ORDER
CHANDER SINGH, A. M. :
These two appeals by the assessee for the asst. yrs. 1989-90 and 1990-91 are directed against the order under s. 263 of the CIT.
2. There is delay of one day in filing the appeals. The following reason has been given by the assessee for such delay :
“It is learnt from the notice of hearing that our abovementioned appeals have been received by office belatedly by 1 day. Regarding delay, it is submitted that, there was calculation mistake on our part, we thought, 5th May, 1993, would be the last day for filing of appeal. Moreover, the appeals have been sent by Angadia. They delayed of appeal papers, though they are known for quick service. We regret very much for delay of 1 day caused and humbly requested to please condone delay caused due to calculation mistake, and on part of Angadia.”
The learned Departmental Representative has no objection if the delay is condoned. Therefore, we proceed to decide the appeals on merit.
3. The business premises of the assessee were surveyed under s. 133A of the IT Act on 24th Nov., 1990. During the survey operations, the Revenue officers came across certain loose papers, documents, etc. which pertained to the asst. yr. 1991-92. From these papers, the AO found that there were number of gawalies, whose balances are shown as credit balances in the books of Bharat Dairy, Pachora. The AO also noticed certain other discrepancies also. The AO also found that huge balances of sundry creditors and debtors were not fully verifiable. Therefore, the AO investigated the case and completed the assessments for the asst. yrs. 1989-90 and 1990-91. On the basis of discrepancies found in the loose papers and documents pertaining to the asst. yr. 1991-92, the AO made the agreed addition of Rs. 1,00,000 for the asst. yr. 1989-90 and Rs. 2,35,000 for the asst. yr. 1990-91. In addition to the above agreed additions, the AO also added a sum of Rs. 25,000 in each of the assessment years under appeal. The assessments were accordingly completed on total income of Rs. 4,09,898 for the asst. yr. 1989-90 and Rs. 6,49,450 for the asst. yr. 1990-91. The AO did not initiate the penalty proceedings under s. 271(1)(c) of the IT Act.
4. The CIT examined the records and was of the view that the order of the AO was erroneous insofar as it was prejudicial to the interest of Revenue. He accordingly issued show-cause notice dt. 13th July, 1992, on the following grounds :
“Grave anomalies like fictitious credits, unrecorded cash remittance, unrecorded sales, etc. came to light in survey operations under s. 133A. The AO made addition for the amount offered by the assessee without scrutinising the impounded documents/papers properly. The huge credit balances for asst. yrs. 1989-90 and 1990-91 remained unscrutinised. Penalty proceedings under s. 271(1)(c) have also not been initiated.”
The assessee vide their letter dt. 7th Aug., 1992, replied to the show-cause notice and pleaded with the CIT that there was no error in the order of the AO. It was also pointed out that the papers or documents found during the survey operations related to the asst. yr. 1991-92. There was not even a single incriminating paper pertaining to the asst. yrs. 1989-90 and 1990-91. The assessee, therefore, had requested the CIT to drop the proceedings.
5. The CIT, however, was not satisfied with the reply and again issued a notice dt. 1st Feb., 1993. The assessee again replied to the CIT and requested that no prejudice was caused to the Revenue and the assessment completed by the AO was in accordance with law.
6. The CIT examined the written submissions of the assessee and also allowed a personal hearing. After considering the facts before him, he was of the view that “the AO has hurriedly framed the assessment without completing the investigation especially in respect of credit balances. The AOs failure to make investigation on proper lines and also accepting the assessees version without initiating penalty proceedings for concealment had caused loss to Revenue”. In view of the CIT, the AO should have made proper enquiries in the case and should not have made the additions on the agreed basis. The AO should have also initiated penalty proceedings under s. 271(1)(c) of the IT Act. Thus, the CIT exercised his power under s. 263 of the IT Act and set aside both the assessments with the direction that the AO should make these assessments in accordance with law.
7. The assessee is in appeal before us. The learned counsel of the assessee Shri K. A. Sathe pointed out that the loose papers and documents found during the course of the survey related to the asst. yr. 1991-92. No documents or paper pertained to the asst. yrs. 1989-90 and 1990-91. On the basis of the documents found for a year subsequent to the years under consideration, no assumption of jurisdiction under s. 263 of the IT Act is justified.
