SETHURAMAN J.

The assessee was a partnership firm consisting of four partners. The firm constituted under a deed of March 26, 1960, was carrying on money-lending business in Malaya and in the course of such business acquired house properties, estates and gardens there. It was also dealing in properties by way of purchase and sale. The profit and loss of these transactions of purchase and sale of estates was being reflected in the income-tax assessment The firm maintained its accounts for the Tamil year. We are now concerned with the year that commenced on 13th April, 1960. The firm closed its accounts on 13th March, 1961, as it was claimed that it was dissolved on that date. Along with the return, a profit and loss account, balance-sheet and profit and loss adjustment account were filed. In the profit and loss account the net profit transferred to the partner's accounts was shown at $ 72, 196.47. This sum was arrived at by crediting, to the profit and loss account, the difference on revaluation of estates and gardens and house properties on dissolution of the firm on 13th March, 1961. The difference on revaluation of estates and gardens and house properties on dissolution of the firm was written back with the result that the adjusted profit for purposes of income-tax was shown as $ 4, 604.88. It was also stated before the Income-tax Officer that out of the four partners, Ramanathan Chettiar formed one group, and the other partners, another group, and that the two groups were carrying on business separately with the assets and liabilities that fell to their shares on the dissolution of the firm. These statements were furnished along with the return on 10th April, 1962. On the same day the Income-tax Officer issued a notice under section 23(2), Indian Income-tax Act, 1922, posting the hearing for the same day. He completed the assessment on the same day by adding back a sum of Rs. 2, 083 representing municipal tax paid in respect of the properties in Malaya. According to the Income-tax Officer, this amount was not admissible as a deduction in arriving at the proper income. He did not issue any assessment order as such, but made a note in the order sheet as under

"Audit assessment--Lakshmanan appears. Return filed--I.T. 86 acknowledged in list of books--Scrutinised--Order dictated" *

In the course of the assessment for 1962-63, for which a notice under section 139(2) was issued, the assessee filed a nil return with a letter stating that the firm was dissolved on March 13, 1961, and that the firm was not in existence for the relevant year. The Income-tax Officer found that the statement of the assessee was correct, that the profit as per the accounts for the year ended March 13, 1961, was $ 72, 196.47 adjusted in the accounts of the respective partners and that a sum of $ 101, 248.25 being the difference on revaluation of house and gardens on dissolution of the firm had been written back in the statement for the year ended on March 13, 1961. He took the view that the difference on revaluation of assets on the dissolution of the firm, viz., $ 101, 248.25 had escaped assessment in the assessment year 1961-62. He, therefore, took proceedings under section 147(b) of the Income-tax Act, 1961. Before starting the proceedings he wrote a letter on September 3, 1963, to the assessee referring to the sum of $ 101, 248 being the difference in revaluation of the estates, etc., and to the decision in G. R. Ramachari & Co. v. Commissioner of Income-tax. He required the auditor to furnish the basis for the valuation and also file his objections, if any, to the amount being taken for assessment

The auditor in his reply stated that the case referred to by the Income-tax Officer had no application and that no loss or profit on a revaluation of assets could be assessed. He referred in this connection to a circular of the Board of Revenue dated June 21, 1956. It was submitted that, under the terms of the circular, surplus was only assessabl