Leila Seth, J.:— These seven references at the instance of the Addl. Commissioner of Income-tax pertain to assessment years 1955-56 to 1959-60, 1961-62 and 1962-63.

2. Late Mr. L. D. Desai, the husband of the assessee, purchased a cinema on 6th July 1948 at a public auction. This cinema known as “New Chitra Talkies” was located at Amritsar. The price paid was Rs. 3,75,000. Immediately thereafter Mr. Desai leased out this cinema to M/s. Better Theatres Ltd., Delhi on a monthly rental of Rs. 3,000. The lease agreement was to be effective from 1-4-1949.

3. For the assessment year 1950-51, Mr. Desai had filed a return wherein he had disclosed, inter alia, his income from the cinema. The income, therefore, was computed at Rs. 5885 and indicated under the head ‘property’ income. Statutory deduction for repairs at Rs. 6116 as also depreciation on machinery and furniture were claimed.

4. The Income-tax Officer did not agree with this computation of income as he felt that a claim both for repairs and depreciation was not justified. Since a composite sum of Rs. 3,75,000 had been paid for the building, machinery and furniture of the cinema the Income-tax Officer allocated Rs. 3,40,000 Rs. 15,000 and Rs. 20,000 towards the value of the building, machinery and furniture respectively. As the rental recovered was again a composite sum of Rs. 3,000 per months equalling Rs. 36,000 per year, he apportioned this income allocating Rs. 24,600 towards rent of the building and Rs. 11,400 as hire charges of the machinery and furniture. From the rental income of the building he allowed deductions for repairs and other charges such as interest, thereby assuming at a net income of Rs. 6786 on this sum. With regard to the sums received as hire charges for machinery and furniture he permitted a deduction for depreciation, resulting in this income being computed at Rs. 7,200.

5. The assessee accepted this basis of allocation of property income and other sources for all the subsequent years including the assessment years under consideration and filed his returns accordingly. The Income-tax Officer completed the assessments for all the subsequent years inclusive of assessment year 1963-64 on this basis.

6. Subsequently, the Income-tax Officer noticed that the lease agreement provided for all the necessary repairs of the building to be made by the lessee at its own costs. He, therefore, was of opinion that the deduction already allowed for repairs was uncalled for. As such he proceeded so correct his mistake by initiating action under Sec. 147 of the Income-tax Act, 1961. By this time assessments upto the assessment year 1954-55 had become time barred. However, he rejected all the assessments for the subsequent years except assessment year 1960-61. The assessee agreed to the withdrawal of the allowance for repairs and filed returns of income in response to the notice under Sec. 147 of the Act accordingly. Thereafter, assessments were made and the deduction already allowed for repairs was withdrawn.

7. Some time thereafter the Income-tax Officer, in pursuance of an audit objection, discovered that depreciation was allowable on the cinema building, but had, in fact, not been allowed at the time of the original assessment. Treating this as a mistake apparent from the records he initiated proceedings under Sec. 154 and rectified all the assessments by allowing depreciation on the value of the cinema hall building. In the common order passed under Section 154 the Income-tax Officer observed :—

“From the perusal of the assessment records it has been noticed that depreciation on the cinema building was not allowed at the time of original assessment. As the mistake was apparent from records the same was rectified under Section 154 of the Income-tax Act, 1961. Prepare revised assessment form and issue refund vouchers.”

8. The Commissioner of Income-tax felt that the orders of rectification were erroneous and prejudicial to the interest of revenue. As such, inviting the provisions of Sec. 338 of the 1922 Act/Section 263 of the 1961 Act he initiated proceedings and cancelled the rectification orders.