8. He further pointed out that the AO had applied her mind and had completed both the assessments after a due scrutiny of the books of account. He drew our attention to para 2 for the asst. yr. 1989-90 wherein the AO even issued the questionnaire to investigate the case. He pointed out that para 2 for the asst. yr. 1989-90 and para 4 for the asst. yr. 1990-91 amply demonstrates that the assessments were completed after due enquiry. For the asst. yr. 1990-91 the AO has also examined the various debit or credit balances. The AO, therefore, had fully investigated the case of the assessee for both the years under consideration. The AO after due enquiry has made the assessee agree to the ad hoc addition of Rs. 1,00,000 for the asst. yr. 1989-90 and Rs. 2,35,000 for the asst. yr. 1990-91. The assessee has agreed to these additions with a view to buy peace. The AO was aware of this fact and therefore did not initiate the penalty proceedings under s. 271(1)(c). That was a conscious act on the part of the AO and she has used her discretion not to initiate penalty proceedings under s. 271(1)(c) of the IT Act. Discretion was judiciously used by the AO which should not be interfered with under s. 263 of the IT Act. Thus, the AO had completed the assessment after due enquiries and the said assessment did not cause any prejudice to the Revenue and, therefore, on this ground alone the CIT was not justified to invoke the provisions of s. 263 of the IT Act.
9. The learned counsel further pointed out that levy of penalty is a matter of discretion of the AO. By drawing our attention to s. 271 of the IT Act, he also pointed out that penalty under the said section could be initiated by the AO or Dy. CIT(A) or the CIT(A) in the course of any proceedings under the Act. The CIT, therefore, under s. 263 of the IT Act has no power to initiate penalty proceedings under s. 271 of the Act. It is only the satisfaction of the AO, Dy. CIT(A) or CIT(A) which could give rise to the initiation or levy of penalty under s. 271 of the IT Act. The power of the CIT under s. 263 of the IT Act does not make him entitled to direct the AO to initiate penalty proceedings under s. 271 of the Act. In this regard, he drew our attention to the decision of the Delhi High Court in the case of CIT vs. J. K. DCosta (1982 133 ITR 7 (Del). In this regard also the order of the CIT under s. 263 cannot be justified.
10. The learned counsel continued and pointed out that every order of the AO cannot be subjected to revision under s. 263 of the Act. The assessment orders which are made by the AO in accordance with law cannot be interfered with. By drawing our attention to the decision of the Bombay High Court in the case of CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom), the learned counsel pointed out that before the assumption of jurisdiction under s. 263 of the IT Act, the CIT must give a clear finding that the order of the AO is erroneous and by virtue of that error prejudice has been caused to the interest of Revenue. However, an order cannot be termed as erroneous unless it is not in accordance with law. If the AO acting in accordance with law makes the assessment, same cannot be branded as erroneous by the CIT simply because, according to him the order should have been written more elaborately. The learned counsel pointed out that the jurisdictional High Court has clearly laid down that s. 263 of the IT Act does not visualise a case of substitution of the judgment of the CIT for that of the AO who passed the order. The AO, the learned counsel argued, has completed the assessment in accordance with law which cannot be interfered with. For this and other propositions, the learned counsel has placed reliance on the following decisions :
(1). CIT vs. Kashi Nath & Co. (1988) 170 ITR 28 (All),
(2). CIT vs. Ratlam Coal Ash Co. (1988) 171 ITR 141 (MP),
(3). CIT vs. Shri Govindram Seksariya Charity Trust (1987) 166 ITR 580 (MP).
11. The learned counsel also brought to our notice that the AO has given effect to the order under s. 263 of the CIT for the assessment years under appeal. These orders passed under s. 143(3) r/w s. 263 of the Act have been placed on record. From these orders, the learned counsel pointed out that no addition has been based by the AO on the directions of the CIT. The AO in fact has made certain other additions which were not subject-matter of s. 263 before the CIT. The learned counsel, thus, concluded that the assumption of revisional jurisdiction by the CIT was not justified.
12. On the other hand, the learned Departmental Representative, Shri Sanjay Prasad, supported the order of the CIT. He pointed out that the AO had completed the assessment in a hurry without properly investigating the case in its right perspective. In such a situation, the CIT has power to assume jurisdiction under s. 263 of the IT Act. The learned Departmental Representative has placed reliance on the decision of the Karnataka High Court in Thalibai F. Jain & Ors. vs. ITO (1975) 101 ITR 1 (Kar).
13. The learned Departmental Representative also contended that the AO did not initiate penalty proceedings under s. 271(1)(c). From the facts of the case, it could be seen that the assessee was guilty of concealment and, as a matter of fact, had agreed to the additions of Rs. 1,00,000 in 1989-90 and Rs. 2,35,000 in 1990-91. On these facts, the assessee was liable to penalty. The AO, therefore, should have initiated the penalty proceedings under s. 271(1)(c) of the IT Act.
