assessee has filed this appeal against order of CIT(A)-IV, Bangalore dt. 31st July, 2003. first grievance of assessee is that learned CIT(A) has erred in holding that reopening of assessment is valid in eyes of law. assessee company was incorporated with main objective of developing commercial complex. assessee filed return declaring income of Rs. 62,430 which included rental receipts from commercial complex as well as long-term capital gain or sale of certain units/shops in commercial complex. rental income was shown under head Income from business . In reasons recorded, AO was of opinion that rental income is assessable under head Income from house property and therefore, expenses claimed by assessee by treating rental income as business income were inadmissible. However, while completing assessment, AO has not held that rental income is to be taxed under head Income from house property . Hence, before learned CIT(A), it was argued that AO has not proceeded to assess on ground mentioned in reasons recorded. Therefore, entire exercise of reopening of assessment is bad in law and fails. However, learned CIT(A) has confirmed action of AO after observing as under: "Once assessment is reopened AO is free to go into all issues and need not confine himself to reason to which assessment has been reopened. Therefore, there was nothing wrong in AO going into issue of treatment of business of assessee and question whether income earned by assessee on sale of shops was taxable as business income or capital gains. This objection of assessee is therefore overruled." During course of proceedings before us, learned Authorised Representative submitted that AO has assumed jurisdiction for reopening assessment on ground that rental income is assessable under head Income from house property . However, while completing assessment, he has assessed rental income as income from business as declared. Hence, ground on which assessment has been reopened has not been found correct while completing assessment. Therefore, there is no foundation for AO to have assumed jurisdictional under s. 147 of IT Act. learned Authorised Representative submitted if addition is made on issue on which assessment has been reopened, then AO can make other additions. However, in instant case, AO has not made any addition on issue on which assessment has been reopened. It was, therefore, argued that assessment order is bad in law. learned Departmental Representative supported order of authorities below. It was argued that s. 147 is for assuming jurisdiction. As per requirement of Act, if AO notices that assessee has claimed excessive deduction, then AO can issue notice under s. 147. It is only prima facie satisfaction of AO for reopening assessment subsequent development cannot be taken into account for holding that assessment has not been validly reopened. There are other issues on which AO has made additions and these issues have been noticed during course of assessment proceedings after issue of notice under s. 147. We have heard both parties. In instant case, assessment was not completed under s. 143(3) before issue of notice under s. 147. AO can issue notice under s. 147 if it is noticed by him that assessee has understated income by claiming excessive allowance or relief in return. In instant case, AO was of opinion that rental income is taxable under head Income from house property and therefore, expenses claimed were not allowable. AO has not given any basis for entertaining such belief. AO in his order has observed that that assessee company is engaged in development of commercial complex and therefore, rental income is taxable under head Income from business . AO in his order has reproduced extracts form Director s report. If one goes through such extracts, then, it is clear that object of assessee company was to develop commercial complex. Such object is apparent from report of directors for period prior to start of this previous year. It is not case of AO that such facts were not available to him before reopening of assessment. learned facts were not available to him before reopening of assessment. learned Punjab & Haryana High Court in case of CIT vs. Atlas Cycle Industries (1989) 180 ITR 319 (P&H) and occasion to consider as to whether assessment proceedings can continue, in case, ground on which assessment was reopened were found to be incorrect. learned Punjab & Haryana High Court held that reassessment proceedings cannot be continued if grounds on which notice is issued are found to be incorrect. learned Punjab & Haryana High Court observed as under: "Adverting to question referred regarding reassessment proceedings, we are of view that Tribunal was right in cancelling reassessment as both grounds on which reassessment notice was issued were not found to exist, and moment such is position, ITO does not get jurisdiction to make reassessment. This view of ours finds support from Supreme Court decision in CIT