V.K Singhal, J.:— The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated November 24, 1988, in respect of the assessment years 1982-83 and 1983-84 under section 256(1) of the Income-tax Act, 1961:

“Whether, on the facts and in the circumstances of the case, the learned Members of the Income-tax Appellate Tribunal were legally justified in setting aside the order of the Commissioner of Income-tax passed under section 263 of the Income-tax Act, 1961, and restoring that of the Inspecting Assistant Commissioner (Assessment)'s order, holding ‘therefore, considering the facts of this case, in our view, the Commissioner of Income-tax was not justified in invoking Explanation 3 to section 43(1) when full facts were brought to the notice of the Inspecting Assistant Commissioner (Assessment) who had allowed depreciation on actual cost to the assessee?’”

2. The relevant facts for the purpose of deciding the above question are that the assessee had other sister concerns, namely, Synthetic Stones, Saboo Emery Stones, Saboo Founders Abrasives India, Sri Engineers, Saboo Udyog, etc. These firms were dissolved and assets were distributed in order to reallocate separate businesses to separate family lines. After dissolution, ‘the assets were distributed on the market value and subsequently, the business of the dissolved firm was taken either by a new firm or by a person as proprietary business. The assessee-firm was dissolved on March 15, 1980, and the assets were taken by one Shri R.P Saboo. The assets were valued at the market rate prevailing on that date. The firm was reconstituted and shares were allocated so that all the brothers could have business independently along with the members of their family. The assessee-firm was constituted on June 1, 1980, and various assets contributed were valued at market price and depreciation was claimed on that basis. The Inspecting Assistant Commissioner (Assessment) allowed depreciation on the basis of the market value as claimed by the assessee. The Commissioner of Income-tax exercised the powers under section 263 of the Income-tax Act and he was of the view that depreciation has wrongly been allowed. According to him, the depreciation should not have been allowed, on the enhanced value and, therefore, Explanation 3 to section 43(1) of the Act was invoked and it was held by him that the assets were used by some other person and transfer of these assets is for the purpose of reduction of tax liability. The Inspecting Assistant Commissioner (Assessment) should not have allowed the depreciation on the enhanced value. He, therefore, set aside the order of the Inspecting Assistant Commissioner (Assessment) with the direction to work out the capital cost of the assets to the firm after applying the provisions of section 43(1) read with Explanation 3 thereto. It was also directed that no depreciation is allowable on the amount as has been allowed by the Inspecting Assistant Commissioner (Assessment). The assessment for the assessment years 1982-83 and 1983-84 was originally completed by the then Inspecting Assistant Commissioner to allow depreciation on the actual cost to the assessee. A proposal under section 263 of the Act was made for cancellation of the orders. The assessment orders for ‘the assessment years 1982-83 and 1983-84 were cancelled and the direction was given by the Commissioner of Income-tax as above. An appeal was preferred against the order of the Commissioner of Income-tax to the Income-tax Appellate Tribunal and the Tribunal found that the firm was dissolved on March 15, 1980, and thereafter was taken by one Saboo and the assets were taken at market value. The firm was reconstituted by the new partners taking the market value of the assets as contribution of capital in the firm. The actual cost to the partners while contributing these assets as capital is the cost at which the new partners have taken those assets as their own and this will be the actual cost to the new partners. The Tribunal was of the view that no material has been brought by the Commissioner of Income-tax on record that the cost of the assets shown in the conveyance deed does not represent the real market value or the actual cost to the partners who brought these assets to the firm. The value of the assets was revalued as under:

Name of the assets Written down value as on October 22, 1979, along with additions up to March 15, 1980 Amount on revaluation Rs. Rs. Building 1,03,265 9,06,314 Machinery 53,561 1,52,350 Furniture and fixture, 23,600 30,005 Generator 39,696 42,121 2,20,122 11,30,890

3. The Tribunal observed that though the revaluation of the assets is higher than the written down value it cannot be rejected as it has to be seen what is the real cost representing the market value to the successor. It was found that the main purpose of transfer of the assets is not to reduce the tax. The firm was dissolved with a view to take the business of his firm with the members of the family of a particular brother. The firm was reconstituted after a gap of three or four months with different partners and, therefore, it was held that the Commissioner of Income-tax was not justified in invoking Explanation 3 to section 43(1) of the Income-tax Act and when full facts were brought to the notice of the Inspecting Assistant Commissioner (Assessment) who had allowed depreciation on the actual cost to the assessee.

