two cases and, in my opinion, these decisions need reconsideration by a larger Bench.

21. The facts of the case are fully stated in the order proposed by S. S. Chadha J. and they need not be repeated here.

22. Now, the question as to what is the extent of the powers of the Commissioner and the scope of his revisional jurisdiction under s. 263 of the Act, viz., as to which orders are revisable by the Commissioner, are well settled. The language of s. 263 itself is very clear and unambiguous. It states that the Commissioner may call for and examine the record of any proceeding under the Act, and if he considers that any order passed therein by the ITO is erroneous in so far as it is prejudicial to the interests of the Revenue, he may pass such order thereon as the circumstances of the case justify. It is thus clear and is well-settled that the revisional jurisdiction of the Commissioner is not confined only to assessment orders passed by the ITOs. The Commissioner may revise any other order passed by the ITO under the Act, which is erroneous in so far as it is prejudicial to the interests of the Revenue. Orders passed by the ITO in penalty cases are one such category of orders which fall within the purview of the revisional jurisdiction of the Commissioner under s. 263. The Supreme Court in the case of CIT v. Amritlal Bhogilal & Co. : [1958]34ITR130(SC) held that an order of the ITO registering a firm can be revised by the Commissioner under s. 33B of the Indian I.T. Act of 1922, whenever he considers that it has been erroneously passed and is prejudicial to the Revenue. The following observations of the Supreme Court at page 141 of the report of the case are also very pertinent for the purpose of resolving the controversy arising in the present case :

'Whether or not the revisional power can be exercised in a given case must be determined solely by reference to the terms of s. 33B itself. Courts would not be justified in imposing additional limitations on the exercise of the said power on hypothetical considerations of policy or the extraordinary nature of the power.'

23. Section 263 of the Act of 1961 is the provision corresponding to s. 33B of the Act of 1922.

24. It is also equally settled that the revisional powers of the Commissioner under s. 263 are of the widest amplitude.

25. Before I deal with the main question as to the connection of penalty action under s. 273(a) and for that matter under s. 271(1) also with assessment proceedings and assessment orders, it may be pointed out here that this court in the case of Gee Vee Enterprises v. Addl. CIT : [1975]99ITR375(Delhi) held that as it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would make such an enquiry prudent that the word 'erroneous' in s. 263 includes the failure to make such an enquiry. The order becomes erroneous because such an enquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. This view was impliedly followed in the case of Bhagwat Swarup Charanjit Singh & Co. : [1982]133ITR13(Delhi) . We have also taken the same view in this very case while answering question No. 1.

26. Now, as regards the main question, viz., that of the connection of penalty action with 'assessment', it is to be seen that the Privy Council in the case of CIT v. Khem Chand Ramdas [1938] 6 ITR 414 and later the Supreme Court in the cases of Abraham v. ITO : [1961]41ITR425(SC) and in CIT v. Bhikaji Dadabhai & Co. : [1961]42ITR123(SC) , held that the word 'assessment' is used in a different context under the I.T. Act and is of wide amplitude. It is also used as meaning the whole procedure laid down in the I.T. Indian Act of 1922 for imposing liability on the taxpayer. The Supreme Court in the two cases even held that penalty is additional tax. The fact remains and it cannot be disputed that penalty is 'revenue' and is an addition to income-tax, if any, determined as payable by the assessed.

27. Kanga and Palkhivala, learned authors of The Law and Practice of Income Tax, expressed their opinion on the point in the seventh edition of their book at page 1207 as below :

'The word 'assessment' would cover penalty proceedings, if it is used (as it is in some sections) to denote the whole procedure for imposing liability on the taxpayer, and that is the correct ratio of the Supreme Court's decisions in Abraham's case : [1961]41ITR425(SC) and Bhikaji Dadabhai's case : [1961]42ITR123(SC) .

28. With this background, we have to examine the point at issue. It would be worthwhile to point out here that none of the said principles was disputed on behalf of the assesseds nor did the Bench of this court hold to the contrary in either of the two decisions. It was held in both these cases that penalty proceedings do not form a part of the assessment proceedings and, thereforee, the omission on the part of the ITO to record in the assessment order his satisfaction or the lack of that in regard to the leviability of penalty cannot be said to be a factor vitiating the assessment order in any respect and an assessment cannot be said to be erroneous or prejudicial to the interests of the Revenue because of the failure of the ITO to record his opinion about the leviability of penalty in the case.

