Leila Seth, J.
(1) The question referred for our opinion in these two income-tax references, at the instance of the Additional Commissioner of Income-tax, Delhi-11, New Delhi is as follows : 'Whether on the facts arid in the circumstances of the case the Tribunal was legally correct in vacating the Additional Commissioner of Income-tax's direction to the Income-tax Officer to initiate penalty proceedings under section 271(l)(a) and 273 of the Income-tax Act, 1961
(2) The assessed an individual derived income from supplying boxes, crates and non-ferrous metals. He also had some other sources of income. The assessment years with which we are concerned are 1964-65 and 1965-66, the relevant accounting years being the previous financial years. The assessed filed returns for these years in the status of a firm and declared an income of Rs. 5,449 in the first year and a loss of Rs. 15,122 in the next years.
(3) As the Income-tax Officer felt that the firm was not genuine and registration had not been granted for earlier years, he refused registration. He, thereforee, assessed the assessed as an individual on a total income of Rs. 68,848 for the first year and Rs. i 9,717 forthe second year. However, he did not charge any interest under section 139(1) of the Income-tax Act, 1961 (in short, 'the Act') for late filing of the return nor under section 217 for non-filing of the estimate of advance tax ; nor did he initiate any penalty proceeding either under section 271(l)(a) or under section 273 of the Act.
(4) thereforee, the Additional Commissioner of Incometax suo moto, called for the records of the case. He examined them and came to a prime facie conclusion that the orders passed by the Income-tax Officer were erroneous and prejudicial to the interests of the revenue. As such he issued a notice dated 28th January, 1971 which was duly served on 29th January, 1971. This required the assessed to show-cause by 12th February, 1971 as to why the proceedings should not be continued. The assessed did not comply with the said notice and the matter was decided ex parte. He felt that as the returns of income had been filed beyond the time limit allowed, the Income-tax Officer should have charged interest under section 39(1) and should also have initiated penalty proceedings under section 271(1)(a) and section 273 ; further, since the assessed was assessed to tax by way of regular assessment for the first time only on 22nd March, 1966, he was required to file an estimate of advance tax in terms of section 212(3) and pay advance tax accordingly, which he failed to do. In these circumstances interest should have been charged under section 217 and penalty proceedings initiated under section 273. The failure of the Income-tax Officer to charge interest. and initiate penalty proceedings was erroneous and prejudicial to the interests of revenue. The additional Commissioner of income-tax accordingly set aside the two assessment orders dated 19th March, 1969 and 25th February, 1970 and directed the Income-tax Officer to make fresh assessments in accordance with law.
(5) The assessed being aggrieved appealed to the Incometax Appellate Tribunal, which allowed the appeals in part. The assessed contended before the Tribunal that the charging of interest and the initiation of penalty proceedings was a matter within the discretion of the Income-tax Officer. Further, the provisions of section 263 did not permit the Commissioner to interfere with the subjective satisfaction of the Income-tax Officer nor could he subsequently substitute his own satisaction or discretion for that of the Income-tax Officer. It was also argued that the penalty proceedings are independent and separate from the assessment proceedings as no order was passed with regard to penalty the Commissioner of Income-tax could not revise the non-existent order, nor could he direct the Income-tax Officer to start the penalty proceedings while purporting to revise an error in the assessment orders.
(6) After giving due consideration to these contentions, the Tribunal came to the conclusion that in view of section 3(2) of the General Clauses Act, 1897, the illegal omission by the Income-tax Officer to pass an order can be the subject of revision under section 263 of the Act. But since the penalty proceedings were distinct and independent of the assessment proceedings and the additional Commissioner of Income-tax could only revise an order passed in a 'proceeding', the record of which was summoned and examined, he could not direct the Income-tax Officer to initiate penalty proceedings as there were no such proceedings or records before him. It, thereforee, held that while examining the records of the assessment orders, the Additional Commissioner of Income-tax was not justified in directing the initiation of penalty proceedings or levy thereof which are matters relatable to entirely different proceedings.
