ORDER
J.K. Verma, A.M.
1. Both these appeals have been filed against a common order of the CIT, Bombay, under s. 263 for the asst. yrs. 1985-86 and 1986-87, dt. 30th March, 1990, and hence, both the appeals are being decided by a common order for the sake of convenience.
2. Very briefly speaking the assessee had filed returns of income for these two assessment years on 31st March, 1987, claiming them to be returns filed under the Amnesty Scheme, 1985. The return for the asst. yr. 1985-86 was for Rs. 2,84,573 and for the asst. yr. 1986-87 it was for an income at Rs. 22,73,044. The Assessing Officer (AO) completed the assessment for both the years on 20th July, 1987, under s. 143(1). Thereafter the CIT issued a common notice under s. 263 to the assessee dt. 20th March, 1990, for both these assessment years. The date of hearing was fixed for 26th March, 1990, and the order under s. 263, as mentioned above, was passed on 30th March, 1990, whereby the CIT held that the orders of the AO under s. 143(1), dt. 20th July, 1987, for the above-mentioned assessment years were erroneous and prejudicial to the interests of Revenue and set them aside “to be made de novo after calling for and examining the necessary details and affording proper opportunity to the assessee”.
3. The learned counsel for the assessee has claimed that the conditions prescribed under s. 263 have not been fulfilled in this case. He submitted that in the notice dt. 20th March, 1990, issued by the CIT he had given two reasons for forming the opinion that the impugned orders were erroneous and prejudicial to the interests of Revenue. Those reasons were (1) that the returns filed do not contain the audit report under s. 44AB, and (2) they did not contain any P&L a/c and that in view of the above, the return were defective returns as per s. 139(9) of the IT Act, 1961. He had further written that thus the assessments under s. 143(1) on defective returns will not be valid assessments in the eye of law and that is why he considered these assessments to be erroneous and prejudicial to the interest of Revenue. The learned counsel in the course of his arguments at a later stage pointed out that as mentioned above the hearing was fixed for 26th March, 1990, the actual hearing was given on 28th March, 1990, when the assessee had filed a detailed written statement exhaustively meeting the allegations of the CIT in his notice under s. 263. But when the order under s. 263, dt. 30th March, 1990, was received, the assessee found that the CIT had given various other reasons for coming to the conclusion that the assessments were erroneous and prejudicial to the interests of Revenue.
4. The learned counsel argued that as per s. 263 of the IT Act both the conditions mentioned in s. 263 should be fulfilled, i.e., (1) the order should be erroneous, and (2) it should be prejudicial to the interest of Revenue. Reverting back to the provisions of s. 139(9) of the IT Act the learned counsel pointed out that sub-section reads as under :
“Sec. 139(9) : Where the AO considers that the return of income furnished by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of fifteen days from the date of such intimation or within such further period which, on an application made in this behalf, the AO may, in his discretion, allow; and if the defect is not rectified within the said period of fifteen days or, as the case may be, the further period so allowed, then, notwithstanding anything contained in any other provision of this Act, the return shall be treated as an invalid return and the provisions of this Act shall apply as if the assessee had failed to furnish the return : Provided that where the assessee rectifies the defect after the expiry of the said period of fifteen days or the further period allowed, but before the assessment is made, the AO may condone the delay and treat the return as a valid return.
He further stated that Expln. (bb) reads as under :
“the return is accompanied by the report of the audit obtained under s. 44AB.”