29. It cannot be disputed that proceedings for assessment are not confined only to the computation of income and tax but various other things which fall within the scheme of Chapter XIV containing provisions relating to procedure for assessment are included therein. Not only that, according to s. 273(a) of the Act, if the ITO in the course of any proceedings in connection with the regular assessment is satisfied that the assessed has without reasonable cause failed to furnish an estimate of the advance tax payable by him in accordance with the provisions of s. 212(3), he may impose penalty on his as provided in that provision. If the facts attract the provisions of s. 273(a), it is obligatory on the ITO to initiate penalty action under that provision. Further, as pointed out above, for initiating penalty action, the ITO has to record his satisfaction in that regard in the course of assessment proceedings i.e., up to the time of the passing of the assessment order. The ITO may make a note in that regard either in the record of the assessment proceedings or in the assessment order which is the culmination of assessment proceedings. I am unable to think of any record other than the record of assessment proceedings where an ITO may record his satisfaction. Thus the note regarding the satisfaction of the ITO has to be seen by referring to the record of the assessment proceedings and the assessment order. In case the ITO fails to record his satisfaction in the said regard in the assessment proceedings or lastly in the assessment order, the ITO shall have no jurisdiction to take penalty action under s. 273(a) and probably in all cases falling under s. 271(1) of the Act as well and penalty action if so taken shall be wholly illegal. It is clear that the recording of the satisfaction of the ITO is a condition precedent to such penalty action and further that the satisfaction has to be recorded by the ITO on the record of the assessment proceedings or at the latest in the assessment order. That being the position, assessment proceedings have not only a necessary relation with penalty action, they are germane to penalty action and the need for taking penalty action has to be sown during the assessment proceeding and further the assessment record including the assessment order must show if the necessary noting about the ITO's satisfaction in that regard was or was not made.

30. Penalty proceedings are different from assessment proceedings in the sense that in penalty proceedings, the Revenue cannot simply rely on the material as adduced in the course of the assessment proceedings and the assessed had a right to lead fresh evidence, etc., in penalty proceedings in support of his Explanationn. That, however, is an entirely different thing. That has no relevance to the question as to which record should be examined by the Commissioner to find out if initiation of penalty action under s. 273(a) was called for in a particular case or not and whether the Commissioner for that purpose can or cannot refer to the assessment proceedings and the assessment order as passed by the ITO. To my mind, the matter is very simple. In the exercise of his powers of revision under s. 263, the Commissioner, in order to satisfy himself if initiation of penalty action under s. 273(a) in called for in a particular case, has necessarily to examine the assessment proceedings and the assessment order and they alone are to be examined by him and he need not refer to any other record, because it is only in the record of assessment proceedings or the assessment order that the note by the ITO regarding the reaching of his satisfaction has to be made. In a case in which, according to the Commissioner, the ITO ought to have recorded his satisfaction that it is a fit case in which penalty action under s. 273(a) is called for, but omits to do so, the Commissioner on finding its omission in the assessment proceedings and the assessment order, has to hold the 'assessment order' as erroneous and prejudicial to the interests of the Revenue. The reason is that the ITO may withhold the recording of his satisfaction till the passing of the assessment order; and he is bound in the last to record that in the assessment order. It is thus the assessment order, which in the event of non-recording of the ITO's satisfaction in the said regard, that would be erroneous. Thus, to say that for seeing if in a particular case, penalty action was or was not called for, assessment order is not to be seen or in the event of its omission in the assessment proceedings and the assessment record, the assessment order cannot be held to be erroneous, to my mind, is wholly incorrect. It may also be pointed out at this stage that in a case like the present one when penalty proceedings are not initiated at all, the question of the Commissioner seeing if 'penalty proceedings' are erroneous and prejudicial to the interests of the Revenue, does not arise. All that he has to see is if initiation of penalty action was called for. The Bench of this court while deciding the two cases lost sight of the fact that these are cases of omission to initiate penalty action and no penalty proceedings were at all taken; and as such there was no question of there being any record of penalty proceedings which could into by looked into by the Commissioner.

31. A question arises as to what is to happen in a case in which the ITO just omits to record his satisfaction for initiation of penalty action when the same is called for on the facts of a case. Obviously, in such a case, penalty action cannot be commenced unless the assessment order is set aside and the ITO is directed to record his satisfaction in that regard on the record of assessment. If it be held that the Commissioner does not have revisional jurisdiction under s. 263 in such cases and he cannot set aside an assessment for the said purpose, it would lead to grave consequence, and the result would be that by the said omission on the part of the ITO penalty provisions under s. 273(a) and under s. 271(1) of the Act would be rendered nugatory and redundant. Surely that is not the position nor is there a lacuna in the Act in that regard. Section 263 of the Act clearly and squarely applies to such a situation and the Commissioner clearly has the power to remedy the error by setting aside the assessment order for that purpose and to that extend. That is exactly what was done by the Commissioner in the present cases. He has set aside the assessment orders with the direction to the ITO to take action for initiating penalty proceedings under s. 273(a) of the Act besides the action for charging interest under s. 215 of the Act. The assessment orders in all other respects remained intact.

32. I am supported in my above view by the decisions of different Benches of the Madhya Pradesh High Court in the four cases, viz, Addl. CIT. v. Indian Pharmaceuticals : [1980]123ITR874(MP) , Addl. CIT v. Kantilal Jain : [1980]125ITR373(MP) , Addl. CWT v. Nathoolal Balaram : [1980]125ITR596(MP) and CIT v. Narpat Singh Malkhan Singh : [1981]128ITR77(MP) .

33. In conclusion, I would answer the question in the affirmative, i.e., in favor of the Revenue and against the assessed.

[The matter then came up for hearing before AVADH BEHARI ROHATGI J. His Lordship delivered the following judgment on February 23, 1984.]

and on a difference of opinion

Avadh Behari Rohatgi J.