4. We have considered the matter. The provisions of section 43(1) are as under:

“43. In sections 28 to 41 and in this section, unless the context otherwise requires—

(1) ‘actual cost’ means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority:

Provided that where the actual cost of an asset, being a motor car, which is acquired by the assessee after the 31st day of March, 1967, but before the 1st day of March, 1975, and is used otherwise than in a business of running it on hire for tourists, exceeds twenty-five thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twenty-five thousand rupees.

Explanation 1.— ….

Explanation 2.— ….

Explanation 3.— Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Income-tax Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Income-tax Officer may with the previous approval of the Inspecting Assistant Commissioner determine having regard to all the circumstances of the case.

Explanation 4.—….”

5. It will be clear from Explanation 3 that a finding has to be recorded by the assessing authority that he is satisfied that the main purpose of transfer of assets was reduction of the liability to income-tax by claiming depreciation with reference to an enhanced cost. It is not in dispute that earlier the assets were used by other firms of which R.B Saboo was one of the partners. From a perusal of the assessment order, it is evident that the assessing authority has not applied his mind at all as to whether Explanation 3 can be invoked in the present case or not. Initially various concerns were owned by the four brothers of Saboo family. On March 15, 1980, the shares in different firms were reallocated so that in one particular firm the family members of only one brother remained as partners. The assets, including land, building and machinery were revalued. The Commissioner of Income-tax exercised powers under section 263 and came to the conclusion that the revaluation was done with the clear purpose of reducing the liability to income-tax. He further observed that the issue has not been examined at the time of assessment by the Inspecting Assistant Commissioner (Assessment) and, therefore, the assessment framed by him is erroneous. Since the assessing authority has not applied his mind to the important issue it was held that it is an erroneous assessment. The assessment order was set aside and the Inspecting Assistant Commissioner (Assessment) was directed to work out the actual cost of the assets to the firm after keeping in view the provisions of Explanation 3 to section 43(1) and the observations given therein. The depreciation was not allowable. It was also found not to be in accordance with law. The Income-tax Appellate Tribunal found that the Commissioner of Income-tax has not proved that the main purpose was to transfer the assets to the assessee to reduce the tax liability and, therefore, the Commissioner of Income-tax was not justified in invoking Explanation 3 to section 43(1) specially when the assessee has given reasons as to why there was dissolution and as to why the firm was reconstituted after a gap of more than ¾ months, and that too with different partners. The order passed by the Commissioner of Income-tax was set aside. It may be observed that the powers of revision under section 263 of the Act could be exercised by the Commissioner if he considers that any order passed by the assessing authority is erroneous in so far as it is prejudicial to the interest of the Revenue. Allowing certain deductions without proving the claim or without proper verification or in ignorance of the provisions of law are the various instances on the basis of which the order could be considered prejudicial to the Revenue and could be set right in revisional jurisdiction. The Commissioner has power to adjudicate on a particular point of law on which the revisional jurisdiction is sought to be exercised or he may set aside the assessment order and send the matter to the assessing authority for fresh assessment. In a case where there is non-application of mind with regard to any particular provision of law, the proper course is to set aside the assessment order and send the matter back to the assessing authority for determining the said issue in accordance with the provisions of law so that the necessary evidence may come on record. The Commissioner himself can also make enquiry and the evidence may come on record by virtue of such an enquiry. Section 43(1) has defined the term “actual cost” for the purpose of claiming depreciation and the Explanation is an exception to such definition and it empowers the assessing authority to take the actual cost different from what has been shown by the assessee. For the purpose of exercising this power, the previous approval of the Inspecting Assistant Commissioner may be taken and in case the assessment is made by the Inspecting Assistant Commissioner himself then the question of any approval does not arise. The assessing authority has to examine as to whether the main purpose of transfer of assets directly or indirectly was to reduce the liability to tax by claiming depreciation with reference to the enhanced cost. If the assessing authority is satisfied then he has to record a finding to this effect that the main purpose of the transfer of the assets was to reduce the liability to income-tax. In order to arrive at the satisfaction of the assessing authority, it is necessary that there must be evidence on record and an enquiry has to be made by the ‘assessing authority. The mere transfer at a higher valuation by itself cannot be considered an act on the part of the assessee showing his intention to reduce the tax liability. The dissolution deed, partnership deed and the surrounding circumstances including the evidence have to be considered and thereafter the assessing authority could come to the conclusion as to whether the main purpose of the transfer of the assets was to reduce the tax liability. The Tribunal has not found that the Commissioner has no jurisdiction under section 263 of the Act. It was only on the merits with regard to invoking Explanation 3 to section 43(1) that it came to the conclusion that there is nothing-on record that the main purpose of the transfer of the assets was to reduce the tax liability. As a matter of fact while exercising the power under section 263, the Commissioner himself was of the opinion that:

“This issue had not been examined at the time of assessment by the Inspecting Assistant Commissioner (Assessment) and the corresponding assessment framed by him is erroneous.”