9. The reasons that prompted the Commissioner of Income-tax to exercise his powers and cancel the rectification orders appear to be :

1. action being taken suo moto by the I.T.O to give relief to the assessee;

2. an application by the assessee for rectification of a similar mistake for the assessment year, 1964-65 having been rejected by the I.T.O and confirmed by the A.A.C;

3. the rectification proceedings being time-barred having been made beyond four years from the date of the original assessment orders;

4. since the lease-deed provided for the lease of the cinema building as also the machinery and furniture, the income from the letting of the building had to be assessed under the head ‘property’ and as such no provision could be made for the allowance of depreciation on the building which had been illegally granted by the I.T.O

5. there being no mention in the lease agreement with regard to the hiring out of the machinery and furniture the I.T.O erred in coming to the conclusion that the building, machinery and furniture were let out together and inseparably.

6. the bifurcation made by the I.T.O for the assessment year 1950-51 which was the basis for the allocation was without material and erroneous;

7. that the question whether the income should be assessed under the head ‘property’ or under the head ‘other sources’ was debatable and not a matter for rectification especially as the assessee had all along returned the income from the building under the head ‘property’; and

8. in any case, the depreciation could only be allowed if certain prescribed particulars had been furnished while provisions apparently had not been complied with.

10. The assessee being aggrieved by the order of the Commissioner of Income-tax appealed to the Income-tax Appellate Tribunal. It was contended before them that the reasons indicated by the Commissioner of Income-tax were neither valid in law nor just and proper and no prejudice had been caused to the revenue. The Tribunal accepted this contention and came to the conclusion that the orders of the Commissioner of Income-tax could not be justified and cancelled them. The Tribunal held that the Income-tax Officer had not acted suo moto, in fact, the endorsement by the Income-tax Officer on the order-sheet before proceeding to rectify the assessments clearly indicated that action was being taken in view of an audit objection. The endorsement read as follows :

“Under Section 154 A.G.C.R objection No. 2084 dated 6-3-1968. Assessment years 1955-56 and 1956-57 depreciation on building allowed”.

11. The Tribunal was, therefore, of the opinion that the Income-tax Officer had not taken the initiative to rectify the assessments suo moto but was stirred into action on the basis of good authority. It also felt that the fact that the Income-tax Officer had declined to rectify a similar mistake for the assessment year 1964-65 was not material. Dealing with the question of time bar, it held that the original assessment orders ceased to operate once reassessments were made, and the rectification being directly relatable to the reassessments which were all made between 25-2-1965 and 31-8-1965 for the relevant assessment years, was well within the time limit of four years, as all the rectification orders had been passed on 10th May, 1968.

12. The Tribunal further held that the lease was a composite and inseparable deed and included not only the lease of the cinema building but also of the machinery and furniture. In these circumstances, applying the law laid-down by the Supreme Court in Sultan Brothers (P) Limited v. Commissioner of Income-tax, Bombay-II, (1964) 51 ITR 353(1) the Tribunal concluded that the orders passed by the Income-tax Officer were not prejudicial to the revenue.

13. The Additional Commissioner of Income-tax moved the Tribunal under Sec. 256(1) of the Act, to refer five questions of law for the opinion of this Court. But the Tribunal referred only two questions which are set out as under :

1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the orders passed by the Income-tax Officer under Sec. 154 were valid, and within the time prescribed, and the Commissioner of Income-tax was not justified in cancelling them under section 263 on the ground of limitation.

2. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in vacating the orders passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961, on the ground that the orders passed by the Income-tax Officer were not erroneous or prejudicial to the interests of Revenue.

14. After the draft statement had been circulated the departmental representative submitted by a letter dated 4-3-1972, that the following two questions had been omitted by inadvertance :—

“3. Whether the Tribunal was correct in law in holding that in computing income from House property the allowance for repairs has to be given irrespective of whether the owner in this case the assessee or the tenant bears the burden of repairs despite the provisions of sec. 9(i)(ii) of the old Act or 24(1)(i)(b) of the new Act ?

4. Whether the Tribunal was correct in law in holding that with the making of reassessment, the original assessment order ceased to operate ?”

15. The Tribunal, however, clarified that question No. 4 was covered by the second question already framed and question No. 3 did not directly arise out of the order of the Tribunal. The draft statement was according finalised.

