The main legal point established in the judgment is that the Income Tax Officer must not invoke S.154 of the Income Tax Act, 1961 when the question is debatable, and the new asset mentioned in S.54(ii) can only be an asset acquired after the sale as envisaged by the first paragraph of S.54.

P. Govindan Nair, J.

1. This is a reference at the instance of the assessee under S.256(1) of the Income Tax Act, 1961. The questions referred are these:

"(i) Whether, on the facts and in the circumstances of the case, the Income Tax Officer , had jurisdiction to invoke the provisions of S.154 of the Income Tax Act, 1961and to revise the assessment originally made?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of S.54(ii) are attracted to the sale effected by the assessee on 1-7-1962?

(iii) Whether the computation of capital gains assessable to tax is in accordance with law?"

2. The year of assessment is 1963-64 the corresponding accounting period being that which ended on 31-3-1963. The assessee, an individual sold his residential house on 25-7-60. He purchased a new house for Rs. 19,550/-. The capital gains in relation to those transactions computed in accordance with the provisions of the Indian Income Tax Act, 1922 was a sum of Rs. 15,029/-. No tax on the capital gains Was however imposed on the assessee under that Act in view of the provisions in sub-s.(4)(b)(ii) of S.12B of that Act. The assessee made considerable improvements to the new house that he purchased but did not keep it for long as he sold that house too on 1-7-62 for a consideration of Rs. 56,500. For the assessment year 1963-64 this sale was taken into account for determination of the capital gains. The capital gains then was determined at Rs. 7500/- by applying S.45 of the Income Tax Act, 1961 by the assessment order dated 25-3-64. The Income Tax Officer, according to him, discerned an apparent mistake on the record of this assessment and therefore issued a notice under S.154 of the Income Tax Act, 1961 to the assessee to show cause why the original assessment should not be rectified by including the sum of Rs. 15,029 the capital gains by the sale of the first house on 25-7-60. This was proposed on the basis of S.54(ii) of the Income Tax Act, 1961. Though the assessee demurred the proposed rectification was made. An appeal taken by the assessee before the Appellate Assistant Commissioner was dismissed and the Tribunal in further appeal came to the same conclusion holding that S.54(ii) applied and that therefore the sum of Rs. 15,029 must be added to the capital gains.

3. Counsel for the assessee contended that it is not at all clear that S.54(ii) of the Income Tax Act, 1961 warranted the inclusion of the sum of Rs. 15,029 to the difference between the purchase and sale price of the house that had been acquired by the assessee after the first sale and which had been considerably improved by him. According to counsel for the assessee, S.54(ii) of the Income Tax Act, 1961 will be applicable only when the first sale also had resulted in capital gains which could be assessed under the 1961, Act. He invited our attention to S.45 and also to S.54. The relevant part of S.45(1) of the Income Tax Act, 1961 enacts that "any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in S.53, 54 and 54B be chargeable to income tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place."

4. Counsel for the assessee contended that capital gains mentioned in S.45(1) can therefore only arise for the purpose of 1961, Act With reference to some sale transaction that took place in the earliest of the previous years relating to which an assessment could be made under the Income Tax Act, 1961 or in any years subsequent thereto. He submitted that since the first sale of the residential house then owned by the assessee was on 25-7-60 the profit or gains made by that sale could not have given rise to any capital gains under the Income Tax Act, 1961. S.53 referred to in S.45(1) of the said Act is not relevant for the purpose of our case. Counsel for the assessee contended th