(7) The failure to charge interest, however, was treated on a different footing. The Tribunal held that interest forms part of the sum payable by the assessed determined in the assessment order and the Commissioner can set aside the assessment order if the Income-tax Officer has failed to exercise his discretion in a judicial manner. In these circumstances the Tribunal upheld the order of the Additional Commissioner of Income-tax on this aspect.
(8) In the result, the Tribunal modified, the direction given by the Additional Commissioner of Income-tax to the Income-tax Officer to the extent that the Income-tax Officer was directed to consider the levy of interest under sections 139(1) and 217 in accordance with law, after giving the assessed a hearing.
(9) It is thus apparent, that the assessed's contentions before the Tribunal were not accepted, except with regard to the penalty proceedings being a distinct and independent proceeding from the assessment proceedings; thus resulting in the decision that the Commissioner would not, thereforee, be competent to issue directions for initiation or levy of penalty, while reviewing the assessment order.
(10) It is this aspect of the matter by which the Commissioner of Income-tax is aggrieved and is before us in reference.
(11) Mr. Lalwani, appearing for the Commissioner of Income-tax has argued that as penalty proceedings can be initiated only in the course of the assessment proceedings, the failure to do so by the Income-tax Officer can be the subject of directions by the Commissioner while examining the assessment record. He relies on three cases of the Madhya Pradesh High Court in support of his contention. These are : Additional Commissioner of Income-tax M.P. v. Indian Pharmaceuticals, : 123ITR874(MP) Additional Commissioner of Income-tax v. Kantilal Jain, : 125ITR373(MP) and Additional Commissioner of Wealth-tax Bhopal v. Mathoolal Balaram, (1980) 125 I.T.R. 597
(12) In Indian Pharmaceuticals (supra) the court after setting out section 271(1)(a) has observed :
'IT is clear from this provision that the Ito or the Aac in the course of any proceedings under this Act, if he is satisfied about the existence of facts enumerated in sub-clause (a) quoted above, an order for payment of penalty could be passed. It. is, thereforee, clear that if no proceedings are pending before the Ito, s. 271(1) could not be used to impose penalty. It is also apparent that it is only in the proceedings pending before an Ito that he may discover the facts attracting sub-clause (a). Section 143 of the Act provides for the assessment and when proceedings of assessment are pending before an Ito it is not disputed that he is free to consider if the facts come to his notice attracting s. 271(1)(a) of the Act.'
Further after referring to the decisions of the Supreme Court in E.A. Abraham v. Income-tax Officer (1961) 41 T.T.R. 425 and Commissioner of income-tax, Andhra Pradesh v. Bhikaji Dadabhai & Co., : 42ITR123(SC) , has opined :
'ITis, thereforee, clear that according to the view of their Lordships of the Supreme Court the word 'assessment' is not used in the Indian I.T. Act in the narrow sense of computing income only but is used in a wider perspective and. thereforee. when proceedings for assessment arc pending before the Ito, if facts attracting the provisions of s. 271(1)(a) come to his notice while proceeding with the assessment, it is necessary for the Ito to invoke the provisions for the recovery of penalty.'
The court further notes that it could not be disputed that when section 271(1) 'talks of 'proceedings pending' it will include the proceedings for assessment within the scheme of Chapter Xiv of the Act and the proceedings of assessment under the scheme of the law ultimately culminating in an order of assessment'.
(13) It, thereforee, held that if the Income-tax Officer during the pendency of the proceedings omitted to take notice of the facts attracting penalty under section 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 section 263 of the Act.
