1. This reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the applicant-assessee, arises out of the order of the Income-tax Appellate Tribunal (for short "the Tribunal"), Indore Bench, Indore, dated September 26, 1995, in I. T. A. No. 952/Ind of 1994 seeking answers to the following questions stated to be questions of law :

"(i) Whether, on the facts and in the circumstances of the case, the Tribunal once having held that its decisions are binding on the lower authorities, was right in not setting aside the order of the Commissioner of Income-tax (Appeals) in which the Commissioner of Income-tax (Appeals) had refused to follow the order of the Tribunal ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in not allowing the appeal on the preliminary issue regarding binding nature of orders of the Tribunal on lower authorities and instead dismissing the appeal on the basis of the grounds which were raised 'without prejudice' to the grounds regarding preliminary issue ?

(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in reviewing its own decision in the case of Arihant Builders, Developers and Investors Pvt. Ltd. particularly when a reference arising out of the said order was already pending before the court ? And whether the Tribunal is right in relying upon the decision in the case of Distributors (Baroda) Pvt. Ltd. v. Union of India [1985] 155 ITR 120 (SC) ?

(iv) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the notice under Section 143(2) could be issued even after grant of refund under Section 143(1)(a)(ii) and the words 'without prejudice to the provisions to Sub-section (2) appearing in Clause (i) of the said section can be read into Clause (ii) ?

(v) Whether, on the facts and in the circumstances of the case, the Tribunal has misinterpreted and misapplied the judgment of the Madhya Pradesh High Court in the case of Kamal Textiles v. ITO [1991] 189 ITR 339, for interpreting the provisions of sub-clause (ii) of Section 143(1)(a) of the Income-tax Act ?"

The matter pertains to the assessment year 1989-90. The assessing authority having first granted refund to the applicant-assessee under Section 143(1)(a)(ii) of the Income-tax Act, subsequently issued notice under Section 143(2) of the Act. On completion of the assessment, certain additions were made. The applicant-assessee challenged the assessment order in appeal before the Commissioner of Income-tax (Appeals). One of the grounds for challenge was that the Assessing Officer having granted refund under Section 143(1)(a)(ii) could not have in law issued notice under Section 143(2) and as such the order of assessment making addition was without jurisdiction. During the hearing of the appeal before the Commissioner of Income-tax (Appeals), the assessee cited a decision of the Tribunal rendered in the case of Arihant Builders,. Developers and Investors Pvt. Ltd. v. ACIT (I. T. A. No. 1014/Ind of 1993) on July 19, 1994, wherein the Tribunal had held that where refund has been granted under Section 143(1)(a)(ii), no notice under Section 143(2) can legally be issued. The Commissioner of Income-tax (Appeals), however, declined to follow the above cited decision and was of the view that the decision in Arihant (supra) did not lay down the correct proposition of law. The appeal filed by the assessee was dismissed and the addition was upheld.

Aggrieved by the decision of the Commissioner of Income-tax (Appeals), the assessee carried the matter in further appeal before the Tribunal and it was contended, inter alia, that the Commissioner of Income-tax (Appeals) was bound by the decision of the Tribunal in the case of Arihant (supra). The Tribunal, however, dismissed the appeal and upheld the view taken by the Commissioner of Income-tax (Appeals). As regards the binding force of its own earlier judgment in the case of Arihant (supra), the Tribunal observed :

"21, In view of the reasons discussed above, we feel that the view adopted by the Commissioner of Income-tax (Appeals) is correct and hence we need not follow the view adopted by this very Bench in the case of Arihant Builders. It would be of place to mention here that once the Supreme Court was also placed in a similar situation. While dealing with the case of Distributors (Baroda) P. Ltd. v. Union of India [ 1985] 155ITR120 (SC), the court had come to the conclusion that the view adopted by it in the case of Cloth Traders [ 1979] 118 ITR 243 (SC), does not lay down the correct law. In such a situation, at page 124 of the Report, the court observed : 'To perpetuate an error is no heroism. To rectify it is the compulsion of the judicial conscience'. The court also referred to the inspiring words of Justice Bronson in Pierce v. Delameter (A. M. Y. p. 18.): 'a judge ought to be wise enough to know that he is fallible and, therefore, ever ready to learn : great and honest enough to discard all mere pride of opinion and follow truth wherever it may lead : and courageous enough to acknowledge his errors'. Further at page 140 of the Report, the court referred to the dissenting opinion of Justice Jackson in Massachusetts v. United States (333 US 611) : T see no reason why I should be consciously wrong today because I was unconsciously wrong yesterday'. Reference was also made to the observations of Lord Denning in Ostime v. Australian Mutual Provident Society [1960] AC 459, 480 : 'The doctrine of precedent does not compel your Lordships to follow the wrong path until you fall over the edge of the cliff."

