The Judgment of the Court was delivered by

Ajit K. Sengupta, J.:— This is a reference under section 256(1) of the Income-tax Act, 1961, for the assessment year 1972-73. While making the assessment for the said assessment year, the Income-tax Officer made an addition of Rs. 25,000 with the following remarks:

“As directed by the Inspecting Assistant Commissioner R-IX, Calcutta, under section 144B on page 4 of his order in the matter of payment to M/s. Industrial Development Corporation Pvt. Ltd., Bangalore, towards charges for preparation of feasibility report of Calcium Carbide Project for Madras and Mangalore Division.”

2. Before the Appellate Assistant Commissioner, it was claimed by the assessee that the addition should not have been made as it was a revenue expenditure. The Appellate Assistant Commissioner, however, found that this was entirely a new project undertaken by the company and, therefore, could not be taken as a revenue expenditure. The disallowance was, there fore, upheld.

3. Before the Tribunal, in support of the ground against the above addition, counsel for the assessee did not submit that it was to be allowed as revenue expenditure. He, however, submitted that the addition made by the Income-tax Officer was illegal. He pointed out that in the draft assessment prepared by the Income-tax Officer it was not disallowed and, therefore, the disallowance of this amount as a result of the direction of the Inspecting Assistant Commissioner in his order under section 144B was illegal. It was contended that the scope of section 144B was limited to the objection which the assessee raised and the Inspecting Assistant Commissioner could not give any direction where there was no objection by the assessee. It was also contended on behalf of the assessee that this was a question of law which had not been raised before the Appellate Assistant Commissioner but could be raised before the Tribunal.

4. On behalf of the Department, it was submitted that this ground did not arise out of the order of the Appellate Assistant Commissioner. It was pointed out that the draft assessment orders for the assessment years 1972-73 and 1974-75 had been sent to the Inspecting Assistant Commissioner simultaneously and, in the assessment year 1974-75, it was pointed out by the assessee that it had not claimed Rs. 50,000 as a deduction in that year and only Rs. 25,000 had been claimed in the assessment year 1972-73. The Inspecting Assistant Commissioner directed the Income-tax Officer to look into this matter and as a result of that while the proposed addition of, Rs. 50,000 was not made in the assessment year 1974-75, the claim of Rs. 25,000 was not allowed in the assessment year 1972-73. On the basis of these facts, the departmental representative submitted that the addition was not illegal and the Inspecting Assistant Commissioner had given the directions as contemplated under section 144A of the Act. It was also pointed out that the assessee had been duly heard and there was no denial of natural justice in so far as this point was concerned.

5. The Tribunal, on a consideration of the facts and circumstances of the case, held that the addition of Rs. 25,000 could not be considered to be illegal. It was further held by the Tribunal that the Inspecting Assistant Commissioner could give such a direction under section 144A and the only requirement was that the assessee had to be heard before such direction is given. The Tribunal further observed that, on the merits of the case, no submissions had been made and considering the facts given in the order of the Appellate Assistant Commissioner, the addition was upheld.

6. On the above facts, the following question of law has been referred to the court.

“Whether, on the facts and in the circumstances of the case, the direction given by the Inspecting Assistant Commissioner to the Income-tax Officer to make the disallowance of Rs. 25,000 was a lawful direction?”

7. At the hearing, it has been contended by Mr. N.K Poddar, learned advocate, that the direction which has been given by the Inspecting Assistant Commissioner under section 144B is illegal inasmuch as such direction was not in respect of matters covered by the objections. He has further submitted that, on merits also, such direction could not be given, as the expenditure in question was a revenue expenditure.

8. Mr. Bagchi, learned counsel appearing for the Commissioner, has submitted that the question which has been raised before this court by the Tribunal is not a question on this aspect. Therefore, this reference is incompetent. He has relied on the decision of this court in the case of P.C Sharma & Sons v. Commissioner Of Income-Tax, West Bengal-I [1979] 116 ITR 758. He has also submitted that the Inspecting Assistant Commissioner has ample power under section 144A and he has relied on the decision of the Kerala High Court in the case of Commr. Of Income Tax v. Krishnan [1988] 172 ITR 604. We have considered the rival contentions. Section 144B states that where the Income-tax Officer proposes to make any variation in the income or loss returned which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board, the Income-tax Officer shall, in the first instance, forward a draft of the proposed order of assessment to the asses-see. The assessee, upon receipt of the draft order, may forward his objections, if any, to such variation to the Income-tax Officer within seven days of the receipt by him of the draft order. If objections are received, the Income-tax Officer shall forward the draft order together with the objections to the Inspecting Assistant Commissioner and the Inspecting Assistant Commissioner shall, after going through (wherever necessary) the records relating to the draft order, issue, in respect of such matters covered by the objections, such directions as he thinks fit for the guidance of the Income-tax Officer to enable him to complete the assessment.

Provided that no directions which are prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard.

(emphasis* supplied).