34. In these eight references under s. 256(1) of the I.T. Act, 1961 ('the Act'), four at the instance of the assessed and four at the instance of Commissioner of Income-tax (CIT), the following two questions of law were referred for the opinion of the court :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Commissioner of Income-tax should have directed the Income-tax Officer to modify the original assessment order by including any interest under section 215 that he might consider chargeable after duly considering the provisions of that section and of rule 40(1)

(2) Whether, on the facts and in the circumstances of the case, the Commissioner of Income-tax was entitled to pass an order under section 263 to revise the assessment order, to direct the Income-tax Officer to initiate proceedings for the imposition of penalty under section 273(a) of the Income-tax Act, 1961 ?'

35. The cases relate to the assessment year 1964-65. The assesseds were served on August 30, 1963, with notices under s. 156 of the Act for payment of advance tax under s. 210. They filed their estimates of advance tax as required by s. 212(1) on August 31, 1963. Eventually, they filed their returns of income on November 11, 1964, for the assessment year 1964-65, showing considerably higher incomes than those estimated under s. 212. The assessments were completed on March 8, 1968, by the ITO on even much higher figures than those shown by them in their returns. While framing the assessments, the ITO did not charge any interest under s. 215. Nor did he initiate any penalty proceedings under s. 273(a) of the Act.

36. The Commissioner was of the opinion that failure on the part of the ITO to charge interest from the assesses under s. 215 and to initiate penalty proceedings under s. 273(a) were prejudicial to the interests of the Revenue. He came to the conclusion that, on both these points, the order of the ITO was erroneous. He, thereforee, set aside the assessments of the ITO in exercise of his powers under s. 263 of the Act. He directed the ITO to make fresh assessments in each case and to take action for charging interest under s. 215 and also initiate penalty proceedings under clause (a) of s. 273 in the course of the Proceedings.

37. From the order of the CIT, the assesseds appealed to the Income-tax Appellate Tribunal. The Tribunal was of the view that the ITO did not direct his attention to the terms of s. 215 and, thereforee, hid order was erroneous and prejudicial to the interests of the Revenue. They agreed with the CIT on the question of interest and upheld his direction. On the other question, they differed from him. They held that the question regarding imposition of penalty under s. 273(a) was totally extraneous to the scope of the assessment order and the Commissioner had no jurisdiction to direct the ITO to initiate penalty proceedings under s. 273(a). In the result, they set aside the order of the Commissioner in so far the initiation of penalty proceedings under s. 273(a) was concerned. The Tribunal then referred the above two question on interest and penalty to this court.

38. The references were heard by a Division Bench of this court (S. S. Chadha and H. C. Goel JJ.). On the first question regarding interest, they were agreed that the Commissioner was right in directing the ITO to consider the question of levy of interest which he had failed to do. But they were faced with a decision of another Division Bench as CIT v. Caxton Press (P.) Ltd. : [1981]129ITR462(Delhi) (D. K. Kapur and N. N. Goswami JJ.) with which they disagreed. They found themselves in agreement with another decision of another Division Bench in Addl. CIT v. D'Costa : [1982]133ITR7(Delhi) (S. Ranganathan and Leila Seth JJ.). These two cases - Caxton and D'Costa-being of co-equal authority taking different views on the subject, are in conflict with each other, they thought. So Chadha and Goel JJ. suggested that the conflict must be resolved.

39. On the second question of initiation of penalty proceedings, the learned judges took diametrically opposite views. Chadha J. following D'Costa and Addl. CIT v. Achal Kumar Jain : [1983]142ITR606(Delhi) , held that the Commissioner had no power to make a direction with regard to the initiation of penalty proceedings. Goel J., however, took the opposite view. He disagreed with D'Costa and Achal Kumar Jain of this court and preferred to follow the decisions of the Madhya Pradesh High Court in Addl. CIT v. Indian Pharmaceuticals : [1980]123ITR874(MP) , Addl. CIT v. Kantilal Jain : [1980]125ITR373(MP) and Addl. CIT v. Nathoolal Balaram : [1980]125ITR596(MP) . Goel J. held that it was within the power of the Commissioner under s. 263 to direct the ITO to initiate penalty proceedings under s. 273(a). On this difference of opinion, the cases were referred to me under s. 259 of the Act.

40. Before I proceed to deal with the two questions referred to us, I will deal with another question which was raised before me. It was suggested by counsel for the assesseds that there being a conflict of decisions in this court on the matter of interest, these references ought to have been placed before a Full Bench and not before a third judge. In my opinion, there is no merit in this contention. Section 259 says :

'Case before High Court to be heard by not less than two judges. - (1) When any case has been referred to the High Court under section 256, it shall be heard by a Bench of not less than two judges of the High Court, and shall be decided in accordance with the opinion of such judges or of the majority, if any, of such judges.

(2) Where there is no such majority, the judges shall state the point of law upon which they differ, and the case shall then be heard upon that point only by one or more of the other judges of the High Court, and such point shall be decided according to the opinion of the majority of the judges who have heard the case including those who first heard it.'

41. In accordance with this section, the references under s. 256 were heard by a Bench of two judges of the court. On the first question, they found that there was a conflict of decisions which required to be resolved. On the second point, there was a sharp difference of opinion. So it became necessary to refer to a third judge. This is perfectly in accordance with s. 259.

