The court held that for the exercise of jurisdiction under Section 263 of the Income-tax Act, it is not enough that the order passed by the Income-tax Officer was erroneous but it has further to be found that the order sought to be revised was prejudicial to the interests of the Revenue.

S.P.Goyal, J.

1. The assessee, Messrs Jagadhri Electric Supply and Industrial Company, a partnership firm, was initially constituted on October 25, 1964, with ten partners and four minors, namely, Ghanshyam Gupta, Chander Kant, Dinesh Kumar and Lalit Kumar, who were admitted to the benefits of the partnership. The two minors, Ghanshyam Gupta and Chander Kant, attained majority on October 25, 1965, and June 4, 1966, respectively. A new partnership deed was executed on July 1, 1966, which was to take effect from April 1, 1966. In the new partnership, Brijmohan Lal, an earlier partner, was dropped whereas Ghanshyam Gupta and Chander Kant were shown as full-fledged partners. The firm was granted registration by the Income-tax Officer for the assessment year 1967-68, vide order dated March 28, 1972. However, subsequently, on May 24, 1973, the Income-tax Officer referred the case to the Commissioner of Income-tax proposing that action under Section 263 of the Income-tax Act (hereinafter called "the Act") be taken for cancellation of the registration. The Commissioner after issuing notice and hearing the assessee cancelled the registration in due course. On appeal by the assessee, the Tribunal set aside the order of the Commissioner on the ground that the finding that the order granting registration was prejudicial to the interest of the Revenue was based on no evidence. Relying on a Supreme Court decision in CIT v. Dwarkadas Khetan & Co. [1961] 41 ITR 528, the Tribunal rejected the contention of the assessee that the order of the Income-tax Officer granting registration was not erroneous. Both the Revenue as well as the assessee moved applications under Section 256(1) of the Act for referring certain questions to this court. Initially only one question in the application of the Revenue and two of the assessee were referred but, later on, on a mandamus issued by this court, instead of the question referred originally, two questions as framed by the Revenue have been referred. The four questions which stand referred now and are the subject-matter of Income-tax References Nos. 18 and 19 of 1985 and Nos. 65 and 66 of 1977 read as under :

2. I.T. Ref. Nos. 18 and 19 of 1985 :

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in giving effect to the plea of the assessees that the order of the Income-tax Officer granting registration to the assessee-firm for the assessment year 1967-68 was not prejudicial to the interests of the Revenue ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in allowing the assessees appeal, thus setting aside the direction of the Commissioner of Income-tax to the Income-tax Officer to frame the assessment of the assessee in the status of an unregistered firm ? "

3. I.T. Ref. Nos. 65 and 66 of 1977 :

"1. Whether the Tribunal has been right in law in suo motu holding that the Commissioner of Income-tax had in his mind the admission of Chander Kant to the partnership with effect from April 1, 1966, and consequently the Income-tax Officers order erroneous ?

2. Whether, on the facts and circumstances of the case, the Tribunal was right in not finding it beyond the jurisdiction under Section 263, the action of the Commissioner of Income-tax in cancelling the registration on the plea of a loss of Rs. 876 having been debited to two minors who were carrying a credit of Rs. 2,250 each as capital and share of previous profits besides a share in surplus of compensation when there had been no invalidity in the partnership firm under the provisions of the Partnership Act ?"

4. A bare reading of the two questions referred at the instance of the Revenue would show that the answer to the second question depends entirely on the decision of question No. 1. So far as question No. 1 is concerned, the argument of learned counsel for the Revenue was that once it is found that the order granting registration by th