AJIT K. SENGUPTA, J. ( 1 ) AT the instance of the Revenue, the following question has been referred by the Tribunal for the opinion of this court under Section 256 (2) of the Income-tax Act, 1961, for the assessment year 1981-82 :"whether, on the facts and in the circumstances of the case, the Tribunal was justified in quashing the order passed under Section 263 of the Income-tax Act, 1961 ?" ( 2 ) THE facts as found by the Tribunal are as under : The assessee-company was holding 5,000 shares of Duncan Brothers (Pakistan) Ltd. The said company was ultimately renamed as "duncan Brothers (Bangladesh) Ltd. " as a result of separation of Bangladesh from Pakistan. After the Indo-Pakistan conflict, the said company in East Pakistan came under the control of the Custodian of Enemy Property. The Custodian made a payment of Rs. 2,05,732 to the assessee-company as compensation for 5,000 shares held by it in Duncan Brothers (Bangladesh) Ltd. The cost of acquisition of the said shares by the assessee was Rs. 1,00,000. The Income-tax Officer, therefore, proceeded to determine the capital gains chargeable to tax in the hands of the assessee-company by deducting the cost of acquisition of Rs. 1,00,000 from the said compensation of Rs. 2,05,732. The capital gains of Rs. 1,05,732 was accordingly computed and charged to income-tax in the hands of the assessee-company in the assessment year 1981-82, vide order dated September 22, 1984, passed by the Income-tax Officer under Section 143 (3)/144b of the Income-tax Act, 1961. ( 3 ) SUBSEQUENTLY, the Commissioner of Income-tax initiated proceedings under Section 263 of the said Act on the ground that the Income-tax Officer while computing capital gains arising in respect of the aforesaid 5,000 shares of Duncan Brothers (Bangladesh) Ltd. , had incorrectly taken the fair market value of the said shares as on January 1, 1964, at Rs. 1,00,000. According to the Commissioner of Income-tax, the fair market value of the said shares as on January 1, 1964, was "nil" and, therefore, the entire compensation of Rs. 2,05,732 should have been assessed to income-tax as "capital gains" in the assessment year 1981-82. 1,00,000. According to the Commissioner of Income-tax, the fair market value of the said shares as on January 1, 1964, was "nil" and, therefore, the entire compensation of Rs. 2,05,732 should have been assessed to income-tax as "capital gains" in the assessment year 1981-82. The Commissioner of Income-tax rejected several contentions advanced on behalf of the assessee-company and by his order dated March 27, 1987, directed the Income-tax Officer to recompute the capital gains in respect of the 5,000 shares and treat the entire compensation of Rs. 2,05,732 as chargeable to capital gains, since the fair market value of the said shares as on January 1, 1964, according to the Commissioner of Income-tax, was "nil" and the Income-tax Officer had committed an error in allowing deduction of Rs. 1,00,000 by way of fair market value of the said shares as on January 1, 1964. ( 4 ) ON appeal by the assessee-company before the Tribunal, it was found by the Tribunal that the Income-tax Officer allowed deduction of Rs. 1,00,000 from the gross compensation of Rs. 2,05,732 by way of cost of acquisition of the said shares by the assessee and not by way of fair market value thereof as on January 1, 1964, as stated by the Commissioner of Income-tax. The Tribunal found that the cost of acquisition of the said shares was admittedly Rs. 1,00,000. The Commissioner of Income-tax, while exercising his jurisdiction under Section 263 of the said Act, had proceeded on a wrong assumption of facts that the Income-tax Officer took the fair market value of the said 5,000 shares as on January 1, 1964, at Rs. 1,00,000. The Tribunal found, as a matter of fact, that the Income-tax Officer did not allow any deduction by way of fair market value of the said shares as on January 1, 1964. It was further found by the Tribunal that the assessee-company had contended before the Income-tax Officer that the fair market value of the said shares as on January 1, 1964, was Rs. 6,68,341 and on that basis, the assessee must be deemed to have suffered a long-term capital loss of Rs. 4,62,609 in respect of the aforesaid shares. The Income-tax Officer, however, did not accept the aforesaid contention of the assessee-company and proceeded to compute the capital gains in the sum of Rs. 1,05,732 by granting deduction of the cost of acquisition of Rs. 4,62,609 in respect of the aforesaid shares. The Income-tax Officer, however, did not accept the aforesaid contention of the assessee-company and proceeded to compute the capital gains in the sum of Rs. 1,05,732 by granting deduction of the cost of acquisition of Rs. 1,00,000 in respect of the aforesaid shares. The Tribunal, therefore, held that the assessment order passed by the Income-tax Officer was neither erroneous in law nor prejudicial to the interests of the Revenue and the very basis adopted by the Commissioner of Income-tax, while initiating proceedings under Section 263 of the said Act, was wholly untenable and factually incorrect. The Tribunal, therefore, quashed the order passed by the Commissioner of Income-tax under Section 263 of the said Act. ( 5 ) BEFORE us the contentions as urged before the Tribunal have been reiterated. The contention of the Revenue is that the Commissioner was justified in revising the assessment order which is erroneous in so far as it is prejudicial to the interests of the Revenue. On the other hand, the contention of the assessee is that the order of the Commissioner is factually untrue and legally