He explained that so far as the first defect enumerated by the CIT was concerned, this cl. (bb) was introduced by Finance Act, 1988, w.e.f. 1st April, 1989, and hence, when the AO completed the assessment on 20th July, 1987, there was no such requirement under the law and hence, the first basis given in the notice of the CIT under s. 263 was without any legal basis. Dealing with the question of defective return as per s. 139(9) of the IT Act, the learned counsel explained that as per that sub-section the AO may choose to give notice to an assessee regarding the defect or defects or may not give such notice and may complete the assessment. In such a case according to the learned counsel, although it would be a defective return yet the assessment would be valid. On the other hand, the AO may choose to intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of 15 days or such further period as he may in his discretion allow. According to the learned counsel, only if after intimating the defect by the AO, the assessee does not rectify the defect within the time allowed to him “the return shall be treated as an invalid return and the provisions of this Act shall apply as if the assessee had failed to furnish the return”. The learned counsel thereafter referred us to Circular No. 281, dt. 22nd Sept., 1980 of the CBDT (Taxman’s Direct Taxes Circular, Vol. 4, p. 2.1041, a copy of which has been filed before us), paragraph 27.5 of which reads as under :
“Where the ITO considers that the return of income furnished by the assessee is defective, he is given the discretion to intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of fifteen days from the date of intimation or within such further extended time as the ITO may allow. If the defect is not rectified within the period of fifteen days or such further extended period, then, the ITO shall treat the return as an invalid return and other provisions of the IT Act shall apply as if the assessee had failed to furnish the return. Where, however, the assessee rectifies the defect after the expiry of the period of fifteen days or the further extended period, but before assessment is made, the ITO has been empowered to condone the delay and treat the return as a valid return.”
Again, the learned counsel pointed out para 27.7 of the same circular which reads :
“The following points may be carefully noted in regard to the new provision in s. 139(9) :
1………….
2………….
3. The provision makes a distinction between a defective return and an invalid return. A defective return is not ipso facto to be regarded as an invalid return. It is only when a return contains any of the specified defects and the ITO, in his discretion, intimates the defect to the assessee and the assessee fails to rectify the same within the specified period of 15 days or such further period as the ITO may, on an application made in this behalf, allow, that the return shall be treated as an invalid return.”
5. In this background the learned counsel argued that when the AO had exercised his discretion which was given not only according to the provisions of the IT Act but which was further clarified by the CBDT and when no guidelines have been given by the Board for exercising or not exercising that discretion, it cannot be said that the AO committed an error when he exercised that discretion of not issuing a defect memo to the assessee on the ground that it was lacking in certain details which were required to be filed along with the return. He emphasised that it would be clear from the language of the Board’s circular cited above that the CIT was wrong in his interpretation to the effect that such an assessment would not be a valid assessment in the eye of law, as given in his notice under s. 263. The learned counsel thereafter cited a number of decisions, including :
(i) Venkatakrishna Rice Co. vs. CIT (1987) 163 ITR 129 (Mad);
(ii) CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom) where the High Courts had held that s. 263 did not visualise the substitution of the judgment of the CIT for the judgment of the ITO unless the decision was held to be erroneous. The learned counsel also sought to rely on the Supreme Court decision in the case of CIT vs. Simon Carves Ltd. (1976) 105 ITR 212 (SC). But we are not inclined to consider it because that is a decision with respect to provision of s. 147(b) of the IT Act. However, the learned counsel for the assessee argued that in the instant case the CIT had not pointed out as to how the Revenue had suffered or was likely to suffer or what was the tax loss to the Revenue but simply set aside the assessment for making fresh enquiries, which was not permissible according to law.
6. The learned counsel thereafter drew our attention to Circular No. 176, dt. 26th Aug., 1987, from D. I. (IT&Audit), New Delhi, a copy of which has been filed before us and submitted that as per the circular the CIT was not legally or administratively authorised to exercise his jurisdiction under s. 263 because as per the circular he was prohibited by the Board from invoking the provision of s. 263 in cases where the assessments have been completed under s. 143(1) under the Summary Scheme. He drew our attention to the fact that as per this circular it had been directed that even where a wrong deductions to the tune of Rs. 2.43 lacs in respect of personal expenses of the partner and totally incorrect deduction in respect of investment allowance were claimed and allowed under s. 143(1), the Board had directed that the CIT should not take any remedial action because the revenue loss, if any, was consciously suffered by the Government to utilise resources for scrutiny and investigation of larger cases. In these circumstances the action of the CIT under s. 263 was contrary to the direction of the CBDT and the policy of the Government for completion of assessment under s. 143(1) of the income-tax. In this regard the learned counsel drew our attention to several decisions of the Tribunal including the decisions of the Tribunal in the case of Fisons Ispat Ltd. vs. Asstt. CIT (1992) 42 ITD 365 (Del), Puranmall Narayan Prasad Kedia (HUF) vs. Asstt. CIT (1994) 48 ITD 439 (Cal) and several other cases where the Tribunal had held that in view of this Circular No. 176 the CIT was not justified in cancelling or setting aside an assessment under s. 143(1) by invoking his jurisdiction under s. 263.
