Omission to levy penal interest is not waiver; revision under section 263 is justified where the non-levy prejudices revenue.

Mere omission by an Income-tax Officer to levy penal interest under section 217(1A) does not amount to waiver of interest. Waiver under rule 40 of the Income-tax Rules requires a conscious and overt exercise of discretion based on special circumstances; inadvertent non-action is insufficient. On that basis, non-levy of interest can be treated as an error prejudicial to the Revenue and revised under section 263, enabling the Commissioner to direct reconsideration of levy in accordance with law.

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Issues: Whether the Commissioner was justified in invoking section 263 of the Income-tax Act, 1961, to direct reconsideration of the levy of penal interest under section 217(1A) where the Income-tax Officer had omitted to levy such interest in the assessment order.

Analysis: The omission by the Income-tax Officer to levy penal interest could not be treated as a waiver of interest. Waiver under rule 40 of the Income-tax Rules, 1962, requires a conscious and overt exercise of discretion based on special circumstances; mere non-action or inadvertent omission does not amount to waiver. Since the non-levy of penal interest was capable of revision as an error prejudicial to the Revenue, the Commissioner was entitled to direct the Income-tax Officer to consider levy of interest in accordance with law.

Conclusion: The reference was answered in the negative and against the assessee; the Commissioner's order under section 263 was held justified.

Ratio Decidendi: A mere omission by the Income-tax Officer to levy interest does not constitute waiver unless there is a conscious decision to waive it on relevant statutory grounds; such omission may be revised under section 263 if it is prejudicial to the Revenue.

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