(14) In Kantilal Jam (supra), the court followed the decision in Indian Pharmaceuticals's case (supra) and held that the Tribunal was not justified in holding that the Commissioner had no jurisdiction to exercise powers vested in. him under section 263 in respect of penalty action under section 273(b). In that case the Income-tax Officer while completing the assessment omitted to Invoke the provisions of section 273(b) relating to penalty for failure to file an estimate of advance tax under section 212(3). He also did not charge penal interest under section 217. The Commissioner of Income-tax while exercising his jurisdiction under section 263 found that for the relevant assessment year the assessed was a person who had not been previously assessed by way of regular assessment and he ought to have filed estimate of advance tax. payable and paid tax. accordingly. Having failed to do so. he was liable to penalty under section 273(b) and interest under section 217. Since the order of the Income-tax Officer was erroneous and prejudicial to the interests of the revenue, it had to be set aside with the direction that a fresh assessment he made in accordance with law keeping in view' the applicability of section 273(b) and section 217.
(15) In Mathoolal Balaram's case (supra), the court held that the Commissioner can exercise the jurisdiction conferred on. him under section 25(2) of the Wealth-tax Act, 1957 and set aside an order of assessment passed by the Wealth-tax Officer. That is, if the order has been passed by the Wealth-tax Officer, without taking notice of the fact of the belated filing by the assessed of the wealth-tax return. In such a case it can direct the Wealth-tax Officer to make a fresh assessment keeping in view the applicability of section 18(1)(a) of the said Act. The non-consideration of this fact. during the assessment proceedings would make the assessment order erroneous.
(16) In a subsequent decision in Commissioner of Income- tax, Madhya Pradesh v. Narpat Singh Malkhan Singh, : 128ITR77(MP) the same high court opined :
'AN order of assessment which does not record the satisfaction of the Ito regarding the existence of the circumstances making out a case for imposition of penalty when it is clear that such circumstances do exist will be an order prejudicial to the interest of the revenue because, after the order of assessment, the Ito will have no jurisdiction to impose penalty. The Commissioner in such a case, in exercise of his revisional power, has to set aside the order of assessment to enable the Ito to initiate penalty proceedings.'
(17) But in the facts of that case, as the assessed had appealed to the Appellate Assistant Commissioner with regard to the assessment order and the order had been modified in appeal, the Commissioner could not set aside the order under section 263 of the Act or the Income-tax Officer's order had merged with the Appellate Assistant Commissioner's order. In the circumstances it held that the Tribunal was justified in holding that the order of the Additional Commissioner of Income-tax passed under section 263 of the Act was without jurisdiction.
(18) On a cursory examination, it appeared to us that title view of the Madhya Pradesh High Court as indicated in the above-mentioned decisions is correct, but no closer scrutiny we respectfully disagree with the same. In any case, the matter is not 'res integr' as far as this court is concerned. In Additional Commissioner of income-tax, Delhi-1 v. Shri J. K. D' Costa, Income-tax Reference No. 82 of 1974(7) disposed of by us on 27th April, 1981, we held on similar facts that the Commissioner could not pass an order pertaining to penalty under section 263 of the Act. We held that the penalty proceedings do not form part of the assessment proceedings. Further, the failure of the Income-tax Officer to record his satisfaction or the lack of it in the assessment order, with regard to the leviability of penalty cannot be a factor vitiating the assessment order. 'An assessment cannot be said to be erroneous or prejudicial to the interest of the Revenue because of the failure of the Income-tax Officer to record his opinion about the leviability of penalty in the case'.
(19) Section 263 enables the Commissioner of Income- tax to call for and examine the record of any proceedings under the Act ; and if he finds that any order passed therein is erroneous in so far as it is prejudicial to Revenue, he can pass such order as the circumstances of the case justify ; this he can do only after giving the assessed an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary.
(20) Under section 263, as above noticed the Commissioner can call for the record of any proceedings under the Act. In the present case he does so. He calls for the record pertaining to the assessment proceedings. He examines them which he is empowered to do. He considers the order of assessment passed therein. He finds that the facts pertaining to the late filing of the return and non-filing of estimate of advance tax have not been considered. The provisions of sections 271(1)(a) and 273 of the Act have not been invoked. Does this make the order of assessment erroneous and prejudicial to the interests of revenue The answer will depend on whether the penalty proceedings are part of the assessment proceedings Is it essential for the Income-tax Officer to record his satis faction or direction to issue a notice under section 271 as a part of the assessment order? We think not. Such a recording of satisfaction or a direction is not an integral part of the assessment order that a failure to do so would render it erroneous.