16. Mr. Wazir Singh appearing for the applicant has contended that the “Tribunal's order is erroneous and the orders of rectification dated 10-5-1968 are not justified for the following reasons :—

(i) the rectification orders have been made beyond four years from the date of the original orders of assessment;

(ii) the theory of merger of the assessment proceedings with the reassessment proceedings cannot be applied in the present ase as all that the ITO has done while reassessing is to withdraw the allowance for repairs in relation to the property income. He has not treated the income as income from other sources but has continued to treat the income as income from property. Therefore, the rectification order not being within four years from the date of the original assessment is time barred;

(iii) disputed and debatable points being involved the I.T.O had no justification to make an order under Sec. 154 of the 1961 Act, and

(iv) the machinery and furniture were old and had no value, it appears that as such the lease deed does not refer to the letting out of machinery and furniture. The building alone was let out and therefore there can be no question of a composite letting out.

17. It also appears to us, in view of the fact that only two questions have been referred, that the controversy before us is limited and cannot be enlarged as counsel for the revenue is seeking to do by raising point No. (iv); this is especially so as there is a clear finding of fact, after consideration of all the evidence, by the Tribunal in paragraph 15 of its order, that the late L. D. Desai leased out the cinema building along with the furniture and machinery (and that the lease deed was inseparable) as such the bifurcation made by the Income-tax Officer for the assessment year 1950-51 was based on proper material. It also held that there was no prejudice to the interest of revenue.

17-A. The fact that the residuary source should be resorted to is apparent from the decision of the Supreme Court in Sultan Brothers (P) Limited v. Commissioner of Income-tax, Bombay-II (supra). That was a case of a composite letting of a building fitted with furniture and fixtures for the purpose of being run as a hotel. The present case is one of a composite letting of a building, machinery and furniture for the purpose of running a cinema. The facts appear to be on all fours. The Supreme Court held in that case that when a building and plant, machinery or furniture are inseparably let, the Act contemplates that the rent from the building be assessed under the residuary head of income. Further all that sec. 12(4) of the 1922 act requires is that the letting of machinery and plant or furniture should be inseparable from the letting of the building, what is pertinent is the intention of the parties and not whether the building was the primary or subsidiary letting.

18. Of the other three contentions referred to above, the third will answer itself once an answer to the first two is found. Learned counsel for the assessee attempted to meet the principal point of limitation raised by the Revenue by contending that, once there is a reassessment under Section 147 in any case, the original assessment no longer holds the field and that any rectification thereafter sought to be made can only be to the order of reassessment. He first tried to support this contention by extending, to the context of reassessments, a doctrine of merger that is to say, a theory that the original assessment order gets merged in an order of reassessment and that, after a reassessment is made, the original assessment order no longer survives. In our opinion, it is doubtful how far this theory can be availed of to solve the tangle in the present case. This is not a case of an original order merging into an appellate order as a result of which the original order no longer survives. The cases referred to by counsel, i.e Commissioner of Income-tax, Bombay v. Amritlal Bhogilal & Company, 1958-34 I.T.R 130(2) and East India Hotels Ltd., (Oberoi Inter Continental Hotels) v. Additional Commissioner, Sales-tax. New Delhi 1976-38 S.T.C 249(3), dealing with the scope of merger of an original order in an appellate order are not, therefore, relevant to the present context.

19. Learned counsel then tried to achieve the same result by contending that, on a proper construction of the various provisions of the Act, a reassessment is nothing but a fresh assessment and that when a reassessment is made the entire matter is completely opened up and redone. It is pointed out that, in response to a notice under sec. 148 of the 1961 act an assessee is required to furnish a return of income. Thereafter, the Income-tax Officer may issue a notice under sections 142(1) and 143(2) and (3) and ask evidence to be led. Thereafter, when the reassessment is completed, the total income and sum payable thereon have to be ascertained under Sec. 147 read with Sec. 153 of the Act. A reassessment order thus passed results in nullifying the original assessment order. In support of this contention, learned counsel invited our attention to Deputy Commissioner Of Commercial Taxes v. H.R Sri Ramulu, 1977-39 S.T.C 177(4). In that case, the Supreme Court while dealing with a similar question as to the starting point of computing the period of limitation for exercise of the revisional powers of the Deputy Commissioner under Section 21 of the Mysore Sales Tax Act, 1957 when a reassessment under Section 12-A had taken place, observed :—