7. The learned counsel thereafter dealt with the allegations made by the CIT in his order under s. 263 to the effect that since the AO had not initiated penalty proceedings, the assessment order was erroneous. In this regard the learned counsel referred us to the decision in the case of Addl. CIT vs. J. K. D’Costa (1982) 133 ITR 7(Del) S. L. P. against which had also been rejected [147 ITR 1) (St)] so also the decision in the case of CIT vs. Keshrimal Parasmal (1986) 157 ITR 484 (Raj) and several other decisions where it has been held that according to law it is the discretion and the satisfaction of the AO while completing an assessment to initiate or not to initiate penalty proceedings against an assessee and if that discretion is exercised by the AO, the penalty proceedings could not render his order erroneous or prejudicial to the Revenue. The learned counsel further pointed out that similarly the allegation of the CIT to the effect that the order was erroneous because the AO had not charged interest under s. 215 or s. 217 of the IT Act, was not tenable because as per the decision in the case of CIT vs. Manda Theatre (1978) 115 ITR 301 (Kar) if the AO did not charge interest under s. 217, no such order existed and could not form part of the assessment order and hence, that could not be considered to be an erroneous order by the CIT under s. 263 of the IT Act. Similarly, in the case of P. P. Dinwala vs. CIT 78 Taxman 421 (Cal) it had been held that non-charging of interest under s. 215 would not give the jurisdiction to the CIT under s. 263.
8. Another objection taken by the CIT in his order was that the AO had completed the assessment under the Amnesty Scheme when, according to the CIT, the Amnesty Scheme was not applicable to old assessees. In this context the learned counsel referred us to Board’s Circular No. 451 on the Amnesty Scheme where in response to question No. 3 the Board had clarified that it was applicable to old assessees also and hence, this objection of the CIT was also untenable. Similarly, the objection that for getting the benefit of the Amnesty Scheme the assessee should have disclosed some “additional income” in the return filed under Amnesty Scheme, the learned counsel pointed out that in the instant case since both these returns had been filed for the first time the entire income disclosed in the two returns were “additional incomes” and hence, this objection of the CIT was also not legally tenable.
9. In his reply the learned Departmental Representative submitted that apart from the fact that the audit report under s. 44AB had not been filed, which was effective from 1st April, 1989, even the P&L a/c and balance sheet had not been filed which was required to be filed along with the return as per Explanation to s. 139(9). In these circumstances he claimed that it was imperative on the part of the AO that he should have issued the defect memo and should have got the defect rectified. According to him, this omission made the return invalid and as such the assessment completed on the basis of such a return was not valid and hence, the CIT was justified in exercising his jurisdiction under s. 263 of the IT Act. The learned Departmental Representative continued by pointing out that the word ‘may’ has been used at a very large number of places in the IT Act and although the use of this word ‘may’ indicates that the authority concerned has been given a discretion, it is an accepted principle that such a discretion has to be exercised judiciously and if that discretion has not been exercised judiciously, it gives the CIT an authority to step in and exercise his jurisdiction under s. 263. According to the learned Departmental Representative it was a serious defect which required the setting aside of the assessment. The learned Departmental Representative drew our attention to the decision in the case of Norma Cables P. Ltd. vs. ITO (1989) 30 ITD 201 (Del) where it was held that an assessment completed on an invalid return entitled the CIT to invoke his jurisdiction under s. 263.
10. The learned Departmental Representative then referred to the argument of Shri Sonde to the effect that the CIT could not cancel an order which did not exist being an order on the basis of an invalid return, he submitted that as per Shri Sonde’s argument since it was only a defective return, the assessment order could not be said to be non-existent and hence, the CIT had only set aside an erroneous assessment made on a defective return.