42. There is no difference, really speaking, between a Full Bench of three judges sitting together and this method of referring to the third judge in the case of a difference of opinion between the two judges. Whether the first method is adopted or the second, 'opinion of the majority' will be decisive. In this case, there is a formal reference to a third judge to ascertain his opinion. His is the deciding voice. He turns the scales. The third judge is the Full Bench. Not alone. But along with the two others who first heard the case. Whether the three judges sit at the same time or at different times - two at one time, and the third hearing the matter later on a difference of opinion - does not make much difference. As has happened in this case, the two judges have differed. So the case has come to me, the third judge. The two judges have expressed their opinion. I am now called upon to give my opinion. The opinion of the majority will prevail. All that happens is that the third is segregated from the two and prevail. All that happens is that the third is segregated from the two and does not sit with them. He comes in later on when there is a difference of opinion between them. In all cases, it is the theory of numbers which is the foundation of the doctrine of stare decisis. Majority is a term signifying the greater number. Counting of heads underlies the theory of judicial precedents as in any majority decision. The constitutional requirement of a constitution court of five judges is based on this theory. Similarly, the Code of Civil Procedure, 1908, enacts that in the case of a difference of opinion, the matter has to be referred to a third judge. (see section 98, C. P. C.). In my opinion, the reference was correctly made to me as the third judge.

43. I now turn to the two questions referred to us. On the first question, there is a plethra of precedents of the various High Courts. To name but a few of those cases, I may mention : Addl. CIT v. D'Costa : [1982]133ITR7(Delhi) , CIT v. Cochin-Malabar Estates Ltd. : [1974]97ITR466(Ker) , Prem Chand Sita Nath Roy v. Addl. CIT : [1977]109ITR751(Cal) , Singho Mica Mining Co. Ltd. v. CIT : [1978]111ITR231(Cal) , Addl. CIT v. Saraya Distillery [1978] 115 ITR 34 , Jagdish Rice Mills v. CIT : [1978]114ITR817(MP) . R. R. Pictures v. CIT [1983] 43 ITR 429 and CIT v. City Palayacot Co. : [1980]122ITR430(Mad) . All these decisions uniformly take the view that the Commissioner has revisional jurisdiction under s. 263 where the assessment order is silent as the levy of interest under s. 139(8) or s. 215 or s. 217.

44. Under s. 215, the ITO must charge interest if he finds that there is no case for waiver or reduction of interest. So he has to make a speaking order. He has to give reasons why, in his opinion, he has waived or reduced interest. It is a quasi-judicial act when he makes an order under s. 215. It is an essential constituent of a quasi-judicial proceeding that the parties must be heard by the authority and reasons must be given for the view that it takes. Waiver is a conscious act and a mere omission or inaction on the part of the ITO to levy penal interest cannot be construed under any circumstances as an act of waiver. If he waives or reduces interest, he must give reasons. On a combined reading of s. 215 and rule 40, it appears to me that if the ITO fails to do his statutory duty, the Commissioner exercising his powers under s. 263, can direct the ITO to consider the levy of penal interest. This is the view taken by this court in D'Costa's case : [1982]133ITR7(Delhi) . Chadha and Goel JJ. agreed with this view. I am also of the opinion that D'Costa is an accurate statement of law.

45. Caxton's case : [1981]129ITR462(Delhi) , it seems to me, is not in line with the preponderant view of the various High Courts. In that case, the ITO did not levy interest. It was claimed by the assessed that he must be deemed to have waived it under rule 48 of the I.T. Rules, 1922, and, thereforee, it was not open to the Commissioner to revise the order. The Tribunal accepted this view. On a reference, the court agreed with the Tribunal.

46. Caxton was cited before Chadha and Goel JJ. They strongly dissented from it. They preferred the view taken in D'Costa's case : [1982]133ITR7(Delhi) . But since Caxton was a decision of co-equal authority, they could not overrule it. Caxton was their chief difficulty on the first question.

47. In Caxton, the gist of the view of the learned judges is expressed in this sentence : 'On any reading of the ITO's order, the Commissioner had no jurisdiction under section 33B of the Indian I.T. Act, 1922, to set aside the order except if he had found that the delay in the assessment proceedings was attributable to the assessed.' This, they said, the Commissioner did find. 'The foundation of the Commissioner's jurisdiction thereforee', they continue, 'did not exist and he could not have set aside the order of the ITO'. On the facts of a particular case, this may be so, but the principle enunciated in that case is not correct. The judges upheld a silent order. But there is no room for silence where there is a duty to disclose reasons. A silent order is as inscrutable as the face of the sphinx.

48. The learned judges in Caxton asked the right question : 'Is a specific order necessary, or can the waiving of the penalty be done without saying anything ?' But, with respect, their answer is wrong. The underlying thought of their judgment is that the ITO need not pass a 'specific order' and he can waive penal interest 'without saying anything'. There is much in the train of thought in the judgment of Caxton to suggest that in the view of the learned judges a speaking order is not an essential requirement of law under s. 215 of the Act. This is not right. In CIT v. Cochin-Malabar Estate Ltd. : [1974]97ITR466(Ker) , the judges said :

'The Commissioner is certainly entitled to know on what grounds interest had been waived.'

49. The question of levy of penal interest is a matter of statutory obligation. It is quasi-judicial proceeding. The authorities under the Act have to act judicially and one of the requirements of judicial action is to give a fair hearing to a person before deciding against him. If interest is levied, the assessed is entitled to know the reasons because the touches his pocket. If it is waived, the Commissioner is entitled to know the reasons because it is prejudicial to the Revenue.

