COMMISSIONER OF INCOME TAX Vs. CHUNILAL BHAGWANDAS MEHTA

JUDGEMENT

(1.) THIS is a reference at the instance of the CIT under S. 256(1) of the IT Act, 1961. The CIT wanted three questions to be referred, but the Tribunal only accepted the third question proposed by the CIT 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 CIT and the second one at the instance of the assessee.

(2.) WE are concerned in this reference with the asst. year 1959 60, the accounting period being S.Y. 2014 (ending on 11th November, 1958). The assessee is an individual and carries on business in iron and hardware and also manufactures and sells iron ghamellas. His original assessment forthis year was completed on 20th August 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 ITO allowed development rebate of Rs. 53,020 on machinery, tools, structurals and motor car. Subsequently, the successor ITO took the view that this development rebate was erroneously granted and accordingly issued a show cause notice to the assessee on 30th April, 1964, in which the following four reasons were offered:

(3.) THE assessee appealed against the order of rectification, but the AAC, agreeing with the ITO, 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 10th November, 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 ITO was in error in granting the development rebate, and this error should be rectified subsequently. 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 ITO to proceed under S. 154. Another contention which was advanced was that no rectification under S. 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: