1. This is a reference at the instance of the Commissioner under section 256(1) of the Income-tax Act, 1961. The Commissioner wanted three questions to be referred, but the Tribunal only accepted the third question proposed by the Commissioner and referred the same to us. The Tribunal at the request of the assessee also referred one other question. Accordingly, the following two questions have been referred to us, the first of them at the instance of the Commissioner and the second one at the instance of the assessee.
'(1) Whether, on the facts and in the circumstances of the case, the Income-tax Officer had jurisdiction to act under section 154 of the Income-tax Act, 1961
(2) Whether, on the facts and in the circumstances of the case, the assessment order for 1959-60 passed on August 20, 1960, could be rectified under section 154 of the Income-tax Act, 1961 ?'
2. A few facts may be stated :
We are concerned in this reference with the assessment year 1959-60, the accounting period being S.Y. 2014 (ending on November 11, 1958). The assessee is an individual and carries on business in iron and hardware and also; manufactures and sells iron ghamellas. His original assessment for this year was completed on August 20, 1960. The income for this year was determined in the said assessment at Rs. 67,743. Included in the above was the business income of Rs. 65,811. In arriving at this business income the Income-tax Officer allowed development rebate of Rs. 53,020 on machinery, tools, structurals and motor car. Subsequently, the successor Income-tax Officer took the view that this development rebate was erroneously granted and accordingly issued a show-cause notice to the assessee on April 30, 1964, in which the following four reasons were offered :
'1. No development rebate can be allowed on 'tools' and `structurals' since they are not plants, much less 'plants installed', within the meaning of section 10(2)(vib) of I.T. Act, 1922.
2. No development rebate can be allowed on 'motor car' since the car is not wholly used for business purposes.
3. No development rebate can be allowed on 'machinery' since as per the requirements of the proviso (b) to section 10(2)(vib), 75% of the rebate; to be actually allowed has not been debited to profit and loss account and credited to development rebate reserve account. (Please vide profit and loss account and balance-sheet filed).
4. The non-compliance of the requirements of proviso (b) to section 10(2)(vib) mentioned in (3) above applies equally in respect of tools, structurals and motor car.'
3. The assessee objected to the proposed section; but, overruling his contentions, the Income-tax Officer passed an order
4. The assessee appealed against the order of rectification, but the Appellate Assistant Commissioner, agreeing with the Income-tax Officer, dismissed the appeal, holding : (i) as regards the motor car, there was nothing on record to suggest that the vehicle was exclusively used for business; (ii) the development rebate reserve had not been created specifically by debiting the profit and loss account. The creation of a reserve by any other method would not satisfy the requirements of law, and (iii) the previous year ended on November 10, 1958, for which the return of income and balance-sheet were filed on August 6, 1959. The assessment was completed on August 20, 1960. In the balance-sheet originally filed, there was no reserve and it was only on September 12, 1960, after the completion of the assessment, that a revised balance-sheet was filed showing a reserve for development rebate and depreciation. Since there was no reserve created in the balance-sheet at the time of the original assessment, the Income-tax Officer was in error in granting the development rebate, and this error should be rectified subsequently.
5. The assessee went in second appeal to the Tribunal. It was, inter alia, contended that the circumstances of the case did not confer authority on the Income-tax Officer to proceed under section 154. Another contention which was advanced was that no rectification under section 154 of the Act of 1961 could be made in respect of the assessment order passed under the old Act. The latter contention which was in the nature of a preliminary contention was rightly overruled by the Tribunal, but the former contention was accepted by the Tribunal which held :
'Having considered the submissions, we are of the view that the Income-tax Officer had no jurisdiction or resort to the provisions for rectification. This is not because we accept Mr. Mulla's contention that section 154 would not in terms apply. That section, as pointed out by the departmental representative, is wide enough to cover old assessments. In fact, if Shri Mulla's contention is correct, we should have been inclined to say that the Income-tax Officer's action could be upheld under section 35, in which case the assessee would have even lost the right of appeal. We think that Shri Mulla is not right on this point and if there was an error in fact, there was no legal bar to the Income-tax Officer's proceeding under section 154. But Shri Mulla is right in arguing that there was no error in this case within the meaning of section 154. Before the assessment was completed by the service of the notice of demand on the assessee, the revised balance-sheet was on record. This balance-sheet showed a reserve. The facts clearly support the assessee's statement that the revised balance-sheet was filed to remove the technical objection raised during the course of assessment proceedings. No other inference is possible, because in the forwarding letter the assessee wrote to the Income-tax Officer that he hoped that the revised balance-sheet would be found to be in order. Rightly or wrongly the assessing officer thought that the assessee had created a reserve as required under the law. Every officer is expected to know the law and the succeeding officer cannot sit in judgment over his predecessor's order. Whether the revised balance-sheet satisfied the requirements of law to claim development rebate is a debatable point and not a manifest error of law. We also consider that the second Income-tax Officer had no legal justification to say that tools and structurals did not constitute plant and machinery entitled to development rebate. As a matter of fact, it is now settled law that development rebate can be allowed on parts of machinery and plant and not merely on whole items of machinery. In regard to the motor car also, there is nothing on record to show that the car on which development rebate was allowed was not used entirely for business. The second Income-tax Officer, therefore, did not have any material to hold that a manifest error of law had been committed by his predecessor. He had, therefore, no jurisdiction to act under section 154. We accordingly, allow the appeal and cancel the order under section 154.'
6. It is very clear that the original Income-tax Officer in deciding to allow the full amount of development rate had agreed to the request of the assessee that the revised balance-sheet subsequently forwarded should be considered adequate, although the original balance-sheet filed along with the return was perhaps technically defective. If this was the view taken by the original Income-tax Officer, who finalised the assessment originally, it is difficult to perceive how this view, which is a possible view, can be subsequently rectified under section 154 on the basis of manifest error on the record. As far as the tools, structurals and the motor car are concerned, it appears to us that the view taken by the Tribunal as reflected in the paragraph above extracted is the correct view and we are in agreement with the conclusion that the second Income-tax Officer, therefore, did not have any material to warrant action under section 154.
7. In this view of the matter it is unnecessary to consider the contentions of the assessee as reflected in the question referred to at his instance (i.e., Question No. 2 as marked by us).
8. Accordingly the two questions are answered as follows :
Question No. 1. - In the negative and in favour of the assessee.
Question No. 2. - Unnecessary to answer in view of the answer given to question No. 1.
9. The Commissioner will pay to the assessee the costs of this reference.