1. The assessment years in question are 1987-88 and 1988-89. For these assessment years, the ITO made additions to the income of the assessee, which is a partnership firm, of sums which, in this view, represented the unexplained cash credits in the name of partners of the firm. The assessments were upheld by the CIT in appeal. The Tribunal, on 7th November, 1994, allowed the assessees appeal and, setting aside the assessment orders, restored the matters to the file of the AO, directing him to pass a fresh order after allowing the assessee the opportunity to support the documents that it had earlier filed before him. Neither party sought to file any reference application thereagainst but the assessee filed an application before the Tribunal under s. 254(2) of the IT Act, 1961 seeking to rectify it on the basis that a contention that it had raised had not been decided. On 4th January, 1995, the Tribunal allowed the rectification application. It noted that the assessees objection was that the assessment on account of the credits should be made in the hands of the partners of the assessee as they had made payments by cheque. The Tribunal observed that this issue had not been decided by it and that there was sufficient force in it. Accordingly, it rectified the error by disposing of the preliminary issues, raised by the assessee. We accordingly amend our order and direct that the additions made by the AO amounting to Rs. 5, 00, 851 and Rs. 85, 700 be deleted from their income from asst. yrs. 1987-88 and 1988-89. As observed, the Department may investigate the matter in the hands of the partners.
2. The Revenue filed an application before the Tribunal seeking reference of two questions that arose out or the order on the rectification application. The questions read thus:
1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of s. 68 of the IT Act, 1961 are not applicable to the facts of the present case
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the additions of Rs. 5, 00, 851 and Rs. 85, 700 made by the AO under s. 68 of the IT Act, 1961, representing the unexplained cash credits in the accounts of the partners
3. The Tribunal declined to make the reference on the basis that there were questions of fact. The Revenue then made an application to the High Court under s. 256(2) of the IT Act and, by the order under challenge, the same was dismissed. The order under challenge followed an earlier decision of the High Court, in the case of Popular Engineering Co. vs. CIT 1981 MP 77 (MP) : TC 54R.173, in which it had been held that a reference against an order of rectification under s. 254(2) was not maintainable
4. In the earlier judgment, the High Court said:
"The language used in s. 256(1) shows that the order contemplated under s. 256(1) is the order passed under s. 254 of the Act. Under s. 254(1) the Tribunal passes an order on the appeal filed by the assessee or the Revenue. This order may be amended under s. 254(2) of the Act with a view to rectifying any mistake apparent from the record. If, however, the application for rectification is dismissed, there is no amendment of the order passed under s. 254(1) of the Act. Since no reference in the instant case was sought in respect of the appellate order passed under s. 254(1), we are of the view that no reference from the order rejecting an application for rectification of any mistake is tenable under s. 256(1) of the Act. The position obviously would have been different had the Tribunal amended its appellate order with a view to rectifying any mistake from the record. In that case the amended order could be a subject-matter of reference under s. 256(1) of the Act. But if the order is not amended and the application for rectification is dismissed, the only order which stands is the order passed in appeal under s. 254(1) of the Act and if no reference has been sought in respect of such order, the same becomes final in view of the language used in s. 254(4) of the Act."
5. Sec. 256 reads thus:
"256(1). The assessee or the CIT may, within sixty days of the date upon which he is served with notice of an order passed before the 1st day of October, 1998, under s. 254, by application in the prescribed form, accompanied where the application is made by the assessee by a fee of two hundred rupees, require the Tribunal to refer to the High Court any question of law arising out of such order and, subject to the other provisions contained in this section, the Tribunal shall, within one hundred and twenty days of the receipt of such application, draw up a statement of the case and refer it to the High Court.
Provided that the Tribunal may, if it is satisfied that the applicant was prevented by sufficient cause from presenting the application within the period hereinbefore specified, allow it to be presented within a further period not exceeding thirty days.
(2) If, on an application made under sub-s. (1), the Tribunal refuses to state the case on the ground that no question of law arises, the assessee or the CIT, as the case may be, may, within six months from the date on which he is served with notice of such refusal, apply to the High Court, and the High Court may, if it is not satisfied with the correctness of the decision of the Tribunal, require the Tribunal to state the case and to refer it, and on receipt of any such requisition, the Tribunal shall state the case and refer it accordingly.
(3) Where in the exercise of its powers under sub-s. (2), the Tribunal refuses to state a case which it has been required by the assessee to state, the assessee may, within thirty days from the date on which he receives notice of such refusal, withdraw his application, and, if he does so, the fee paid shall be refunded."
Sec. 254, so far as it is relevant, reads thus:
"254 (1) The Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.
(2) The Tribunal may, at any time within four years from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub-s. (1), and shall make such amendment if the mistake is brought to its notice by the assessee or the AO.
Provided that an amendment which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this sub-section unless the Tribunal has given notice to the assessee of its intention to do so and has allowed the assessee a reasonable opportunity of being heard.
Provided further that any application filed by the assessee in this sub-section on or after the 1st day of October, 1998, shall be accompanied by a fee of fifty rupees."
6. Sec. 256 empowers the assessee and the Revenue to "require the Tribunal to refer to the High Court any question of law arising out of" an order passed under s. 254. Sec. 254(1) states that the Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. It would appear that the High Court read s. 254(1) as referring only to orders passed by the Tribunal on an appeal. We do not think that that would be a correct way of reading s. 254(1). Sec. 254(1) empowers the Tribunal to pass orders not only on an appeal before it but also upon such applications as are made in the appeal and it specifies that, before doing so, it shall hear both parties to the appeal. Sec. 254(2) permits the Tribunal to rectify any mistake apparent from the record and amend any order passed by it under sub-s. (1) within four years from the date of that order. The proviso requires it to give notice to the assessee before enhancing an assessment and allow him a reasonable opportunity of being heard. It will be seen, therefore, that the consequence of an order passed in rectification under s. 254(2) could have serious financial implications for the assessee and it is unthinkable that the assessee should be left without a remedy, by way of a reference to the High Court, if his assessment is erroneously incurred in rectification proceedings. It is also to be noted that s. 256 contemplates the reference of a question of law arising out of an order passed "under s. 254"; that is to say an order both under s. 254(1) and s. 254(2).
7. In our view, therefore, under the provisions of s. 256, a reference may be made to the High Court of a question of law that arises upon any order of the Tribunal. The view taken by the High Court in the earlier judgment in Popular Engineering Co. (supra) and followed by it in the order under challenge is erroneous.
8. There is no doubt in our mind, particularly having regard to the fact that the deletions of the additions that had been made by the AO were made in rectification proceedings, that the questions that were sought to be referred were questions of law and that the High Court ought to have called upon the Tribunal to refer the same to it for its consideration.
9. Learned counsel for the assessee submitted that pursuant to the order of the Tribunal in the rectification proceedings, the amounts of the additions had been assessed in the hands of the partners of the assessee and that, therefore, nothing survived for consideration insofar as the assessee was concerned. It is unclear whether the assessments in the hands of the partners were on a protective basis or otherwise. In any event, this is something that the High Court can go into in greater detail when it hears the reference.
10. The civil appeal is allowed. The order under appeal is set aside. The Tribunal shall refer to the High Court for its consideration the questions set out above, having framed a statement of case
11. No order as to costs.