The applicant-assessee feeling aggrieved by the decision of the Tribunal made an application under section 256(1) of the Income-tax Act, whereupon the Tribunal made a reference to this court for resolution of the questions already extracted above.

We have heard Shri P.M. Choudhary, learned counsel for the applicant, and Shri R.L. Jain, learned counsel for the respondent-Department.

Questions Nos. 1 to 3 are interrelated and if they are answered in favour of the applicant-assessee, then it would not be necessary for us to consider the remaining questions Nos. 4 and 5. In fact, this reference involves the much larger question of judicial propriety and discipline.

The Tribunal is created under Section 252 of the Income-tax Act, consisting of as many judicial and accountant members as may be appointed by the Central Government. One such judicial member of the Tribunal is normally appointed as the President thereof. Any assessee aggrieved by the orders passed by the authorities as enumerated under Clauses (a) to (c) of Sub-section (1) of Section 253 may appeal to the Tribunal. The Tribunal has power to pass such orders on such an appeal as it thinks fit. Sub-section (4) of Section 254 attaches finality to the orders of the Tribunal subject to the provisions of section 256 (or section 260a). Needless to say the orders passed by the Tribunal are binding on all the Revenue authorities functioning under the jurisdiction of the Tribunal. Dealing with this very aspect of the matter, the Supreme Court in the case of Union of India v. Kamlakshi Finance Corporation Ltd., AIR 1992 SC 711 ; [1991] 55 ELT 433 (SC) emphasised (page 712 of AIR 1992 SC) :

"It cannot be too vehemently emphasised that it is of utmost importance that, in disposing of the quasi-judicial issues before them revenue officers are bound by the decisions of the appellate authorities. The order of the Appellate Collector is binding on the Assistant Collectors working within his jurisdiction and the order of the Tribunal is binding upon the Assistant Collectors and the Appellate Collectors who function under the jurisdiction of the Tribunal. The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not 'acceptable' to the Department--in itself an objectionable phrase--and is the subject-matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessees and chaos in administration of tax laws."

Obviously, the Commissioner of Income-tax (Appeals) not only committed judicial impropriety but also erred in law in refusing to follow the order of the Appellate Tribunal. Even where he may have some reservations about the correctness of the decision of the Tribunal, he had to follow the order. He could and should have left it to the Department to take the matter in further appeal to the Tribunal and get the mistake, if any, rectified.

The learned Members of the Tribunal who decided the appeal upholding the view taken by the Commissioner of Income-tax (Appeals) also did not observe the due procedure as laid down by various judicial pronouncements. It is significant to note that the decision in the case of Arihant (supra) was rendered by the same Bench of the Tribunal comprising the same members who decided the appeal giving rise to this reference. The learned Members took upon themselves to overrule their own judgment in the case of Arihant. This again in our opinion was not proper. In para. 21 of their order, the learned Members have referred to certain decisions of the Supreme Court wherein the apex court has undertaken review of its own earlier decisions. However, the learned Members seem to have missed the point that the review was undertaken by a larger Bench. The legal position on the point is made luculent by the Supreme Court in the case of Pradip Chandra Parija v. Pramod Chandra Patnaik [2002] 254 ITR 99 in the following terms (headnote) :

"Judicial discipline and propriety demands that a Bench of two judges of the Supreme Court should follow a decision of a Bench of three judges. If the Bench of two judges concludes that an earlier judgment of a Bench of three judges is so very incorrect that in no circumstances can it be followed, the proper course for the Bench of two judges to adopt is to refer the matter before it to a Bench of three judges, setting out the reasons why it could not agree with the earlier judgment. If, then, the Bench of three judges also comes to the conclusion that the earlier judgment of a Bench of three judges is incorrect, reference to a Bench of five judges is justified."

The Gujarat High Court in Sayaji Iron and Engineering Co. v. CIT [2002] 253 ITR 749, dealing with an almost similar situation laid down guidelines for resolution of such controversy as follows (headnote) :

"(ii) That the Tribunal of fact had no right to come to a conclusion contrary to the one reached by another Bench of the same Tribunal on the same facts. If the Tribunal wanted to take an opinion different from the one taken by an earlier Bench, it ought to place the matter before the President of the Tribunal so that he could have the case referred to a Bench consisting of three or more members for which there was provision in the Income-tax Act itself."

The requisite provision is contained in Sub-section (3) of Section 255 where the President of the Tribunal is authorised to constitute a Special Bench of three or more members. In the instant case also the learned Members of the Indore Bench of the Tribunal instead of reviewing their own earlier judgment, ought to have referred the matter to the larger Bench.

For what we have said above, we answer questions No. 1 to 3 in favour of the applicant-assessee and against the Revenue leaving the remaining questions unanswered. The matter shall now go back to the Tribunal for doing the needful in the light of the observations made hereinbefore.