50. In my opinion, Caxton is based on a view which is wrong in its initial assumption. The inarticulate major premise of the decision is that silence means waiver. The statute does not support such a construction. It is not for the Commissioner to find whether delay is attributable to the assessed or the Department. It is for the ITO to find facts and if he finds that the delay was not attributable to the assessed, he can waive interest under rule 40. But he must find so and say so. The ITO has to find that special circumstances exist in a case which justify waiver or reduction of interest chargeable under s. 215 of the Act. Mere omission by the ITO to charge penal interest cannot as a matter of law be regarded as waiver (R. R. Pictures [1983] 143 ITR 429. If he waives or reduces interest, he must give reasons. If he does not, the Commissioner can direct him to decide the question of interest. In Caxton, the learned judges overturned the statute. What was to be done by the ITO as a matter of duty, they asked the CIT to do. This is an inversion of duties. The primary duty is of the ITO as a fact-finding authority in deciding whether to levy interest or waive it. Section 215(4) is addressed to the ITO : 'In such cases and under such circumstances as may be prescribed, the ITO may reduce or waive the interest payable by the assessed under this section.' The jurisdiction of the Commissioner is revisional, a sort of overseeing or overview of what the ITO does. It will indeed be a fine case of upside-down logic if the Commissioner were to start on a voyage of discovery in each case to explore facts and reasons, 'cases' and 'circumstances', leading to waiver of interest simply because the ITO whose duty it was has chosen to say nothing on the subject of interest.

51. A speaking order by the ITO is, thereforee, necessary. Section 215 casts a statutory duty on the ITO. The performance of a statutory duty involves the application of mind. Natural justice must be observed. The assessed must be heard. Section 215 requires the ITO to pass an order in the discharge of his quasi-judicial duty stating why he was not charged interest. If he waives interest, he must state the circumstances in which he does so. But he cannot waive interest 'without saying anything'. Say he must, whether he charges interest or waives it. 'A specific order' is the sine qua non of the exercise of a statutory power. There is no assumption or presumption that the ITO has waived interest simply because he has chosen to remain silent. Silence is not waiver. There is a duty on the ITO to speak. If he does not speak, he does not do his duty. Chadha and Goel JJ. seem to be right in dissenting from Caxton. Their criticism of this case is valid. I join them and hold that Caxton should be overruled here and now.

52. In Addl. CIT v. Saraya Distillery [1978] 115 ITR 34, it was held that the omission of the ITO to charge interest under s. 215, in a case where the advance tax paid by the assessed fall short of 75 per cent. of the tax assessed, would substantially affect the legal right of the Revenue and, hence, would be prejudicial to its interests. The Additional Commissioner had, thereforee, jurisdiction to issue notice under s. 263. This is exactly the case here.

53. On the cases, it appears to me, that the preponderance of opinion is that the failure of the ITO to charge interest is clearly prejudicial to the interests of the Revenue and, thereforee, the Commissioner will be justified in law to direct the ITO by an order under s. 263(1) to levy interest. Caxton is the solitary decision to take a contrary view and, in my opinion, ought not to be followed.

54. On the second question regarding initiation of proceedings for penalty, there is a sharp division of opinion. This court in D'Costa's case : [1982]133ITR7(Delhi) and Achal Jain's case : [1983]142ITR606(Delhi) , has consistently held that the Commissioner has no power to set aside the assessment on the ground that the ITO has not levied penalty under s. 273(a). The Madhya Pradesh High Court, on the other hand, in India Pharmaceuticals' case : [1980]123ITR874(MP) has taken a contrary view. Recently in CIT v. Narpat Singh Malkhan Singh : [1981]128ITR77(MP) , the view taken in Indian Pharmaceuticals' case : [1980]123ITR874(MP) was reaffirmed in that court. Chadha J. preferred to follow D'Costa and Achal Jain. Goel J. was of the view that Indian Pharmaceuticals laid down the correct law.

55. The parameter of s. 263 has been the subject of controversy. D'Costa and Achal Jain take the view that penalty proceedings are independent proceedings and form no part of the assessment proceedings. In Achal Jain's case : [1983]142ITR606(Delhi) , Ranganathan and Leila Seth JJ. expressly dissented from Indian Pharmaceuticals' case : [1980]123ITR874(MP) and adhered to their previous view expressed in D'Costa's case : [1982]133ITR7(Delhi) . Their conclusion appears to be summed up in a sentence : 'It is well established that proceedings for the levy of a penalty whether under section 271(1)(a) or under section 273(b) are proceedings independent of and separate from the assessment proceedings.'

56. In Indian Pharmaceuticals' case : [1980]123ITR874(MP) , the Madhya Pradesh High Court holds that the word 'assessment' in s. 263 has been used in a wide sense and confers power on the Commissioner to set aside the assessment where the ITO has not levied penalty in a case in which, in the opinion of the Commissioner, he ought to have levied.

57. The question turns on the proper construction of s. 263. The controversy centres round the word 'assessment' used in s. 263. Does it comprehend penalty proceedings The Delhi view is that penalty proceedings are not part of assessment proceedings. The M. P. view is that the word 'assessment' is of 'wider perspective' and includes in its fold penalty proceedings. If the words were so plain and precise as to be capable of one signification only, so that the actual provision were its own expositor, leaving no room for construction, no court could venture to alter its meaning. But the words of a mixed and wavering content are the greatest of all tricksters. Language plays great tricks with the human mind.