11. The learned Departmental Representative also argued that as per answer to question No. 1 in Board’s clarification in respect of Amnesty Scheme in Circular No. 451, dt. 17th Feb., 1986, the scheme applied only where the assessments were pending, and where the taxpayer was to advise to file revised return before the ITO along with evidence of payment of taxes. Further according to him, this scheme was not applicable for the asst. yr. 1986-87.
12. Further, according to the Departmental Representative the action of the AO accepting a return as amnesty return under s. 143(1) without making enquiries made it an erroneous order. Further, even if it was not necessary to file the audit report along with the return, no evidence to show that the audit had been completed had even been filed. He also argued that it was a case where assessments should have been taken up for scrutiny because the Summary Scheme applied only to returns of income upto Rs. 1 lac only. Regarding Circular No. 176, the learned Departmental Representative argued that it was not a blanket prohibition and as mentioned in that circular only small income cases had to be accepted so that more time could be devoted to bigger cases and according to him the returns of income of more than Rs. 2 lacs and Rs. 22 lacs could not be considered to be small income cases. In these circumstances the CIT was justified in setting aside the assessment for making detailed enquiries and completing the assessment after that only. The learned Departmental Representative emphasised that in view of the decisions in several cases such as Gee Vee Enterprises vs. Addl. CIT (1975) 99 ITR 375 (Del), Addl. CIT vs. Mukur Corporation (1978) 111 ITR 312 (Guj), it was not necessary for the CIT to come to a firm conclusion about the errors and if in his opinion there was only a prima facie case of error the CIT could set it aside under s. 263 of the IT Act. The learned Departmental Representative also heavily relied on the decisions in the cases of Ram Pyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC), Tarajan Tea Co. P. Ltd. vs. CIT (1994) 205 ITR 45 (Gau), CIT vs. Emery Stone Mfg. Co. (1995) 213 ITR 843 (Raj) to canvass his viewpoint that when an assessment had been completed in undue hurry or without proper examination of material on record it could be considered to be sufficient for giving jurisdiction to the CIT under s. 263.
13. The learned Departmental Representative tried to distinguish the cases relied upon by the learned counsel for the assessee of which we have taken note and with which we shall deal separately. He referred to the decision in the case of Addl. CIT vs. Krishna Narayan Naik (1984) 150 ITR 513 (Bom) where non charging of interest under s. 139(8) was held to authorise the CIT to invoke jurisdiction under s. 263. The learned Departmental Representative referred us to several such cases reported in Chaturvedi and Pithisaria 5th Vol. at p. 5,564.
14. The learned Departmental Representative thereafter stated that it was a case where the assessee had filed settlement petition before the Settlement Commission which indicated that it was a case which required investigation and examination by the AO. At this stage Shri Sonde conceded that the statement of Shri Balkrishnan was factually correct inasmuch as the assessee had filed petition before the Settlement Commission for the asst. yrs. 1982-83 to 1993-94 which included the assessment years under consideration yet the fact was that no additional income than what has been declared in the returns has been shown before the Settlement Commission for those two years. He clarified that since the petition for 12 years had been filed as a block, it was not necessary for the assessee to declare some additional income for the asst. yrs. 1985-86 and 1986-87 for admission before the Settlement Commission.
The learned Departmental Representative thereafter referred to Chaturvedi & Pithisaria’s Commentary Vol. 5 at p. 5559 where the learned authors had cited cases where it had been upheld that action under s. 263 could be taken in respect of assessments completed under s. 143(1). He also referred to the decision of the Calcutta High Court in the case of CIT vs. Bankam Investment Ltd. (1994) 208 ITR 208 (Cal) where action under s. 263 by the CIT against an order under s. 143(1) had been upheld.