“The short question which arises for determination in these appeals is that in the event of an order having been made under Section 12A of the Act, what is the starting point for computing the period of four years, mentioned in Section 21(3), for the exercise of the powers under Section 21(2). Is it the initial assessment order or is it the order made under Section 12A? In the context of the present case, the question to be answered is as to whether the period of four years is to be calculated from March 21, 1963, when the initial assessment orders were made, or from June 8,1966, when the orders under Section 12A of the Act were made. So far as this question is concerned, we are of the opinion that the period of four years should be calculated from June 8, 1966, i.e, the date on which orders under section 12A of the Act were made. The reason for that is that once an assessment is reopened, the initial order for assessment ceases to be operative. The effect of reopening the assessment is to vacate or set aside the initial order for assessment and to substitute in its place the order made on reassessment. The initial order for reassessment cannot be said to survive, even partially, although the justification for reassessment arises because of turnover escaping assessment in a limited field or only with respect to a part of the matter covered by the initial assessment order. The result of reopening the assessment is that a fresh order for reassessment would have to be made including for those matters in respect of which there is no allegation of the turnover escaping assessment…………………”.

In coming to the above conclusion the Supreme Court relied, inter alia, upon its earlier decision in International Cotton Corporation (P) Ltd. v. Commercial Tax Officer, Hubli, 1975-35 STC 1(5) wherein it had been held that once an assessment order had been rectified, the period of limitation with regard to further rectification would commence not from the date of the original assessment order but from the date of the earlier rectification order. Even before these two decisions, in V. Jaganmohan Rao v. Commissioner of Income-tax and Excess Profits Tax Andhra Pradesh, 1970-75 ITR. 373(6), the Supreme Court had opined in an income tax case that once proceedings are validly initiated under Sec. 34 of the 1922 Act, the jurisdiction of the Income-tax Officer is not restricted only to the portion of the income that had escaped assessment.

20. The above decisions, prima facie, seem to support the contention of the learned counsel for the assessee. But we do not think that it is necessary, for the purposes of the present case, to examine the very broad principle sought to be evolved by counsel for the assessee from the above decisions. That principle will have far-reaching consequences and may be considered in a more appropriate case for, so far as the present case is concerned, it seems to us, the questions are capable of solution on a much narrower ground which we shall proceed to discuss.

20-A. It will be appreciated that once we place apart the contention of the learned counsel for the assessee that the orders of reassessment supplant the original assessment orders, we have to deal with the matter on the footing that the reassessment orders have a separate and independent existence and do the original assessment orders, for their existence has to be taken as not in any manner affected by the orders of reassessment. Hence, in order to judge the correctness and validity of the orders under Sec. 154 we have to examine whether the rectifications attempted by the officer in the present case are to the original assessment orders or to those passed under Sec. 147. The answer, we think, is very clear.

21. At the time of the original assessments, both the assessee and the Income-tax Officer looked at the income from the building as distinct from that attributable to the letting of the plant and machinery, as an item falling under sec. 9 of the 1922 act (i.e the head “Income from property”). This being so, on the face of that order, depreciation could not have been granted to the assessee in respect of the building and the present action of the Income-tax Officer, if viewed as a rectification of that order, would not only be out of time but also patently incorrect. Since it is very elementary that property assessed under Sec. 9 is not and cannot be entitled to depreciation it is obvious that it could not have been the intention of the Income-tax Officer to rectify that order. Indeed there can be no doubt that the rectification would not have been attempted at all but for the modifications introduced in the original assessments by the orders of reassessment. What the officer is really seeking to do is only to rectify a mistake allegedly made at the time of the reassessments, viz. withdrawing the deduction for repairs but omitting to grant depreciation it was this that was pointed out by the audit objection and all we have to see, therefore, is whether there is any mistake in the orders of reassessment and whether the impugned action is justified vis-a-vis those orders of reassessment. It is, therefore, crystal clear that the rectification is not of the original assessment orders but only of the orders of reassessment and that the point of limitation raised by the Department cannot be upheld.