58. We were told by that distinguished tax judge, Rowlatt J., that one must look at what is clearly said in the statute (See Cape Brandy Syndicate v. IRC [1921] 1 KB 64 . But the difficulty is that in the taxing Acts nothing is clearly said. 'Of the maker of the tax code, as of another inscrutable author, 'we ask and ask : Thou smilest and art still, Out-topping knowledge'.' (Mathew Arnold's Sonnet on Shakespeare, quoted in IRC v. Frere [1965] AC 402 (per Viscount Radcliffe). But we cannot fold our hands and blame the draftsman. The intention of the legislature has to be discovered.

59. As early as 1916, Lord Wrenbury gave this warning : 'In these Acts', he said, speaking of the English taxing Acts of 1842 and 1880, 'it is not possible to rest any conclusion upon a particular word. The same word is in one section used in one sense and in another in a different sense.' (Kensington, I.T. Commissioner v. Aramayo [1916] 1 AC 215 . The Privy Council in CIT v. Khemchand Ramdas [1938] 6 ITR 414 said :

'One of the peculiarities of most Income-tax Acts is that the word 'assessment' is used as meaning sometimes the computation of income sometimes the determination of the amount of tax payable and sometimes the whole procedure laid down in the Act for imposing liability upon the taxpayer. The Indian Income-tax Act is no exception in this respect.......'

60. It is universally accepted now that the Act uses the term 'assessment' in more than one sense. Verbal consistency is the last virtue that can be attributed to an Act which is the handiwork of different hands which made innumerable amendments to it since its enactment in 1961. The Act is no more than a make - shift patchwork in many respects.

61. The fundamental fallacy in the reasoning of the learned judges of the M. P. High Court, with very great respect, is that the wide meaning that they attribute to the word 'assessment' is not borne out by the context. Take a simple illustration. The ITO frames the assessment. But he does not initiate penalty proceedings. The Commissioner thinks that the order is erroneous and prejudicial to the Revenue. He cancels the assessment and directs a fresh assessment even though with the assessment as such there is nothing wrong. Income has been correctly computed and the tax has been calculated at the correct rate. But, since in the course of the proceedings, the ITO has not issued notice of penalty proceedings, the entire assessment has to go. The Commissioner himself cannot initiate the penalty proceedings because they have to be commenced 'in the course of any proceedings, in connection with the regular assessment' by the ITO, if he is 'satisfied' 'that any assessed has furnished under section 212 an estimate of the advance tax payable by him which he knew or had reason to believe to be untrue' under s. 273(a). Section 275 enacts a bar of limitation for imposing penalty. Penalty proceedings can be commenced only on the completion of the assessment proceedings. They must be concluded within two years from commencement. This shows that the legislature attaches the greatest importance to the time-limit of two years after which no order for penalty can be passed. But the Commissioner by cancelling the assessment and directing a fresh assessment will open the door to the ITO to start everything de novo. Even then the ITO may say : 'I find no case for the imposition of penalty.' With this the Commissioner may disagree. He will again cancel the assessment and direct a fresh assessment. Every time the assessment will have to be cancelled. Because, without a regular assessment penalty proceedings cannot be commenced.

62. Is assessment more important or penalty proceedings Of central importance is the assessment. That is the cornerstone of the Act. Cancelling an assessment wholesale has far-reaching consequences, as was pointed out in D'Costa : 'Such a wholesale cancellation of the assessment with a direction to make a fresh assessment is called for only in cases where there is something totally or basically wrong with the assessment which is not capable of being remedied by amendment order itself.' (D'Costa at page 12 of 133 ITR).

63. The view contended for would require must to be written into the section which is not there, would complicate its operation and would lead to practical difficulties. The consequences of accepting the interpretation put by the Revenue will lead to harsh results [CIT v. Vegetable Products Ltd. : [1973]88ITR192(SC) ] . This may well lead to tax laws capable, if unchecked, of great oppression. It will be an 'intolerable inquisition', to use an expressive phrase of H. H. Monroe, if penalty proceedings can be continued even after the expiry of the original limit of two years (Intolerable Inquisition Reflections on the Law of Tax, Hamlyn Lectures, 33 series).

64. The object of the construction of a statute being to ascertain the will of the legislature, it may be presumed that neither injustice nor absurdity was intended. If, thereforee, a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted (Owen Thomas Mangin v. IRC [1971] AC 739 per Lord Donovan).

65. The legislature never intended that the time-limit would be lengthened. Penalty proceedings are peripheral in nature. They are initiated in the course of 'regular assessment' and have to be completed within two years of the completion of the assessment. Cancelling the assessment every time for the sake of penalty will mean this. What is gained on the swings will easily by lost on the roundabouts. Between assessments and penalties there will be many rounds. So we will live in a world where the Commissioner will care more for penalties than for assessments. It will indeed be a curious world in which solid assessments will be set aside by the side wind of penalty. The truth is that Chapter XXI which deals with 'penalties imposable' cannot be fitted into a coherent legal scheme that s. 263 envisages. The very mechanism of Chapter XXI is incompatible with the scheme of s. 263. The requirement of 'regular assessment' is interwoven and interlocked with the ITO's power to impose penalty. And 'regular assessment' means the assessment made under s. 143 or s. 144 (s. 2(40). For the infraction of the statute, the legislature has prescribed penalty. The penalty is not uniform and its imposition depends upon the exercise of discretion by the taxing authorities.