(21) The Income-tax Officer's jurisdiction to impose penalty under section 271(1)(a) arises only if he is satisfied 'in the course of any proceedings under this Act' that the return has either not been furnished or furnished late, without reasonable cause. Similar is the situation with regard to the filing of estimate of advance tax and section 273 uses the words 'in the course of any proceedings in connection with regular assessment'.
(22) The Supreme Court has dealt with this aspect of the matter in Commissioner of Income-tax,' Madras and another v. S. V. Anidi Chettiar, : 44ITR739(SC) and D. M. Manasvi v. Commissioner of Income-tax, Gujarat-II, : 86ITR557(SC) and held that the necessary satisfaction of the Income-tax. Officer which gives him jurisdiction to impose the penalty has to be arrived at before the passing of the assessment order.
(23) Though it is true that the satisfaction of the Income- tax Officer, before conclusion of the assessment proceedings, is the condition precedent for exercise of the Jurisdication to impose penalty, the non expression of such a satisfaction in the assessment order cannot invalidate it. It is well established that proceedings for the levy of penalty are independent and separate from assessment proceedings.
(24) thereforee, if the Income-tax Officer fails to record his satisfaction with regard to penalty before completing the assessment or in the assessment order, when on the facts it is patient that such a satisfaction should exist, it will not make the assessment order erroneous and prejudicial to revenue. The Commissioner's jurisdiction in the present case is confined to the assessment order proceedings and he can revise an order should he find any 'error which results in prejudice to the Revenue. Under section 263 he can set aside the order of the Income-tax Officer and direct him to make a fresh assessment in accordance with law.
(25) The meaning attributed to the expression 'assessment' is different in various contexts of the Act. But in the context of section 263, it is a particular 'proceeding' that is to be considered. If he is dealing with the assessment proceedings and assessment order, he cannot expand his powers to deal with penalty proceedings when they are not before him. As observed by us in J. K. D'Costa's case (supra) :
'THERE is no identity between the assessment proceedings and the penalty proceedings ; the latter are separate proceedings, that may in some cases, follow as a consequence of the assessment proceedings. As the Tribunal has pointed out, though it is usual for the Income-tax Officer to record in the assessment order that penalty proceedings are being initiated, this is more a matter of convenience than of legal requirement. All that the law requires, so far as the penalty proceedings are concerned, is that they should be initiated in the course of the proceedings for assessment. It is sufficient if there is some record somewhere, even apart from the assessment order itself, there the Income-tax Officer has recorded his satisfaction that the assessed is guilty of concealment or other default for which penalty action is called for. Indeed in certain cases it is possible for the Income-tax Officer to issue a penalty notice or initiate penalty proceedings even long before the assessment is completed though the actual penalty order cannot be passed until the assessment is finalised.'
(26) This court's observation, in Ges Vee Enterprises v. Additional Commissioner of Income-tax, Delhi-1, : 99ITR375(Delhi) that the intention of the legislature was to entrust the Commissioner under section 263 with a larger power than the Income-tax Officer, is to be read in the context of the case. Deshpande, J. speaking for the court observed :
'THE intention of the legislature was to give a wide power to the Commissioner. He may consider the order of the Income-tax Officer as erroneous not only because it contains some apparent error of reasoning or of law or of fact on the face of it, but also because it is a stereo-typed order which simply accepts what the assessed has stated in his return and fails to make inquiries which are called for in the circumstances of the case.'
(27) This cannot be read to mean that the Commissioner of Income-tax is entitled to bring within his scope and deal with penalty proceedings and orders (which are admittedly connected but distinct) while calling for and examining the record of the assessment proceedings and orders.
(28) For the reasons outlined above, we answer the question in the affirmative and in favor of the assessed. As the assessed has not appeared before us, we make no order as to costs. Question answered in the affirmative.