15. The learned Departmental Representative very heavily relied on the decision of the Hon’ble Supreme Court in the case of Kerala Financial Corpn. vs. CIT (1994) 210 ITR 129 (SC) where after referring and explaining some of its earlier decisions the Hon’ble Supreme Court had held that the Board’s circulars could not detract or override the provisions of law. The learned Departmental Representative argued that the Tribunal in its decision in the case of Puranmull Narayan Prasad Kedia (HUF) (supra) had, inter alia, relied upon the decisions of the Supreme Court in the cases of Navnit Lal C. Javeri vs. K. K. Sen, AAC (1965) 56 ITR 198 (SC), Ellerman Lines Ltd. vs. CIT (1971) 82 ITR 913 (SC) and K. P. Varghese vs. ITO (1981) 131 ITR 597 (SC). But none of these decisions had held that the Board could override the provisions of the IT Act; they had only held that the Board’s circulars were binding on the IT authorities. According to the learned Departmental Representative this point had been specifically dealt with by the apex Court in the case of Kerala Financial Corpn. (supra) at pp. 134 and 135 of the report. Their Lordships had also referred to the decision of K. P. Varghese (supra) and had clarified that the Courts have not held that Board’s circular could override the provisions of the IT Act.
16. In this view of the matter the learned Departmental Representative summed up that since the AO had failed to apply his mind and had failed to issue the defect memo, the assessment orders under s. 143(1) for both the years had become erroneous as discussed by the CIT in his order and the CIT was justified in invoking the provisions of s. 263 of the IT Act.
17. The learned counsel for the assessee in his rejoinder pointed out that in the case of Norma Cables P. Ltd. vs. CIT (supra) the return of income was not signed by the assessee and hence, it was an invalid return or no return at all. Therefore, the Tribunal has upheld the CIT’s action under s. 263. That was not the situation in the present case. Referring to paras 27.5 and 27.7(3) of Board’s circular clarifying the provisions of Finance (No. 2) Act, 1980, IT Act (sic) he repeated that the Board had clarified that to issue or not to issue the defect memo was within the absolute discretion of the AO and as per the ratio of decision of the jurisdictional High Court in the case of CIT vs. Gabriel India Ltd. (supra) and the observations of their Lordships at p. 115 of the report that s. 263 does not visualise a case of substitution of the judgment of the CIT for that of the ITO who passed the order unless the decision is held to be erroneous and if an ITO acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the CIT simply because, according to him, the order should have been written more elaborately. Hence, when the AO exercised his discretion of not issuing the defect memo the action could not be said to be erroneous only because the CIT considered that the defect memo should have been issued in this case. The learned counsel for the assessee referred to the decision in the case of CIT vs. General Trade Agencies (1973) Tax LR 1383 where the Hon’ble Calcutta High Court has held that if a notice for revision (s. 33B of the IT Act, 1922, corresponding to s. 263 of the IT Act, 1961) did not specify some matters, the order under s. 33B on the basis of such matters could not be upheld. Regarding the case law cited by the learned Departmental Representative, namely, Gee Vee Enterprises (1974) 99 ITR 375 (Del) (supra), the learned counsel pointed out that that was a case where registration had been granted without enquiry when the law required that the AO should make enquiries before granting registration to a firm. In the cases relied upon by the learned Departmental Representative, namely, Tarajan Tea Co. P. Ltd. (supra), Ram Pyari Devi Saraogi and Emery Stone Mfg. Co. (supra), the assessments had been framed under s. 143(3) of the IT Act which presupposed that the AO shall make enquiries, examine the evidence produced before him and then only shall pass the assessment order. Obviously when he failed to make those enquiries those orders were held to be erroneous and prejudicial to the interest of Revenue. He argued that if the view of the learned Departmental Representative is accepted then every assessment completed under s. 143(1) would entitle the CIT to reopen it because as per the provision of s. 143(1) the AO is authorised to make the assessment without calling the assessee and without asking the assessee to adduce any evidence. He pointed out that in fact these are the two defects found on the basis of which the CIT has set aside the assessments. With regard to the decision of the Bombay High Court in the case of Addl. CIT vs. Krishna Narayan Naik (supra) the learned counsel pointed out that in the first instance that was also an assessment under s. 143(3), the ITO had not considered the question of levy of interest under s. 139(8) when he was bound to charge interest under s. 139(8) and hence, that order was considered to be erroneous and prejudicial to the interest of Revenue. Moreover, in that case the Addl. CIT had merely directed the levy of interest in his order under s. 263. According to the learned counsel mere non-charging of petty amount of interest would not entitle the CIT to cancel the entire assessment order for making roving enquiries. The learned counsel had pointed out while dealing with the point of assessee’s filing of petition before the Settlement Commission raised by the learned Departmental Representative that in the fresh assessments completed by the AO in consequence of this order under s. 263 the AO had made assessments by applying provisions of s. 145(2) and even