66. We must, thereforee, reject the wide interpretation of the term 'assessment'. It has to be interpreted in the context of the Act and its scheme as would yield a more just result. I am of the view that assessment and penalty are different and distinct concepts under the Act. Penalty proceeding have distinctive features. The taxpayer is heard separately. Separate evidence is taken. They have to be initiated in the course of the regular assessment. A separate time-limit is fixed for their completion. They are committed to the sole discretion of the ITO and the AAC.

67. The power to impose penalty depends upon the 'satisfaction' of the ITO 'in the course of any proceedings in connection with regular assessment'. If he is not satisfied, the power cannot be exercised. His satisfaction is a condition for the exercise of the jurisdiction.

68. What is important is the satisfaction of the income-tax authorities that a default has been committed by the assessed which would attract the provisions relating to penalty. Whatever the stage at which the satisfaction is reached, the scheme of s. 275 is that the order imposing penalty must be made after the completion of the assessment. The crucial date, thereforee, for purposes of penalty, is the date of such completion.

69. So the necessary satisfaction conferring jurisdiction on the ITO to impose penalty has to be reached before passing the order of assessment. (see CIT v. Angidi Chettiar : [1962]44ITR739(SC) ; Manasvi v. CIT : [1972]86ITR557(SC) ). The power to impose penalty is exercisable only if the ITO is satisfied about the existence of the conditions which give him jurisdiction.

70. On the strength of certain observations of the Supreme Court in Abraham v. ITO : [1961]41ITR425(SC) and CIT v. Bhikaji Dadabhai : [1961]42ITR123(SC) , counsel for the Revenue contended that penalty is an 'additional tax' and, thereforee, the Commissioner has jurisdiction in the matter of penalty. This argument is not well founded. The word 'penalty' means any punishment. Penalty in the broad sense may be defined as any suffering in person or property by way of forfeiture, deprivation or disability imposed as a punishment by law or judicial authority in respect of an act prohibited by the statute. The Oxford Dictionary echoes the same wide conception by referring to a loss, disability or disadvantage of some kind - fixed by law for some offence. (Coogans v. Macdonald, [1954] S L T279, per the Lord Justice - General (Cooper) at p. 281. Chapter XXI deals with 'penalties'. Chapter XXII deals with 'offences and prosecutions'. Both are penalties. Speaking about tax avoiders, Lord Greene M.R. said : 'It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers [Howard de Walden v. IRC [1942] 1 KB 389 . If penalty is a suffering it will be misnomer to call it 'additional tax' and thereby found jurisdiction in the CIT.

71. No one loves taxes, it is true. But everyone dreads pains and penalties. In R v. Barger [1908] 6 Commonwealth L.R. (Australia) 41 , Issacs J. said :

'The difference between a pecuniary penalty and a tax is that the former is a required in respect of an unlawful act, and the latter is a sum required in respect of a lawful act.'

72. In Addl. CIT v. China Krishna Murthy : [1980]121ITR326(AP) , it was said that tax and penalty cannot be equated. The observations in Abraham's case : [1961]41ITR425(SC) , were made in a different context and for a different purpose, as was pointed out by the Supreme Court in CIT v. Anwar Ali : [1970]76ITR696(SC) .

73. In Jain Bros. v. Union of India : [1970]77ITR107(SC) , the Supreme Court said :

'Although penalty has been regarded as an additional tax in a certain sense and for certain purposes, it is not possible to hold that penalty proceedings are essentially a continuation of the proceedings relating to assessment where a return has been filed.'

Issacs, J.

'Miller on the Constitution of the United States at p. 235 says : 'The definition by both Webster and Story is that 'a tax is 'a contribution imposed by Government on individuals for the service of the State'. A penalty is never spoken of as a contribution.' (R. V. Barger p. 99) (supra).

I cannot better the language of Issacs J., when he says that penalty is not a contribution and, thereforee, not a tax. Nor 'additional tax.'

74. Penalty is a punishment annexed by law to some illegal act. Philosophically, linguistically and morally, it is a contradiction in terms to say that penalty is an 'additional tax'. To raise penalty to the status of tax is to lend it a dignity, a respectability, which by no canon of ethics it would deserve. In other words, we will be asking virtue to pay homage it would deserve. In other words, we will be asking virtue to pay homage to vice.

75. Unlike s. 215, which uses the word 'shall', s. 273 uses the word 'may'. 'May' imports a discretion and 'shall' an obligation. Under s. 273, the decision to initiate penalty proceedings rests with the ITO. With s. 215 it is different. Under s. 215, a statutory duty to charge interest is cast on him. Interest is an integral part of the assessment. If he waives or reduces interest, he has to give reasons. Sub silentio he cannot do. The matter of penalty, I venture to think, the legislature in its wisdom has left to the discretion of the ITO and the AAC. To the Commissioner it is a forbidden territory. If the legislature does not trust its own ITO and the AAC, it can always alters the law. It can give to the Commissioner more discretionary powers and make him the trustee and guardian of the administration in the moral and legal sense of the term. As it is a question of voting, I would vote with both hands for the proposition that penalty is not in the Commissioner's province and power, whatever else may be.