22. Turning now to the reassessment orders, the Department's suggestion is that the action under Sec. 154 should fail for the same reason (other than the question of limitation) as has been indicated above in regard to the original orders of assessment. For, it is pointed out, even in these reassessments, the income from the building has been computed under the head “income from property” and so the orders under Sec. 154 granting depreciation are prima facie erroneous and prejudicial to the interests of revenue. This objection has been answered by the Tribunal by pointing out that, had the income in question been assessable as “income from property” the allowance for repairs could not have been withdrawn at all, it could have been withdrawn only if the income were being assessed under “other sources”. It has been suggested in question No. 3 proposed by the applicant (but not referred to this Court) and in the course of arguments before us that this inference drawn by the Tribunal is not correct in view of the provisions of Sec. 9(1)(ii)/Sec. 24(1)(i)(b) of the 1922/1961 Act. There are two difficulties in accepting this argument on behalf of the Revenue. The first is this. In para 10 of their orders, the Tribunal observed :—

“The withdrawal of repairs could not be justified if the income is to be satisfied under the head “property” inasmuch as under that head the allowance for repairs has to be given irrespective of whether the owner in this case the assessee or the tenant bears the burden of repairs. We do not have to explain the legal position on this point, indeed, it is admitted. It is no doubt true that in the 147 proceedings the head of income was taken as “property”, which means section 23 and other relevant sections connecting therewith would apply. But since the allowance of repairs could not be withdrawn under these sections, it is to be seen under which other section such a withdrawal is permissible. It is only when the income could be assessed under the head “other sources” assessable under section 56 of the Income-tax Act, the withdrawal of repairs could be justified although the Income-tax Officer had not mentioned that he was assessing the income under the head “other sources” it must be held that he had section 56 in this mind when the withdrawal of repairs as otherwise it would not be presumed that the Income-tax Officer was unaware of the provisions of section 23 under which section the allowance of repairs could not be withdrawn. Indeed, the audit objection, on the basis of which the Income-tax Officer proceeded to rectify these assessment, pointed out that the Income from this cinema hall should be assessed under the head “other source”. The assessee is as also under the same misapprehension and no one had referred to the correct section, but we have to see that in law in the correct position and the authority must be traced to that section which authorities the course adopted by the Income-tax Officer and not to the section which render it nugatory. Once we reach this conclusion it becomes clear that the error committed by the Income-tax Officer was traceable to the reassessment under section 147 and not to the original assessments…………”.

It is seen from this paragraph that, before the Tribunal, it was conceded for the Revenue that the withdrawal of the allowance for repairs was consistent only with the treatment of the income as assessable under the head “other sources” and that it is on this basis that the officer proceeded under Sec. 147 even though he did not also, while doing so, change the head of assessment from “property” to “other sources” as he should have done. The earlier narration will also show that the Revenue sought for the reference of a question on the point (question No. 3) but it was declined for the reason that it did not arise out of the Tribunal's order and the department has not pursued the matter further. Technically, therefore, it is not now open to the Revenue to raise this objection. The second reason why this argument cannot be accepted is that, if the head is “other sources” the allowance for repairs had to stand automatically withdrawn in view of Sec. 57(ii) read with Sec. 30(a)(ii). On the other hand, if the head is “property”, the provisions of Sec. 24(1)(i)(b) do not enable the officer to straightaway withdraw the allowance for repairs. He will have to compute the annual value of the property (irrespective of the actual rent paid) and then proceed to allow either “the excess of the annual value over the amount of rent payable for a year by the tenant or a sum equal to one-sixth of the annual value, whichever is less”. This sub-clause proceeds on the footing that of the annual value, in a case where the tenant has undertaken the cost of repairs, is more than the actual rent derived then the difference between the rent derivable and the rent actually derived is attributable to the repairs. While this procedure could perhaps have led to the same result as what the Income-tax Officer has done by way of reassessment that procedure was not adopted. The allowance for repairs was automatically withdrawn and this is consistent only with the treatment of the income under the head “other sources”.