in the fresh assessment he had not been able to point out that any particular amount of income had not been charged to tax in the original assessment. Those assessments were set aside by the CIT(A) and now in third round of assessments the AO had made additions in respect of bank loans because, according to him, satisfactory explanation regarding securities given to the banks for the loans had not been given by the assessee. The learned counsel argued that this could not be the purpose or scope of action under s. 263 of the IT Act. Regarding the objection of the Departmental Representative that the Amnesty Scheme did not apply to existing assessee and that it applied only to revised returns the learned counsel referred to various circulars of the Board on the Amnesty Scheme, copies of which have been filed before us, which show that the claim of the CIT and the learned Departmental Representative was not in consonance with the Board’s circular. The learned counsel finally referred to the decision in the case of Tata Iron & Steel Co. Ltd. vs. N. C. Upadhyaya & Anr. (1974) 96 ITR 1 (Bom) where at p. 17 the Bombay High Court relying on the Supreme Court decision in the case of Navnit Lal Javeri (supra) held that the Board’s circulars are binding on the IT authorities in so far as they are for the purpose of giving administrative relief to the taxpayer and not for the purpose of imposing a burden on them.
18. Regarding the non-verification of TDS by the AO highlighted by the CIT in his order, the learned counsel filed copies of fresh assessment orders for the two assessment years under consideration and pointed out that in the fresh assessment orders while the AO had considered the TDS no discrepancy was found by him. Similarly, he pointed out to the “office note” at the bottom of two assessment orders written by the AO to the effect that the search was conducted at the assessee’s premises on 18th Sept., 1990, and was not relevant to the assessment years under consideration. Shri Sonde further stated that the search for the asst. yr. 1982-83 referred to by the CIT in his order was at place of one Mr. M. P. Jain and not at assessee’s premises and hence, to this extent the order of the CIT was factually incorrect. We may mention that the learned Departmental Representative did not have the record with him to deny the claim of the learned counsel for the assessee. The learned counsel, therefore, pleaded that order of the learned CIT, Bombay, should be cancelled.
19. We have carefully considered the learned arguments advanced from both the sides so the case law on the subject and the material on record. In the first instance we may point out that by now it is trite that two circumstances must exist to enable the CIT to exercise his power under s. 263, i.e., (i) the impugned order should be erroneous and (ii) it should be erroneous in so far as it is prejudicial to the interest of Revenue. Both the conditions must be satisfied. Even if an order is erroneous but it is not prejudicial to the interest of Revenue, provisions of s. 263 do not come into play. Similarly, even if an order is prejudicial to the interest of Revenue, but it is not erroneous, it cannot authorise the CIT to exercise his powers under s. 263. In order to apply this test in the instant case we have to examine the impugned assessment orders as well as the order of the CIT in the particular facts and circumstances of this case. The first important factor which has to be taken into account is that both the returns had been filed under the Amnesty Scheme with a stamp prominently displaying this fact on both the returns. Secondly, both the assessments had been completed under the prevailing scheme of assessments under s. 143(1). After examining the circulars on the Amnesty Scheme, copies of which have been filed before us, we are inclined to agree with the submissions of Shri Sonde rather than of the learned Departmental Representative and the CIT. Thus, in the last para of Circular No. 432, dt. 20th Sept., 1985/15th Nov., 1985, it is written that though the penal provisions of the law do apply in such cases….., instructions are being issued to all officers of the Department that they should adopt a liberal and sympathetic approach where the assessee has come forward suo motu and cooperate with the Department. Assessee will do well to avail themselves of this opportunity and file returns of income without any fear. Even if it is for the first time, they should do so as early as possible. In the first para of Circular No. 440, dt. 15th Nov., 1985, it is written that if higher incomes are estimated/shown for the asst. yr. 1986-87, it will not by itself lead to any roving enquiries against the assessee in respect of past or pending assessments, whether he be an existing or a new assessee. This shows that the claim of the CIT that the scheme applied to new assessees only is ill-founded. Again in Circular No. 441, dt. 15th Nov., 1985 in first para it is written that the fears continue to be expressed on behalf of “some existing taxpayers” and then in para 2 it is stated that the questing of starting any roving enquiries against such taxpayers does not arise. In para 3 it is written that while it is true that the penal provision of law will hereafter be applied strictly, Department’s approach will be wholly different and necessarily liberal and sympathetic in the cases of those assessees who come forward voluntarily to make a full and true disclosures of their incomes and wealth….. old as well as new, assessees are enabled to avail themselves of this opportunity by voluntarily filing returns of income and wealth without fear of any penal consequences, such as, penalty or prosecution.