14. Regarding the power of the CIT under s. 263 with respect of the directions to initiate penalty proceedings, the learned Departmental Representative drew our attention to the decision of the Madhya Pradesh High Court in the case of Addl. CIT vs. Kantilal Jain (1980) 125 ITR 373 (MP). He pointed out that if, during the pendency of proceedings which ultimately ended in an order of assessment, the AO has omitted to take notice of facts attracting the penal provisions, such an order would be erroneous and the CIT would be entitled to exercise the revisional jurisdiction under s. 263 of the IT Act. The learned Departmental Representative, therefore, argued that the assessment order of the AO was erroneous insofar as it was prejudicial to the interest of Revenue and, therefore, the CIT was justified in assuming the jurisdiction under s. 263 of the IT Act. His order, therefore, should be maintained.
15. We have considered the rival submissions in the light of judicial pronouncements brought to our notice. Before the CIT can exercise powers under s. 263 of the IT Act, 1961, two conditions must be satisfied, namely, that the order of the assessing authority is erroneous and further that it is also prejudicial to the interest of Revenue. Unless both the conditions are satisfied, the CIT does not get jurisdiction to pass an order under s. 263 revising the assessment order. It is not necessary that every order which is found erroneous is also prejudicial to the interest of Revenue. It may also be mentioned that the power of revision by the CIT under s. 263 of the IT Act is quasi-judicial in character. The CIT must give reasons in support of his conclusion that the assessment order is erroneous insofar as it is prejudicial to the interest of Revenue. The reasons in this respect should not be vague but should be specific. It should be clearly mentioned by the CIT that because of the specific error in the assessment order, the prejudice has been caused to the Revenue. If the CIT does not give specific reasons the order would be vitiated.
16. In the case before us, it has been alleged that the AO had completed the assessment without proper enquiries. It bears repetition that during the course of survey operations carried out on 24th Nov., 1990, certain loose papers and documents pertaining to asst. yr. 1991-92 were discovered and impounded. No paper or document was found and impounded for the asst. yrs. 1989-90 and 1990-91. These two assessments were completed by the AO on the basis of papers and documents found for the asst. yr. 1991-92. The AO had seen certain discrepancies for the asst. yr. 1991-92 and had concluded that similar discrepancies must be in the books of account for the asst. yrs. 1989-90 and 1990-91. The AO, therefore, had investigated the matter to find out the said discrepancies. We have very carefully gone through the assessment orders for the two years under consideration and find that the AO had made proper investigation and had properly considered the material found during the course of survey for the asst. yr. 1991-92. On account of the discrepancy for the asst. yr. 1991-92, the assessee also had agreed for the addition of Rs. 1,00,000 for the first year and Rs. 2,35,000 for the second year. The assessee, however, had agreed for the addition on the condition that no penal action under s. 271(1)(c) should be initiated by the AO. The AO had consciously accepted the condition of the assessee and did not initiate the penalty proceedings. As far as the completion of the assessment proceedings are concerned, we find that the AO has made proper investigation and had completed the assessments after due enquiry. The CIT, therefore, was not factually correct in stating that the assessments were completed in a haste without application of mind.
17. It is well settled that the power of suo motu revision under s. 263 is in the nature of supervisory jurisdiction and can be exercised only if warranted by facts. The CIT cannot term an order as erroneous, unless it is not in accordance with law. If the AO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous simply because according to the CIT the order should have been written more elaborately. The section does not visualise a case of substitution of the judgment of the CIT for that of the AO.
18. We have reproduced above the reasons for interference for assumption of jurisdiction under s. 263. The CIT as it appears from the facts of the case, was influenced by papers and documents found during the course of survey for the asst. yr. 1991-92. He has not pointed out any error in the assessment order for the asst. yrs. 1989-90 and 1990-91. As far as the anomalies like fictitious credits, unrecorded cash remittances, unrecorded sales, etc. are concerned, the AO had considered this aspect of the case and had in fact made the assessee to agree for the addition of Rs. 1,00,000 for 1989-90 and Rs. 2,35,000 for 1990-91. A careful reading of the order of the CIT indicates that he has assumed jurisdiction under s. 263 merely on the ground that the AO failed to initiate penalty proceedings under 271(1)(c) of the IT Act. Apart from this, no other specific error has been pointed out by the CIT.
