IMPORTANT POINT
Reference to High Court under Section 256 of the Income Tax against an order of rectification under Section 254(2) is maintainable.

ORDER

The assessment years in question are 1987-88 and 1988-89. For these assessment years, the Income Tax Officer made additions to the income of the assessee, which is a partnership firm of sums which. In his view, represented the unexplained cash credits in the name of partners of the firm. The assessments were upheld by the Commissioner in appeal. The Income Tax Appellate Tribunal, on 7th November, 1994, allowed the assessee s appeal and, setting aside the assessment orders, restored the matters to the file of the assessing officer, 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 Section 254(2) of the Income Tax 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 assessee s 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 Assessing Officer amounting to Rs.5,00,851/- and Rs.85,700/- be deleted from their income for assessment years 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 of 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 Section 68 of the Income Tax 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. 500851/- and Rs. 85700/- made by the A.O. under Section 68 of the Income-tax 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 these were questions of fact. The Revenue then made an application to the High Court under Section 256(2) of the Income Tax 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. v. Commissioner of Income Tax, M.P.1, in which it had been held that a reference against an order of rectification under Section 254(2) was not maintainable.

In the earlier judgment, the High Court said :

"The language used in Section 256(1) shows that the order contemplated under Section 256(1) is the order passed under Section 254 of the Act. Under Section 254(1) the Appellate Tribunal passes an order on the appeal filed by the assessee or the Revenue. This order may be amended under Section 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 Section 254(1) of the Act. Since no reference in the instant case as sought in respect of the appellate order passed under Section 254(1), we are of the view that no reference from the order rejecting an application for rectification of any mistake is tenable under Section 256(1) of the Act. The position obviously would have been different had the Appellate 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 Sec