In the detailed Circular No. 451, dt. 17th Feb., 1986 in response to question No. 4 it has been stated that the immunity from penalty and prosecution applies in all cases whether of income-tax or of wealth-tax and in response to question No. 5 that the ITOs have been instructed not to initiate penalty proceedings and be liberal in waiver of interest in such cases. In response to question No. 7 it has been stated that where the investigations in the case of persons other than the assessee indicate concealment of income by the assessee and the assessee makes a true and full disclosures of his income, would he be entitled to immunity under these circulars, the answer is “yes”. This brief perusal made by us would indicate that as per Amnesty Scheme all the assessees whether new or existing ones were provided immunity from penalty, prosecution and charging of interest. Accordingly when the appellant before us filed its returns of income under the Amnesty Scheme, as per instructions from the CBDT, the AO was not supposed to have initiated penalty proceedings against the assessee even if he were an old and existing assessee nor was he supposed to charge interest for filing of the late returns. Another scheme which was prevalent, and is still prevalent, was completion of assessments under s. 143(1) of the IT Act which empowers, nay, almost compels the AO to complete the assessments in respect of assessees who filed their returns of income upto a particular limit of income under s. 143(1) i.e., without calling the assessee and without asking for any further evidence. In fact as per the provisions of s. 143(1)(a) as they stood at the relevant time and as per the instructions of the Board the AO was not even authorised to make much variation in the return of income except for giving effect and which is emphasised in Circular No. 176 (supra) to some provisions regarding brought forward depreciation, investment allowance, losses, etc. Moreover, as has been stated in detail by the learned counsel for the assessee even as per the clarification given by the Board it was the absolute discretion of the AO to take note of the fact as to whether a particular return was defective according to the standard prescribed in s. 139(9) and whether to issue or not to issue the defect memo. Considering this discretion with the ratio of decision of the Hon’ble Bombay High Court in the case of CIT vs. Gabriel India Ltd. (supra) it would be apparent that if the AO chose not to treat these returns as defective returns when the returned income was Rs. 2,84,573 for asst. yr. 1985-86 which suddenly rose in asst. yr. 1986-87 to Rs. 22,73,044, when Amnesty Scheme was in force, he exercised his discretion within the four corners of law. As pointed out by Shri Sonde there are no guidelines issued by the Board as to when an ITO should exercise his discretion to treat a return as defective. On the other hand, as mentioned earlier the Board has only emphasised that it shall be the absolute discretion of the AO to issue defect memo or not. Hence, if the AO exercised his discretion according to law, merely because the CIT is of the opinion that he should have considered these returns to be defective, it cannot be said that the assessment orders framed by the AO under s. 143(1) became erroneous for this reason. So far as the argument of the learned Departmental Representative that the Summary Scheme applied to income upto Rs. 1 lac only is concerned, we find that this objection was not taken by the CIT either in his notice issued under s. 263 nor has it been considered in his order under s. 263 and hence, we are unable to agree with the learned Departmental Representative that on this ground we should hold that these orders completed under s. 143(1) by the AO when the returned income was higher than Rs. 1 lac should be held to be erroneous. We hold this view more particularly when the returns were filed under Amnesty Scheme, and as can be gathered after going through the scheme and various clarifications given in a large number of Board’s circulars, that the assessees were being trusted and no enquiries, much less roving enquiries, were to be made. Moreover, as per the Amnesty Scheme there does not appear to be any monetary limit imposed by the Board for not accepting the returns if they were beyond a particular monetary limit. The consequence