9. In this case, in the draft assessment order, the amount claimed as expenditure was not disallowed by the Income-tax Officer. Therefore, the question of disallowance of the amount in question could not have been covered by the objection raised by the assessee. Had this amount been disallowed by the Income-tax Officer, then the assessee could have raised objection before the Inspecting Assistant Commissioner. The assessee could not have raised any objection against any allowance of expenditure made which was in his favour. The direction of the Inspecting Assistant Commissioner is that the income of the assessee shall be enhanced to the extent of disallowance directed to be made or the loss suffered by the assessee be reduced to that extent. The Inspecting Assistant Commissioner directed disallowance of an expenditure which was allowed by the Income-tax Officer in the draft assessment order. In such a case, the Inspecting Assistant Commissioner does not have the power to direct the Income-tax Officer to make the disallowance and thereby enhance the assessment or reduce the loss suffered by the assessee. In Bengal and Assam Investors Ltd. v. CIT [1983] 142 ITR 156, this court held that, having regard to the provisions of section 144B(4), the correct view would be that the enhancement of the assessment as a result of the direction issued by the Inspecting Assistant Commissioner under section 144B(4) on the items not covered by the draft assessment order would be invalid to the extent “it was not covered by the draft”.

10. We are of the view that, in the instant case, the direction was not lawful. The contention of Mr. Bagchi is that the question referred by the Tribunal is not the question asked for by the assessee. It is altogether a new question which the Tribunal has no jurisdiction to refer to this court. The question which has been proposed by the assessee in its application under section 256(1) of the Income-tax Act, 1961, is as follows:

“Whether, in the facts and circumstances of the case, the direction given by the Inspecting Assistant Commissioner to the Income-tax Officer to make the said disallowance of Rs. 25,000 was ultra vires the powers of the Inspecting Assistant Commissioner?”

11. The Tribunal has reframed the question and referred the question which has already been set out hereinbefore. In our view, it is not a new question at all. If any direction is ultra vires, the powers of the authorities in such direction cannot be a lawful direction. The decision which is relied on by counsel appearing for the Commissioner has no application to the facts and circumstances of this case. In P.C Sharma and Sons [1979] 116 ITR 758 (Cal), the assessee raised three questions regarding the validity of the reopening of the assessment, the genuineness of the loans and discharge of the initial dues. There the finding was not challenged by the assessee in the questions raised under section 256(1). However, in the application made under section 256(2), the question which was directed to be referred to this court was with regard to the correctness of the Tribunal's finding regarding the genuineness of the loans. In that context, it was held that the question challenging the validity of the finding of the Tribunal having not been raised by the assessee, the court cannot direct a new question to be referred to this court for the first time. Accordingly, the court held that the reference was not competent. But, in this case, as indicated earlier, no new question has been referred by the Tribunal. The question raised by the assessee was whether the direction of the Inspecting Assistant Commissioner was ultra vires. The question referred to us is whether such direction is lawful. We do not find any difference. Any act done beyond the scope of powers defined by the statutes will be ultra vires. This term has a broad application and includes acts prohibited by the statute or which are in excess of the powers granted. Exercise of power in a manner not allowed by law is ultra vires and not lawful as well.

12. We are, therefore, not impressed by the submissions of learned counsel for the Revenue.

13. The decision which has been relied on by the Revenue in the case of Commr. Of Income Tax v. Krishnan [1988] 172 ITR 604 (Ker), in our view, has no application in the facts of this case.

14. There the question was whether the Inspecting Assistant Commissioner has power under section 144A to issue direction suo motu. This is not the case here. The question before us is whether a direction under section 144B is valid in respect of the matters on which the assessee did not raise any objection.

15. There is another facet to this question. Learned counsel for the assessee contended that, whether the direction disallowing a sum of Rs. 25,000 was valid or not would depend on the question whether such expenditure can be allowed or not. If such expenditure is allowable as revenue expenditure, in that event the direction would not be valid even assuming that the Inspecting Assistant Commissioner had the power to give a direction on a matter where the assessee has not raised any objection.

16. From the facts as appearing from the orders of the authorities below, it would appear that the payment in question was made towards charges for preparation of a feasibility report in respect of the calcium carbide project. This project dealt with an item which was the major raw material of the assessee's products. In Hindusthan Aluminium Corporation Ltd. v. Commissioner Of Income-Tax [1986] 159 ITR 673 (Cal), the assessee-company claimed deduction of a sum of Rs. 2,15,314 incurred by it for prospecting and searching for bauxite mines in order to enable it to obtain bauxite which was the raw material for the production of aluminium. There, the Division Bench of this court held as follows (p. 675):

“In regard to the first question, the Tribunal held that the expenditure incurred by the assessee in prospecting and searching for bauxite mines was not incurred in connection with earning profit but was incurred only with a view to finding out the source from where the assessee could get raw material for its aluminium plant which was yet in the construction stage. Construction of the plant had been completed and production actually started on May 14, 1962. It was not quite correct to say that this expenditure was incurred in its entirety during the construction stage or prior to the production stage. A part of it was undoubtedly spent subsequently. Bauxite was the raw material for the aluminium plant established at the assessee's factory. It was its stock-in-trade. The expenditure was incurred in order to enable the assessee to prospect and search for its stock-in-trade. This expenditure could not be said to be incurred with a view to obtain any asset of enduring nature. It was linked up and connected with the production, i.e, for earning profits at the factory. It was, in our opinion, allowable as revenue expenditure. It was not in the nature of capital expense.”

17. In our view, the principles laid down in this decision will govern this case.

18. In our view, the assessee was entitled to the deduction and the Income-tax Officer was justified in allowing the deduction in the relevant assessment year to the extent of a sum of Rs. 25,000. Accordingly, the direction of the Inspecting Assistant Commissioner under section 144B of the Act to disallow the said expenditure is not sustainable.

19. For the reasons aforesaid, the question in this reference is answered in the negative and in favour of the assessee.

20. There will be no order as to costs.

Bhagabati Prasad Banerjee, J.:— I agree.