19. Regarding the initiation of penalty proceedings, we find from the assessment orders that the AO had made the additions on agreed basis. She did not initiate the penalty proceedings for the following reasons, namely, “Penalty under s. 271(1)(c) is not initiated because of the fact that assessee has come-forward to offer the amount in this assessment year, though it cannot be said that full amount does belong to this period only”. This observation has been made by the AO for the asst. yr. 1990-91. For the asst. yr. 1989-90, the AO observed “Proceedings under s. 271(1)(c) are not initiated because of the reason that there is no conclusive evidence to prove that this particular amount belong to asst. yr. 1989-90 and addition was on agreed basis, in the light of evidence at the time of survey operation”. A plain reading of the observations of the AO indicates that she herself was not sure whether the agreed amount for both the years under consideration pertained to the assessment years under appeal. The AO did not find any specific concealed income in the case of the assessee and has made the agreed addition on the basis of material found for the asst. yr. 1991-92. She has clearly mentioned that the entire amount added for both the years under consideration may not pertain to these years. There was, thus, a conscious act on her part not to initiate penalty proceedings under s. 271(1)(c). On these facts, the CIT is not entitled to assume jurisdiction under s. 263 of the IT Act. In this regards, we are supported by the ratio of the decision of the Madhya Pradesh High Court in the case of CIT vs. Shri Govindram Seksariya Charity Trust (1987) 166 ITR 580 (MP). In the said case, the assessee was a charitable trust. For the asst. yrs. 1973-74 and 1975-76 to 1977-78, the CIT had found that the debtors of the assessee persons to whom the provisions of s. 13(3) of the IT Act were applicable and that the income of the assessee would be deemed to have been used for the benefit of those persons, as provided by s. 13(2) of the Act. On these facts, the CIT was of the view that the AO had allowed exemption under s. 11 of the Act to the assessee without examining in detail the applicability of the provisions of s. 13(1)(c)(ii) of the Act. Therefore, the CIT set aside the assessment order of the AO. On these facts, the Honble High Court held that the Tribunal, after examining the record, found that to the audit objections that the assessee was not entitled to the benefit of exemption by virtue of the provisions of s. 13(1) of the Act, the AO had given detailed replies showing that the AO was alive to the relevant provisions of law and the facts before passing the orders of assessments. Since from the entire record the Tribunal found that the AO was alive to the relevant facts and provisions of law before proceeding to frame the assessment, the Tribunal was right in setting aside the order of the CIT. In the case before us also, we find that the AO was well aware about the penal provisions under s. 271(1)(c) and had taken a conscious decision not to initiate the penalty proceedings under the said section. The AO was also not certain that the entire addition in fact pertained to these two assessment years under appeal.
20. The Delhi High Court in the case of J. K. DCosta (supra) had laid down that s. 263 of the Act refers to a particular proceeding that is being considered by the CIT and it is not possible, when the CIT is dealing with the assessment proceedings and the assessment order, to expand the scope of these proceedings which are being sought to be revised by the CIT. Proceedings for the levy of a penalty whether under s. 271 or s. 273 are proceeding independent and separate from assessment proceedings. There is no identity between the two. The Honble Court further held that though it is usual for the AO 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. Failure of the officer to record in the assessment order his satisfaction or the lack of it is in regard to the leviability of penalty cannot be said to be a factor vitiating the assessment order in any respect. An assessment cannot be said to be erroneous or prejudicial to the interest of Revenue because of the failure of the AO to record his opinion about the leviability of penalty in the case. In other words, the Honble High Court was of the view that assumption of jurisdiction under s. 263 is not justified merely on the ground that the AO has failed to initiate the penalty proceedings under s. 271 of the Act. This view has been consistently held by the Delhi High Court in some other decisions also which are placed on page 2 of the material papers. It may also be mentioned that against this decision, the Supreme Court had rejected the S. L. P. as reported in 147 ITR 1 (St).
21. We may also mention here that penalty proceedings under s. 271 of the IT Act could be initiated by the AO or by the Dy. CIT(A) or the CIT(A) in the course of any proceedings under the IT Act. Only these three IT authorities are recognised as competent to record the satisfaction regarding the leviability of the penalty under s. 271. In our view, no such power has been given to the CIT under s. 263 of the IT Act.
22. We are aware that there are some contrary decisions in favour of the Department, one such decision has been mentioned above in the case of Kantilal Jain (supra). However, in view of the decision of the Honble Supreme Court in the case of Vegetable Products (1973) 88 ITR 192 (SC), we take the view favourable to the assessee and hold that the CIT cannot revise the order of the AO on the leviability of the penalty under s. 271 of the Act. Moreover, it bears repetition that the AO herself was not sure whether the agreed addition wholly belonged to the assessment years under appeal. It, therefore, cannot be said that there was a definite concealment on the part of the assessee.
23. We find from the various notices issued by the CIT that the reasons assigned by him for assumption of jurisdiction were vague and not specific. Perhaps due to this reason, the CIT did not give any specific direction to the AO. He merely concluded his order by saying “both the assessments are, therefore, set aside with the direction that the AO should make these assessments in accordance with law”. Perusal of the facts of the case shows that the AO in fact had made the assessments for both the years as per law. This is perhaps the reason that while completing the reassessment as per the directions of the CIT the AO did not make any addition on the basis on which the CIT had assumed jurisdiction under s. 263 of the IT Act. The AO made certain other additions and not the additions contemplated by the CIT. The totality of the circumstances, therefore, shows that the CIT failed to establish the error which caused prejudice to the Revenue and therefore, was not justified in setting aside the order of the AO. We, therefore, vacate his order and allow the assessees appeals.