Commissioner of Income-tax is not entitled to set aside assessment order passed by Income-tax Officer on ground that there was no mention of initiation of penalty proceedings in assessment order and Commissioner of Income-tax in proceedings under section 263 of Act cannot direct Income-tax Officer to make fresh assessment to initiate penalty proceedings.

1. - The Commissioner of Income-tax, jodhpur ("the CIT") has filed this application under section 256(2) of the Income-tax Act, 1961 (for short "the Act"), for a direction to the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as "the Tribunal"), to state the case and refer the following question of law for the opinion of this court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the order under section 263 of the Act when the order of the ITO was erroneous and prejudicial to the interests of the Revenue on account of his failure to initiate penalty proceedings under section 271(1)(c) notwithstanding a clear confession of concealment of true particulars of income on the part of the assessee by the act of surrendering the cash credit appearing in the name of M/s. Bherunath Mohanlal & Co. as a havala entry ?"

2. The assessee-respondent is a registered firm comprising of five partners. During the course of assessment proceedings for the assessment year 1977-78, the Income-tax Officer (ITO) came across a cash credit of Rs. 10,000 in the name of M/s. Bherunath Mohanlal & Co., Pali, a concern belonging to one, Shri Mohanlal. The assessee surrendered this entry of cash credit before the Income-tax Officer and confessed to it being a havala entry. The Income- tax Officer, however, did not initiate penalty proceedings under section 271(1)(c) of the Act with reference to the above surrendered amount of Rs. 10,000. The Commissioner of Income-tax initiated proceedings under section 263 of the Act on the following grounds:

1. That the Income-tax Officer committed a serious error in not initiating penalty proceedings under section 271 (1)(c) of the Act notwithstanding the clear-cut confession on the part of the assessee that the cash credit account appearing in the name of M/s. Bherunath Mohanlal & Co. was merely a hawala entry and as such admittedly a bogus one;

2. That the Income-tax Officer failed to appreciate that circumstances existed for initiating penalty proceedings under section 271(1)(c) before completing the assessment;

3. That the assessment was concluded by the Income-tax Officer in a perfunctory manner without proper application of mind causing prejudice to the interests of the Revenue.

3. In response to the show-cause notice issued by the Commissioner of Income-tax, written submissions were made by the authorised representative of the assessee challenging the validity of action under section 263 basically on the ground that the surrender of cash credit was made only in order to buy peace of mind and avoid prolonged litigation and not because the same was bogus. It was further submitted that the Income-tax Officer was justified in not initiating penalty proceedings under section 271 (1)(c) of the Act. The Commissioner of Income-tax was of the opinion that there were no sound reasons for not initiating penalty proceedings under section 27](1)(c) for which a prima facie case existed and that the penalty proceedings could only have been initiated in the course of the assessment proceedings and since the Income-tax Officer has not applied his mind to this aspect, he committed an error and the completion of assessment was erroneous which requires interference under section 263 of the Act. In support of the aforesaid finding the Commissioner of Income-tax placed reliance on Addl. CIT v. Indian Pharmaceuticals [1980] 123 ITR 875 (MP). He also took into consideration the fact that the assessee's claim for registration is vitiated for the reasons mentioned in para. 5 of his order dated August 19, 1981. The Commissioner, therefore, set aside the assessment made by the Income-tax Officer and directed him to apply his mind to both the points mentioned in his order and to reframe the assessment in accordance with the provisions of law. The purport of the order passed by the Commissioner under section 263 of the Act was to set aside the assessment and t