of all these discussions would be that here is an assessee who has filed his return for two assessment years under the Amnesty Scheme showing substantial income; although it suffered from some defects as enumerated under s. 139(9) of the IT Act but the AO in his discretion chose not to consider them as defective returns and in the light of the circulars on the Amnesty Scheme completed the assessments under s. 143(1) and did not initiate penalty proceedings, nor charged interest, following the directions of the Board under that scheme and hence, can such assessments be termed as erroneous in so far as they are prejudicial to the interest of Revenue. In our considered opinion the answer to this question is in the negative. Our opinion gets further strength from the fact that even the subsequent events, namely, the assessments framed by the AO do not indicate that the AO could find any such material in the subsequent assessments which would indicate that any factual or legal error had been committed in the assessment under s. 143(1) which were set right in the fresh assessments. In fact the fresh assessment orders only show that the AO embarked on some roving enquiries and in completion of the assessments on pure estimate basis.
20. So far as the technical views and various arguments advanced by the learned counsel for the assessee are concerned, we are in agreement with them. Not only because the Hon’ble Calcutta High Court in the case of CIT vs. General Trade Agencies (supra) has taken this view, but even on principle of natural justice it is obvious that if the CIT has given notice to the assessee to show cause why he should not exercise his jurisdiction under s. 263, he should not hit the assessee on the basis of such grounds which have never been communicated to the assessee. In the instant case the first ground was that audit report under s. 44AB was not filed. As mentioned by Shri Sonde these provisions were not applicable when the AO completed the assessments and hence, this objection was invalid. So far as the second objection that the return was defective, we have already dealt with it and held, agreeing with Shri Sonde, that the returns could be said to be defective but not invalid and hence, the assessments on that ground could not be held to be erroneous in so far as it was prejudicial to the interest of Revenue. Further, as mentioned earlier, merely non-charging of interest or non-initiation of penalty proceedings would not render the assessments as prejudicial to the interest of Revenue not only on the basis of case law relied on by the learned counsel for the assessee but also on the basis of the circulars of the Board in connection with the Amnesty Scheme.
21. So far as the question as to whether the circulars of the Board are binding on the authorities or not is concerned we may observe that Circular No. 176 (supra) has been issued by the Directorate of IT & Audit in some particular circumstances, i.e., to reply to audit and may not justify taking the view that the CIT is altogether prohibited overriding the provisions of the IT Act from exercising his jurisdiction under s. 263 in all cases where assessments have been completed under s. 143(1) of the IT Act. This would become more true after the decision of the Supreme Court in the case of Kerala Financial Corpn. (supra). But to our mind that question is only of academic interest and would not affect the decision in this case. In a case where the Board issues direction to the authorities below to exercise their jurisdiction within the provisions of the IT Act in favour of assessees to reduce the rigours of law, they cannot be said to be detracting or overriding the provisions of law and would be binding on the AOs. In this light the circulars issued under the Amnesty Scheme or with regard to assessments under s. 143(1) would be binding on the AOs.
22. Examined in this light it is obvious that when the AO completed these assessments under s. 143(1) treating them as returns under Amnesty Scheme, he exercised his discretion within the limit prescribed by law and Board’s circulars and hence, the orders cannot be said to be erroneous much less prejudicial to the interest of Revenue. Accordingly, we cancel the order of the CIT pertaining to both the assessment years.
23. In the result, both the appeals filed by the assessee are allowed.