Income-tax---

----Revision---Commission---Jurisdiction---Rectification of mistakes-- Original order rectified--- Original order ceased to exist after such rectification---Revision of original order after date of rectification was not valid---Subsequent cancellation of order of rectification would not validate order of revision---Indian Income Tax Act, 1961, Ss. 154 &.263.

The original assessment in the case of the assessee for the assessment year 1979-80, was completed on March 30, 1982. This order was rectified under section 154 of the Income Tax Act, 1961, on May 6, 1983. The original assessment was held erroneous and prejudicial and proceedings under section 263 of the Income Tax Act were initiated by the Commissioner of Income-tax on March 2, 1984. Subsequently, however, the order of rectification was cancelled in appeal on January 30, 1985. On a reference of the question whether the Commissioner had jurisdiction to revise:

Held, that on March 2, 1984, when the power of revision was exercised the order, dated March 30, 1982, was not in existence. On that day, there was no order which could have been considered as erroneous and prejudicial to the interests of the Revenue because that order was superseded by the order of rectification on May 6, 1983. The order of revision was not valid. The subsequent cancellation of the order of rectification would not validate the order of revision.

Commissioner of Police v. Gordhandas Bhanji AIR 1952 SC 16 and Mohinder Singh Gill v. Chief Election Commissioner AIR 1978 SC 851 ref.

G.M. Chaphekar with Subhash Samvatsar for the Assessee.

D.D. Vyas for the Commissioner.

JUDGMENT

A.R. TIWARI, J. ---At the instance of the assessee, the Tribunal has stated the case and referred the undernoted question of law under section 256(1) of the Income Tax Act, 1961 (for, short, "the Act"), on an application registered as R.A. No. 148/(Ind) of 1986 arising out of the order passed by the Tribunal on July 29, 1986, in I.T.A. No.530/(Ind) of 1986 for our opinion:

"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the Commissioner of Income-tax had jurisdiction to initiate proceedings under section 263 of the Income Tax Act and to revise the original assessment order?"

Briefly stated the facts of the case are that the assessee is a private limited company and the year of assessment is 1979-80 ending March 31, 1979. The original assessment in the case of the assessee for 1979-80 was completed by the Income-tax Officer on March 30, 1982. The Income-tax Officer later rectified the said assessment order under section 154 of the Act on May 6, 1983. He, thereby, disallowed 15 percent of interest under section 40-A(8) of the Act which worked out to Rs.53,095. He further disallowed the sum of Rs.24,984 being the interest on borrowed capital utilised for acquiring shares held as stock-in-trade under the head "Business income" and allowed the same from the income of gross dividend. This was done by the Income-tax Officer after allowing the deduction under section 80-M of the Act on net dividend and not with reference to the gross amount of such dividend (Annexure "A"). The Commissioner of Income-tax, however, found that the original assessment, dated March 30, 1982, was erroneous and prejudicial to the interests of the Revenue, and thus, initiated proceedings under section 263 of the Act. Notice dated March 2, 1984, was issued. The assessee replied to the notice. The main contention of the assessee was that the original assessment order was already rectified on May 6, 1983, under section 154 of the Act and as the rectified order of assessment was not erroneous and prejudicial to the interests of the Revenue, the Commissioner of Income-tax had no jurisdiction to resort to section 263 of the Act. The other contention was that the assessee had filed an appeal against the order of rectification which was pending. The Commissioner of Income-tax, however, revised the assessment order and directed the Income -tax Officer to disallow interest under section 40-A(8) of the Act quantified at Rs.21,700 and to allow deduction under section 80-M of the Act on the net dividend on March 26, 1984 (Annexure "E"). The order of rectification was dislodged in appeal by the Commissioner of Income-tax (Appeals) on January 30, 1985. The assessee filed the appeal before the Tribunal against the order passed under section 263 of the Act. The Tribunal remanded the case to the Income-tax Officer to redetermine the issues (Annexure "C"). The assessee felt aggrieved by the order of the Tribunal and thus filed the application under section 256(1) of the Act. The Tribunal stated the case and referred the aforesaid question of law.

We have heard Shri G.M. Chaphekar, learned senior counsel with Shri Subhash Samvatsar, for the applicant, and Shri D.D. Vyas, learned counsel for the non-applicant.

The undernoted facts are not in dispute:

(a)The original assessment was completed on March 30, 1982.

(b)The aforesaid order was rectified under section 154 of the Act on May 6, 1983.

(c)The original assessment was held erroneous and prejudicial and proceedings under section 263 were initiated by the Commissioner of Income-tax on March 2; 1984.

(d)The order of rectification was dislodged in appeal on January 30, 1985. It is thus luculent that when proceedings under section 263 of the Act were initiated on March 2, 1984, there was no original order, dated March 30, 1982, in existence and it was superseded by the order of rectification on May 6, 1983.

Section 263(1) of the Act provides as under:

"Revision of orders prejudicial to Revenue.---(1) The Commissioner may gal! for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or .causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment."

It is manifest that the Commissioner is empowered to resort to the aforesaid provision if he considered that any order passed by the Assessing Officer (prior to the introduction of the word "Assessing", the words appearing in the section were "Income-tax" till substitution by the Direct Tax Laws (Amendment) Act, 1987, effective from April 1, 1988), was erroneous in so far as it was prejudicial to the interests of the Revenue. It is, thus, clear that the order is the basis of the exercise of the power conferred by this section. Indisputably on March 2, 1984, when this power was exercised, the order, dated March 30, 1982, was not in existence. It is a different matter that the order of rectification, dated May 6, 1983, which was in existence on the date of initiation of the proceedings under section 263 of the Act was later demolished on January 30, 1985, by the Commissioner of Income-tax (Appeals) in the Appellate jurisdiction.

In Mohinder Singh Gill v. Chief Election Commissioner, AIR 1978 SC 851, it is held as under (headnote):

"When a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to Court on account of a challenge, get validated by additional grounds later brought out. Commissioner of Police v. Gordhandas Bhanji, AIR 1952 SC 16 Relied on."

The question presented before us is whether the order passed by the Commissioner on March 2, 1984, for initiation of the proceedings under section 263 of the Act was valid on that day. On that day, there was no order which could have considered as erroneous and prejudicial to the interests of the Revenue because that order was superseded by the order of rectification on May 6, 1983.

As the validity of the order is required to be judged by reference to the reasons contained in the order and is not to be supplemented by fresh reasons, the subsequent event of demolition of the order of rectification on January 30, 1985, does not have the potential of validating the invalidity which is present imprimis on the face of the order.

In view of the aforesaid admitted position of the facts, we find that the Tribunal was not justified in holding that the Commissioner of Income tax had jurisdiction to initiate the proceedings under section 263 of the Act and to revise the original assessment order when such an order was not in existence at the time of initiation of the proceedings. Consequently, we have no option but to answer the question in the negative, i.e., in favour of the assessee and against the Department. However, law and justice are not distant neighbours. We, therefore, deem it proper to part with this case with the observation that as the order of rectification is no longer in existence, the appropriate authority shall be at liberty to resort to appropriate proceedings with reference to the order, dated March 30 1982, if otherwise not forbidden under the law.

The miscellaneous civil case is, thus, disposed of as noted above, but without any orders as to costs. Counsel fee for each side is fixed at Rs.750, if certified.Transmit a copy of this order to the Tribunal in accordance with law.

M.B.A./1414/FCOrder accordingly.