76. There are in-built limitations in the fiscal process. The Revenue can rightly take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer's pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue. Ayrshire Pullman Motor Service v. IRC [1929] 14 TC 754, per Lord Clyde). Moral precepts are not applicable to the interpretation of revenue statutes.

77. Revisional power of the Commissioner is not administrative but quasi-judicial. A revisional authority cannot ask the initial authority to do something which the former is not empowered to do under the law. The power conferred upon this functionary is hedged with restrictions. It is not an unfettered power. It is 'cabined, caged and confined' by the limitations of the fiscal process.

78. The M.P. view, with all deference, is too literal an interpretation of s. 263. We must remember : 'The letter killeth, the spirit give the life.' (St. Paul). What we must look for is the intention of Parliament. I find it difficult to believe that Parliament ever intended the consequences which flow from the contention of the Revenue. Himself, the Commissioner cannot impose penalty. It is left to the ITO by the Legislature. He has to be satisfied in the course of assessment that penalty proceedings should be initiated. If, ultimately, he finds no case either for initiation or for imposition, there is precious little that the Commissioner can do. He can only cancel the assessment and direct a fresh assessment. Himself, he cannot impose penalty, as I have said. The uncontrollable width of the language of s. 263 adds little to his powers in the matter of penalty.

79. The scheme of the Act is the assessment must be made in the past and imposition of penalty in the future. The assessment plays its part in the quantification of the penalty. A multiplier of the tax with which taxpayer ought to be charged is made a constituent of the penalty. The timing factor is crucial. The Commissioner's revisional power can be exercised only within two years.

80. Section 275 says that no order imposing a penalty shall be passed after the expiry of two years from the date of the completion of assessment in the course of which the proceedings for the imposition of penalty were commenced. Two years there in s. 263(2) and two years here in s. 275 strongly suggest that the two proceedings are separate and distinct. If the word 'assessment' is not given a limited meaning, limitation periods will become meaningless. Not only there will be much overlapping, the intention of the Legislature will also be defeated. The limitation enacted for the protection of the taxpayers will become illusory. Nothing will be finished within the time limited by ss. 263 and 275. The taxation troubles will never end. The ITO can go on with penalty proceedings till the end of all time. I would hesitate long before acceding to a contention that would lead to such extravagant results.

81. So, from the 'assessment' proceedings, I will subtract the penalty proceedings. I prefer this construction because it does not lead to oppressive and unreasonable conclusion. One is entitled and indeed bound to assume that Parliament intends to act reasonably, and, thereforee, to prefer a reasonable interpretation of a statutory provision (IRC v. Hinchy [1960] AC 748 , per Lord Reid). 'To apply the words literally is to defeat the obvious intention of the legislation and to produce a wholly unreasonable result. To achieve the obvious intention and to produce a reasonable result we must decided on some violence to the words.' (Luke v. IRC [1963] AC 557, per Lord Reid). Of rules of construction, Lord Reid has said : 'They are our servants not our masters.' (Maunsell v. Olins [1975] AC 373.

82. Penalty is to be measured only by tax on income which is the subject of regular assessment. After that has been done, the ITO has a discretion to inflict penalty for the violation of statutory provisions. The area within which he has to operate is indicated in Chapter XXI. Penalty has been prescribed by the Legislature for a very wide variety of defaults. The sequence of events clearly indicates that the Commissioner's jurisdiction extends to the 'regular assessment' where the total tax liability is ascertained. I find myself unable to hold that the crucial words of s. 263 are capable of the interpretation which the M.P. judges have adopted, however, elliptical the expression 'assessment' may be.

83. A true and sober view of s. 263 is that taken in D'Costa and Achal Jain, with which I respectfully agree. 'Assessment' is a word which cannot be its own expositor. It takes colour from the context. Context is everything. 'The proper course in all these cases is to search out and follow the true intent of the Legislature, and to adopt that sense of the words which harmonizes best with the context and promotes in the fullest manner the apparent policy and objects of the Legislature.' [Scott v. Cawsey [1907] 5 C L R 132, per Issacs J. (Australia)]. The context suggests that the vital term 'assessment' used in s. 263 should be given a limited construction rather than a literal interpretation.

84. At the end of the day, I will quote Dryden : 'As long as words a different sense will bear, And each may be his own interpreter, Our airy faith will no foundation find : The words a weathercock for every wind.' (Dryden : 'The Hind and the Panther II 462. Quoted in Statutory Interpretation in Australia by D.C. Pearce (2nd edn., 1981) at p. 179).

85. For these reasons, I agree with Chadha and Goel JJ. that the first question must be answered in favor of the Revenue. As against Caxton, D'Costa should be preferred as an accurate statement of the law. On the second question, I am with Chadha J. In my opinion, we should not follow the M.P. view propounded in Indian Pharmaceuticals. I think D'Costa and Achal Jain were correctly decided. The second question, I would answer in favor of the assessed and against the Revenue.

86. In accordance with the opinion of the majority, the first question is answered in the affirmative. The second question is answered in the negative.

87. The parties are left to bear their own costs.


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