vs. A. Raman & Co. (1968) 67 ITR 11 (SC) and Bankipur Club Ltd. vs. CIT (1972) 1972 CTR (SC) 245: (1971) 82 ITR 831 (SC). Similar view has been taken by Rajasthan High Court in Addl. CIT vs. Ganeshilal Lal Chand (1984) 43 CTR (Raj) 120: (1985) 154 ITR 274 (Raj). On behalf of Revenue, CIT vs. Ahmedabad Mfg. & Calico Printing Co. Ltd. 1976 CTR (Guj) 214: (1977) 106 ITR 159 (Guj), decision of Gujarat High Court was cited. On consideration of matter, we are of view that in view of aforesaid Supreme Court decision, view taken by Rajasthan High Court is correct and view taken by Gujarat High Court is not correct. Accordingly, we dissent from view taken by Gujarat High Court and in view of decisions of Supreme Court and Rajasthan High Court, we hold that ITO did not have jurisdiction to proceed with reassessment, moment he found two grounds mentioned in reassessment notice incorrect or non-existent. Accordingly, we answer referred question in favour of assessee, in affirmative, that Tribunal was right in cancelling reassessment." Gujarat High Court in case of Sagar Enterprises vs. Asstt. CIT (2002) 173 CTR (Guj) 528: (2002) 257 ITR 335 (Guj) quashed notice under s. 148 as reasons recorded showed that AO has issued notice on account of failure of assessee to file return, while it was actually found that assessee has filed return. learned Gujarat High Court observed that factor of non-filing of return has over bearingly weighed with AO for arriving at satisfaction about failure on part of assessee and escapement of assessment of income. Once such fact is found to be incorrect, then reopening was held as invalid. Patna High Court in case of Chunnilal Surajmal vs. CIT (1986) 50 C T R (Pat) 121: (1986) 160 ITR 141 (Pat) had occasion to consider taxability of bank deposit found in name of wife of Karta of HUF in case when assessment was reopened for reassessing investment for house property. reasons recorded showed that case was reopened to assess unexplained investment in house. It was noticed that fact of investment in house property was disclosed and such ground was found to be not sufficient for reopening assessment. In this view of matter, Tribunal confirmed finding of appellate authority in annulling assessment order. learned Patna High Court upheld finding of Tribunal and held that reassessment was not valid in law. In case of Farrukhabad Gramin Bank vs. ITO (2005) 194 CTR (All) 67: (2005) 273 ITR 113 (All), issue before High Court was as to whether notice under s. 148 is valid in view of subsequent decision of Supreme Court overruling its earlier decision. In this case, assessment was reopened on basis of Hon ble Supreme Court s decision but subsequently that decision was overruled. Before Allahabad High Court, it was argued that once notice has been issued, subsequent development would not invalidate notice, as there may be other items of income which can be brought to tax in reassessment proceedings. learned High Court did not accept above proposition. It was held that where very basis of notice issued it disappears on account of overruling of decision, proceedings in pursuance of reassessment notice cannot go. It is true that Gujarat High Court has upheld reopening, even if no addition is made on issue on which assessment is reopened. This decision has been mentioned by Punjab & Haryana High Court in Atlas Cycle Industries case (supra). It is also settled proposition of law that in case two views are possible, then view favourable to assessee is to be adopted. be adopted. Sec. 147 of IT Act is as under: "If AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to provisions of ss. 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment, and which comes to his notice subsequently in course of proceedings under this section, or recomputed loss or depreciation allowance or any other allowance, as case may be, for assessment year concerned hereafter in this section and in ss. 148 to 153 referred to as relevant assessment year." AO is required to assess and reassess such income and also any other income chargeable to tax which has escaped income and which comes to his notice during proceedings initiated under s. 147 of IT Act. words such income refers to income which has escaped assessment and is mentioned in reasons recorded. In case there is such income, then AO in addition to that include escaped income found during course of proceedings under s. 147. If such income is not there then one has to see as to whether any other income can be included. legislature has used words and also . It m e n s that if such income is assessed or re-assessed then income appearing after words and also can be taxed. If there is no such income, then income after appearing words and also cannot be assessed or reassessed as per provisions of s. 147. Keeping in view above discussion and considering fact that no addition has been made on issue on which assessment was reopened, it is held that reassessment is not valid