23. It is sought to be urged that the reassessment orders refer only to “property” as the head of income for this source and so it can at best be a matter of doubt, debate or controversy as to whether the Income-tax Officer proceeded to withdraw the allowance for repairs acting under Sec. 24(1)(i)(b) or under Sec. 30(a)(ii) read with Sec. 57(ii). But this contention cannot be accepted for there was no room or possibility of any doubt or ambiguity in this regard if one bears in mind that the orders of reassessment had been passed on various dates in 1965. By this time the decision of the Supreme Court in the case of Sultan Bros. (1964-51 ITR 353) had been reported and made the position perfectly clear. In the case of a composite letting—and as pointed out earlier, it is not open to the Revenue to challenge that this was not such a case—even the income from the building has to be processed, only under sections 56 and 57. The fact that the notices under Sec 147 were formally issued and the reassessments acquiesced in by the assessee also clearly shows that both the assessee and the Department proceeded only on this footing. Had the idea that the income was assessable under the head “property” persisted, the assessee would in all probability have resisted action under Sec. 147, it seems a fair inference to say that the assessee did not protest because there was really no doubt that the income was being processed under Secs. 56 and 57 and the decision in Sultan Bros. (P) Ltd. (supra) left no room at all for the assessee to protest. It is also seen from the passage from the Tribunal's order we have extracted earlier, that the audit objection also proceeded on the same understanding of the earlier orders. We could perhaps bring out the purport of the audit note very clearly, if we attempt to portray it in the form of an oral instruction given by he internal auditor to the Income-tax Officer. It must have gone thus :—

“You no doubt computed the income under the head “property” originally. Subsequently, however, on the strength of Sultan Bros. you treated it as income from other sources and withdrew the allowance granted in respect of repairs. But you overlooked that consequential relief ought to have been granted to the assessee by way of depreciation. Not doing this was a mistake and you should proceed to rectify it.”

24. In this view of the matter we think that what the Income-tax Officer did was to effect what was a clear rectification of a patent error in the orders of reassessment which was within time and also justified on merits. We, therefore, answer the first question referred to us in the affirmative and in favour of the assessee.

25. Coming to question No. 2 it has to be answered in the affirmative, in view of our answer to question No. 1. It is pertinent to remember, as Mr. G. C. Sharma appearing for the respondent-assessee pointed out, that the Tribunal was dealing with an appeal against an order under Sec. 263 of the 1961 Act, in which the Commissioner of Income-tax has revised the order passed by the Income-tax Officer under Section 154. As such the predominant point to be examined by the Tribunal was, whether the order passed by the Income-tax Officer under Section 154 was erroneous and prejudicial to the interest of the revenue. The Tribunal has held to the negative on both counts.

26. It would appear to as also that the orders were no prejudicial to revenue and were quite correct. The Income-tax Officer had granted relief to the assessee on the basis of an audit objection and not a suo moto action. The Tribunal held on merits that the assessee was entitled to the depreciation (the validity of the orders under Section 154 and the larger question being before it), as such they could not be said to be orders prejudicial to the revenue. The orders under Section 154 rectified the re-assessment orders, the matter in issue being basically one of taxable quantum of income and not under what head of income the amount was to be assessed. The rectification permitted the depreciation allowance to be granted on the clear understanding that the particular income was liable to be and was being assessed under the residuary source. It is, therefore, clear to us that the order passed by the Income-tax Officer was neither erroneous nor prejudicial to the revenue.

27. For the reasons outlined above both the questions have to be answered in the affirmative and in favour of the assessee. The assessee will be entitled to her costs, Councils fee Rs. 350.

U. K. Reference answered in affirmative and in favour of the assessee.