6. If a particular issue is not examined by the assessing authority then the proper course for the Commissioner was to set aside the assessment order and to direct the assessing authority to apply his mind to the provisions of law which have not been considered. From the assessment order framed under section 143(3) it is clear that the Inspecting Assistant Commissioner has not applied his mind at all and there is no finding in the assessment order regarding the application or non-application of Explanation 3 to section 43(1). The Inspecting Assistant Commissioner having not applied his mind at all and having allowed the depreciation at the enhanced value without considering Explanation 3, the order was prejudicial to the interest of the Revenue. Not only this, the Commissioner of Income-tax found that the depreciation has been allowed on land which is complete non-application of mind and in such a situation the power under section 263 could be exercised by the Commissioner of Income-tax. On the point as to whether the main purpose of transfer of the assets was to reduce the tax liability or not, the matter could have been decided by the assessing authority after taking into consideration the oral and written evidence. The Commissioner of Income-tax also in such a situation should have set aside the assessment on this point and should have left it to the assessing authority to come to the conclusion whether the main purpose of transfer of the assets was to reduce the tax liability or not. He could have called for the copy of the partnership deed and dissolution deed and could have taken other evidence into consideration. In the absence of any finding recorded by the assessing authority, though the Commissioner of Income-tax has power to record a finding after giving opportunity to the assessee, the proper course for the Commissioner of Income-tax was to set aside the assessment order on that point so that the assessing authority could record his finding whether the transfer of assets was for the purpose of reduction of tax liability by taking into consideration the earlier dissolution deed, new partnership deed, valuation report and other relevant facts including the oral evidence. The Income-tax Appellate Tribunal has come to the conclusion that the Commissioner of Income-tax was not justified in invoking Explanation 3 when the firm was reconstituted after a gap of more than three months with different partners. The gap of three months may or may not be relevant looking to the particular circumstances of a case. Simply because after the dissolution of the firm a new firm was reconstituted after three months, does not mean that the main purpose was not for transfer of assets to reduce the tax liability. The different partners are not outsiders, but family members of the same partner, who was a partner in the earlier firm. It is no doubt true that the burden is on the assessing authority to prove that the main purpose for transfer of the assets was to reduce the tax liability, but he can definitely take into consideration the relevant facts. If the view taken by the Tribunal is accepted as the correct view then the Explanation cannot be invoked in any case, and, therefore, in order to find out whether the Explanation is applicable or not, the entirety of the circumstances has to be taken into consideration and it could not be for one reason or the other. It was a case where the assessing authority has not applied his mind. That was the end of the matter for exercising power under section 263 and, therefore, the matter should have been sent back to the assessing authority for applying his mind to find as to whether the Explanation is applicable or not. The observation of the Tribunal that full facts were brought to the notice of the Inspecting Assistant Commissioner (Assessment) is also not correct inasmuch as after giving statement with regard to the actual cost of the assets and depreciation claimed thereon, the assessing authority was bound to consider the Explanation. Simply because the facts have been disclosed by the assessee, it does not give immunity from revisional jurisdiction which the Commissioner can exercise under section 263 and as such even in a case where the facts have been disclosed by the assessee to the assessing authority and the correct provisions of law have not been examined by the assessing authority, the power under section 263 can be invoked.

7. In these circumstances, we are of the view that the Tribunal was not justified in setting aside the order of the Commissioner of Income-tax passed under section 263 of the Income-tax Act and holding that the Commissioner of Income-tax was not justified in invoking Explanation 3, to section 43(1) of the said Act when the full facts were brought to the notice of the Inspecting Assistant Commissioner (Assessment) by the assessee.

8. The matter will now be considered by the assessing authority afresh who will take into consideration the dissolution deed, partnership deed and valuation report and other oral and written evidence and the entirety of the circumstances.

9. Consequently, the reference is answered in favour of the Revenue and against the assessee. No order as to costs.