in eye of law. If foundation of notice goes, then no superstructure or such foundation can exist. Hence, it is held learned CIT(A) was not justified in holding that assessment proceedings concluded as result of notice under s. 147 were valid. next grievance of assessee is that learned CIT(A) should have held that sale consideration with regard to building sold was liable to be reduced from block of assets. During year under reference, assessee company completed construction work on ground and first floor. construction started for second floor was shown as work-in-progress. Due to shortage of fund, assessee company sold some of shops. These shops were shown as assets in block of assets termed as building. assessee claimed depreciation for first time during year under reference. These shops were current assets and according to learned CIT(A) no depreciation was allowed on these shops during year and therefore profit arising from such sale of shops has been held as taxable under head Capital gain . assessee is aggrieved against such finding. According to assessee, sale consideration received in respect of sale of shops should have been considered for reducing WDV of block of assets termed as building. learned CIT(A) observed that s. 50 is applicable in case depreciation has been allowed on asset. Since shops were current asset added to block of assets during year under reference and hence no depreciation was allowed on these shops and therefore provisions of s. 50 were held as inapplicable. During course of proceedings before us, learned Authorised Representative argued that s. 50 is applicable in case depreciation is admissible on asset. learned Authorised Representative drew our attention to fact that assessee company was showing work-in-progress in earlier assessment years. assessee had at no point of time intended that asset is current asset to be dealt as such. assessee has claimed depreciation during year under reference and that depreciation has been allowed. It was therefore submitted that profit arising from sale of shops cannot be assessed as capital gain but is to be considered for reducing WDV of block of assets termed as building. On other hand, learned Departmental Representative supported orders of authorities below. learned Departmental Representative drew our attention to s. 50 of IT Act. It has been mentioned in that section that it is applicable in respect of asset on which depreciation has been allowed. shops under reference were shown as asset during year and since these were sold during year and, therefore, no depreciation has been allowed on these shops. profit arising from sale of shops has been rightly taxed under head Capital gain . We have heard both parties. Sec. 50 of IT Act, which is relevant for our consideration is re-produced as under: Sec. 50: "Notwithstanding anything contained in cl. (42A) of s. 2, where capital asset is asset forming part of block of assets in respect of which depreciation has been allowed under this Act or under Indian IT Act, 1922 (11 of 1922)." It is true that s. 50 is applicable in case depreciation has been allowed. Now words depreciation has been allowed as mentioned in s. 50 can refer to (1) asset forming part of block of asset. (2) Block of assets. In case meaning of depreciation allowed under s. 50 is referred to asset forming part of block of assets, then depreciation on shops have not been allowed and s. 50 will become inapplicable. However, in case depreciation allowed under s. 50 refers to block of assets, then depreciation stands allowed to block of assets i.e., building of which shops are part. In order to resolve this controversy, one has to refer to s. 32(1), where it has mentioned that depreciation has to be allowed in case of any block of assets. Hence, depreciation is always allowed on block of assets. In instant case, block of assets is building of which shops are part. During year under reference, AO has allowed depreciation on building. Once depreciation is allowed on block of assets, then any asset forming part of asset if sold will be considered as per provision of s. 50 of IT Act. It is not disputed that no capital gain is chargeable as per s. 50 of IT Act, as actual cost of assets falling within block of assets acquired during previous year exceeds sale consideration of part of block of assets sold. previous year exceeds sale consideration of part of block of assets sold. Moreover, in case of shops sold, roof of shops becomes floor of other shops while walls of shops are shared by other shops. Floor of such roof sold to roof of other shops. Such other shops are part of block assets and it cannot be said that depreciation has not been allowed to such shops which are sharing roof and floor of shops sold. Hence, it is held that s. 50 is applicable and assessee is not liable for capital gain in respect of shops sold. In result, appeal is allowed. *** SRI RAMA COMMERCIAL COMPLEX (P) LTD. v. INCOME TAX OFFICER