untenable. ( 6 ) WE have considered the rival contentions. ( 7 ) SECTION 48 of the Income-tax Act, 1961, provides that the income chargeable under the head "capital gains" is required to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the following amounts, namely,-- (i) Expenditure incurred wholly and exclusively in connection with such transfer ; (ii) The cost of acquisition of the capital asset and the cost of any improvement thereto. ( 8 ) UNDER Section 55 (2) of the said Act, the assessee has an option to substitute the fair market value of the asset as on January 1, 1964, in place of the cost of acquisition of the capital asset in question in those cases where the capital asset became the property of the assessee before January 1, 1964. In other words, while computing the income chargeable under the head "capital gains", the option is with the assessee to claim deduction either in respect of the actual cost of acquisition of the capital asset in question or the fair market value of the capital asset as on January 1, 1964. In other words, while computing the income chargeable under the head "capital gains", the option is with the assessee to claim deduction either in respect of the actual cost of acquisition of the capital asset in question or the fair market value of the capital asset as on January 1, 1964. It is obvious that the assessee would like to exercise his option only if the same results in some benefit to the assessee in the sense that the fair market value of the capital asset is higher than the cost of acquisition. ( 9 ) THE Income-tax Officer did not proceed on substitution of the fair market value as on January 1, 1964. He took the cost of the shares at Rs. 1 lakh which was also shown in the books of the company as well as in the balance-sheet and notes of the company. The Commissioner of Income-tax while passing the order under Section 263 of the Act had to consider the question as to whether the cost of the shares was Rs. 1 lakh or not. He cannot proceed on the substitution of the fair market value as on January 1, 1964. The law permits an assessee to determine the cost of acquisition in relation to a capital asset where the asset has become the property of the assessee before January 1, 1964, either on the basis of the actual cost of acquisition or at the option of the assessee the fair market value as on January 1, 1964. It is the option of the assessee to determine the cost of acquisition of an asset either on the basis of the cost of acquisition or on the basis of the fair market value as on January 1, 1964, where the property was acquired before January 1, 1964. The income-tax authority cannot and has no power to exercise the option. The authorities under the Act have no jurisdiction or power to direct the ascertainment of the cost of acquisition in relation to a capital asset on the basis of the fair market value as on January 1, 1964, unless the assessee exercises such option. The option is given to the assessee whether to adopt the cost of acquisition of the asset to the assessee or the fair market value of the asset on January 1, 1964. "bawa Shiv Charan Singh v. CIT. The option is given to the assessee whether to adopt the cost of acquisition of the asset to the assessee or the fair market value of the asset on January 1, 1964. "bawa Shiv Charan Singh v. CIT. " ( 10 ) THE cost of acquisition has to be determined for the purpose of computation of income chargeable under the head "capital gains" as provided by Section 49 of the Act. It, therefore, follows that the option available to the assessee under Sub-clause (ii) of Section 55 (2) of the Act can be exercised till the income chargeable under the head "capital gains" is computed. The right of choice is conferred on the assessee by Sub-clause (ii) of Section 55 (2) of the Act solely for the benefit of the assessee and unless there is anything in the enactment which curtails the freedom of choice, it would not be proper to restrict its freedom. Hence, an assessee is entitled to change the option for deduction of the value/cost of the asset for computation of capital gains from Section 55 (2) (ii) to Section 49 "rani Udayadevi Payagpur Dewas v. CIT". ( 11 ) IN the present case, the Income-tax Officer has proceeded on the basis of the cost of acquisition of the asset and not on the basis of the fair market value of the asset. When the Income-tax Officer has computed the capital gains on the basis of the cost of acquisition of asset, the Commissioner of Income-tax can consider the order to be erroneous if only the cost has been taken at any figure other than actual cost. It is not the case of the Commissioner of Income-tax in his order under Section 263 that the cost of acquisition has been erroneously taken at Rs. 1 lakh. The only contention of the Commissioner of Income-tax is that the mistake in the order of the Income-tax Officer has arisen because the Income-tax Officer has wrongly taken the fair market value of the shares as on January 1, 1964, at Rs. 1 lakh, and thereby determined the capital gain at Rs. 1,05,732. Therefore, the order is erroneous, according to the Commissioner of Income-tax, because the Income-tax Officer has wrongly taken the fair market value of the shares as on January 1, 1964, at Rs. 1 lakh. 1 lakh, and thereby determined the capital gain at Rs. 1,05,732. Therefore, the order is erroneous, according to the Commissioner of Income-tax, because the Income-tax Officer has wrongly taken the fair market value of the shares as on January 1, 1964, at Rs. 1 lakh. The Income-tax Officer has never taken the fair market value of the shares as on January 