1981 (9) TMI 40 - HC - Income Tax

Summary

Issues Involved:
1. Validity and timing of rectification orders under section 154.
2. Justification for the Commissioner of Income-tax canceling the rectification orders under section 263.
3. Whether income from the cinema should be assessed under "Property" or "Other sources."
4. Whether the reassessment orders nullify the original assessment orders.

Detailed Analysis:

1. Validity and Timing of Rectification Orders under Section 154:
The Tribunal concluded that the rectification orders passed by the Income-tax Officer (ITO) under section 154 were valid and within the prescribed time limit. The ITO's action was based on an audit objection, not suo motu. The Tribunal found that the original assessment orders ceased to operate once reassessments were made. The rectification, being directly related to the reassessments made between February 25, 1965, and August 31, 1965, was within the four-year limit, as all rectification orders were passed on May 10, 1968. The High Court upheld this view, stating that the rectification was not of the original assessment orders but of the reassessment orders, making the point of limitation raised by the Department invalid.

2. Justification for the Commissioner of Income-tax Canceling the Rectification Orders under Section 263:
The Tribunal vacated the orders passed by the Commissioner under section 263, holding that the rectification orders were neither erroneous nor prejudicial to the interests of the Revenue. The Tribunal reasoned that the ITO had not acted on his own initiative but had responded to an audit objection. The High Court agreed, noting that the ITO's rectification was justified as it corrected a mistake in the reassessment orders, where depreciation on the cinema building had been omitted. The High Court affirmed that the orders were not prejudicial to the Revenue and were correct on merits.

3. Whether Income from the Cinema Should be Assessed under "Property" or "Other Sources":
The Tribunal held that the lease was a composite and inseparable deed, including the cinema building, machinery, and furniture. Applying the law laid down by the Supreme Court in Sultan Brothers P. Ltd. v. CIT [1964] 51 ITR 353, the Tribunal concluded that the income should be assessed under "Other sources." The High Court supported this view, stating that the reassessment orders implicitly treated the income under "Other sources" by withdrawing the allowance for repairs, which would not have been permissible if the income were assessed under "Property."

4. Whether the Reassessment Orders Nullify the Original Assessment Orders:
The High Court examined whether the reassessment orders nullified the original assessment orders. It concluded that once reassessments are made, the original assessment orders no longer hold the field. The reassessment orders are separate and independent. The High Court found that the rectification was related to the reassessment orders, not the original assessment orders, thus supporting the Tribunal's decision that the rectification was within the time limit and justified.

Conclusion:
Both questions referred to the High Court were answered in the affirmative and in favor of the assessee. The rectification orders under section 154 were valid and within the prescribed time limit, and the Commissioner was not justified in canceling them under section 263. The income from the cinema was correctly assessed under "Other sources," and the reassessment orders nullified the original assessment orders. The assessee was entitled to costs, with counsel's fee set at Rs. 350.