JUDGMENT
K. P. Balanarayana Marar, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal, Cochin Bench, has referred the following question of law for the decision of this court :
“Whether, on the facts and in the circumstances of the case and also on an interpretation of the revisional order, the assessee is entitled to claim deduction of the cost of improvement in respect of an asset (the capital gains arising on the sale had been considered in the original assessment) in the reassessment pursuant to the order of the Commissioner under Section 263 of the Income-tax Act, 1961 ?”
2. The deceased first respondent whose legal representatives are respondents Nos. 2 and 3 herein is an assessee to income-tax. The relevant assessment year is 1976-77. In the original assessment completed on February 25, 1977, the Income-tax Officer did not include the capital gains arising out of transfer of 2,000 shares in Messrs. Nirlon Synthetic Fibres and Chemicals Ltd. to a firm called Messrs. Laxmi Ram in which the assessee was a partner. The Commissioner of Income-tax, acting under Section 263 of the Income-tax Act, 1961, held that the Income-tax Officer erred in failing to bring to tax the capital gains arising out of this transaction. The order of the Income-tax Officer was set aside with a direction to make a fresh assessment.
3. A revised return was filed by the assessee on January 20, 1981, wherein he claimed deduction of an amount of Rs. 75,198 towards cost of improvements in respect of a sale of property in Courtallam. This claim was not put forward at the time of the original assessment. The Income-tax Officer rejected the claim on the ground that it was not put forward earlier and also on the further ground that the original assessment order was set aside in revision for the limited purpose of computing the capital gains on the sale of shares to the partnership firm. The revised assessment was made on March 21, 1981, wherein the value of the shares transferred was fixed at Rs. 544 per share by invoking the provisions of Section 52(2) of the Income-tax Act, 1961, and the capital gain arising out of that transaction was worked out at Rs. 9,02,810. On appeal, the Commissioner of Income-tax (Appeals) held that the provisions of Section 52 (2) could not be invoked and relief was granted to the extent of Rs. 5,88,000. It was further found that the assessee was entitled to claim the deduction towards cost of improvements in respect of the property at Courtallam. The Commissioner of Income-tax (Appeals) set aside the assessment for recomputing the capital gains and for making the deduction claimed by the assessee. The matter was carried in second appeal to the Appellate Tribunal. The Tribunal held that the assessment having been set aside by the Commissioner on the earlier occasion, the assessee was well within his rights to agitate a claim that was not made in the original assessment. It was observed that the original assessment has become non est on the passing of the order by the Commissioner under Section 263. The appeal by the Revenue was dismissed by the Tribunal upholding the order of the Commissioner. It is in these circumstances that the question aforementioned has been referred to this court.
4. Heard counsel.
5. The main argument advanced by learned counsel for the Revenue is that the Commissioner acting under Section 263 of the Income-tax Act by his order dated February 22, 1979, has only directed the Assessing Officer to make a fresh assessment after giving an opportunity to the assessee to place before the Income-tax Officer whatever materials he wishes to place in regard to the question relating to the taxation of capital gains indicated in that order. It is seen mentioned therein that the shares owned by the assessee have been transferred to the firm in lieu of his capital contribution and, on the facts of the case, there is a transfer of a capital asset within the meaning of Section 2(47). The contention is that the Income-tax Officer should have made a reassessment in the light of the order of the Commissioner and deduction of Rs. 75,198 towards cost of improvements in respect of sale of the property in Courtallam should not have been allowed. The claim made by the assessee was rejected by the Income-tax Officer on the ground that the earlier assessment was set aside for the limited purpose of computing capital gains on the transfer of shares to the partnership-firm. On appeal, the Commissioner of Income-tax (Appeals)–the first appellate authority–found the deduction to be admissible for the reason that the claim now made is a deduction in computing the capital gains though not in respect of the assets considered by the Commissioner of Income-tax in revision. The deduction claimed relates to the expenditure incurred by the assessee for laying roads and other developmental activities in respect of some land at Courtallam. The Commissioner observed that the amount claimed is a portion of the total expenditure and is calculated in proportion to the area sold as compared to the total area of the land held by the appellant.
6. The Income-tax Appellate Tribunal has considered the matter in detail and found that the assessee was well within his rights to claim deduction of that amount. On hearing counsel for the Revenue, we see no error in the order of the Tribunal.
7. Section 263 of the Income-tax Act enables the Commissioner to call for and examine the record of any proceeding under the Act. If he considers that an order passed 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 enquiry 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. Power is, therefore, given to the Commissioner to suo motu revise the order of the assessing authority if the order is erroneous and the order has resulted in prejudice to the interests of the Revenue. While revising the order, the Commissioner may cancel the assessment and direct a fresh assessment. Section 264 also confers power on the Commissioner to call for the records of any proceeding under this Act and pass such order thereon as he thinks fit either of his own motion or on an application by the assessee for revision. But an order passed under that Section should not be an order prejudicial to the assessee. On the other hand, an order passed under Section 263 can be one prejudicial to the assessee. The enhancement or modification of the assessment or cancellation of the same is contemplated under Section 263 only when the order of the assessing authority is prejudicial to the interests of the Revenue.
8. There has not been any appeal against the earlier order of assessment. The Commissioner, in exercising the revisional powers under Section 263, can either enhance or modify or cancel the assessment and direct a fresh assessment to be made. In this case, the Commissioner, by his order dated February 22, 1979, passed under Section 263 of the Act, had set aside the earlier assessment and the Income-tax Officer was directed to make a fresh assessment after giving an opportunity to the assessee to place before the Income-tax Officer whatever materials he wishes to place in regard to the question relating to the taxation of capital gains indicated in that order. Learned counsel for the Revenue would contend that the assessing authority has only to consider the aspects indicated in the order which did not relate to the expenses incurred in connection with the property at Courtallam. It is, therefore, contended that the deduction of that amount was not made in accordance with the direction of the Commissioner. It is his contention that the assessing authority was bound to confine the enquiry within the four corners of that order and was not competent to entertain other claims.
9. The question, therefore, to be considered is whether the assessing authority has power to entertain the claim when the entire assessment has been set aside or annulled and a direction has been given to make a fresh assessment When the Commissioner has cancelled the order and has directed a fresh assessment to be made, the entire assessment is before the Officer. He is within his powers to consider all claims–even the one not taken up earlier. The entire matter is afresh before the assessing authority and all relevant aspects should be considered by him while making the assessment afresh. The position will be different if the assessing authority has been directed to make only an assessment following some directions issued by the Commissioner. That the assessee was given an opportunity to place before the Income-tax Officer all materials regarding the question relating to taxation of capital gains indicated in the order does not by itself restrict the powers of the assessing authority while making a fresh assessment. The entire assessment had been cancelled and the direction was to make afresh assessment. The Commissioner of Income-tax (Appeals) was, therefore, right in observing that the assessee is legitimately entitled to claim the deduction. No error has, therefore, been committed by the Tribunal in upholding the order of the Commissioner (Appeals).
10. For the aforesaid reasons, the question referred to us is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
11. A copy of this judgment under the seal of the court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.