1, 1964, at Rs. 1 lakh. He has determined and accepted the cost of acquisition of the said shares at Rs. 1 lakh on the basis of the balance-sheet and the notes appearing in the books of the assessee-company as also the Bangladesh company. It is not the case of the Commissioner of Income-tax that the cost of acquisition taken at Rs. 1 lakh is erroneously taken. Therefore, the basis on which the Commissioner of Income-tax has passed the order is on the face of it untenable and the order, therefore, is without jurisdiction. If the cost of acquisition is taken at Rs. 1 lakh which has been adopted by the Income-tax Officer, there is no mistake in the computation of capital gains. ( 12 ) IN this case, it is an admitted fact that the cost of acquisition to the assessee-company in respect of the aforesaid 5,000 shares of Duncan Brothers (Bangladesh) Ltd. was Rs. 1,00,000, The assessee-company in exercise of the option vested in it under Section 55 (2) of the said Act wanted to claim deduction of the fair market value which, according to the assessee-company, was Rs. 6,68,341 as on January 1, 1964. The Income-tax Officer did not permit the assessee-company to exercise the said option. This action of the Income-tax Officer was not disputed by the assessee. The Income-tax Officer proceeded to compute the capital gains chargeable to tax in this case by deducting the actual cost of acquisition of Rs. 1,00,000 from the full value of the consideration being Rs. 2,05,732 which was the amount of compensation granted to the assessee-company by the Custodian of Enemy Property, Bangladesh. ( 13 ) THE Commissioner of Income-tax, in the facts and circumstances of this case, clearly proceeded on a wrong premise that the deduction of Rs. 1,00,000 which was granted by the Income-tax Officer by way of cost of acquisition was, in fact, by way of fair market value as on January 1, 1964, This was factually incorrect as found by the Tribunal. 1,00,000 which was granted by the Income-tax Officer by way of cost of acquisition was, in fact, by way of fair market value as on January 1, 1964, This was factually incorrect as found by the Tribunal. The Income-tax Officer did not grant any deduction by way of fair market value as on January 1, 1964, while computing the capital gains chargeable to tax in the hands of the assessee-company in respect of the said shares. ( 14 ) AT the hearing in the proceedings under Section 263, the assessee submitted before the Commissioner that the assessee had exercised the option under Section 55 (2) (i) of the Act. Therefore, the Commissioner could not have unreasonably proceeded on the basis that the option to substitute the cost of acquisition for the fair market value as on January 1, 1964, having been exercised by the assessee-company, it was not open to the Income-tax Officer to override the option. This is implicit in the Commissioner's observations occurring in the said order to the following effect :"there is nothing to fault the assessee-company in the exercise of the option under Section 55 (2) (i) of the Income-tax Act, 1961, for adoption of the fair market value of the shares as on January 1, 1964. It is for this reason that the Commissioner considers the Income-tax Officer's order to be erroneous because according to him the value of the shares on January 1, 1964, could not be anything but nil. " ( 15 ) TO our mind the entire question of the erroneous nature of the order turns on this estimation of the fair market value as on January 1, 1964, as nil. If the Commissioner had reasons for coming to such a prima facie conclusion, there would certainly be a case for cancellation of the assessment as erroneous and prejudicial to the Revenue. But the Commissioner has not brought any cogent materials to support such valuation at nil. His estimation is based on certain hypotheses. His first proposition is that the company being a company outside the Indian territory and that again in a country not in the best of relationship with India, the fair market value of the property as on January 1, 1964, in India could be nothing and there could be no prospective buyers of such shares. His first proposition is that the company being a company outside the Indian territory and that again in a country not in the best of relationship with India, the fair market value of the property as on January 1, 1964, in India could be nothing and there could be no prospective buyers of such shares. But, this particular approach of the Commissioner is difficult to appreciate because the transfer for the purpose of capital gains does not require the situs of the asset as well as the transfer to be within India. ( 16 ) AGAIN, the perception of the chances of sale is also a bare hypothesis. But one particular observation in the said order under Section 263 as a matter of fact negates the very chargeability of the assessee's receipt as capital gains, where he observes :"it is very important to remember here that payment which the assessee-company has received from the Custodian of Enemy Property in India is merely an ex gratia payment and has no relevance to the fair market value of the shares. "if this proposition is taken as correct, in that event the assessee will get away from the charge of capital gains tax altogether. Therefore, we find that the Commissioner's contention that the Income-tax Officer erred for reasons as set out by him and the error resulted in prejudice to the Revenue is without foundation. ( 17 ) FOR the foregoing reasons, we answer the question referred to this court in the affirmative and in favour of the assessee. There will be no order as to costs.