The Commissioner of Income-Tax Vs. M/S. Mcmillan & Co [1957] INSC 87 (16 October 1957)
DAS, S.K.
BHAGWATI, NATWARLAL H.
KAPUR, J.L.
CITATION: 1958 AIR 207 1958 SCR 689
ACT:
Income-Tax-Assessment -Acceptance by Income-tax Officer of the assessee's method of accounting--Power of Appellate Assistant Commissioner in appeal -If can reject such method and adopt another Indian Income-tax Act (XI of 1922), ss. 31, 13 Proviso-Indian Income-tax Rules, R. 33.
HEADNOTE:
The respondent assessee, a non-resident company, sold and published books and magazines in various parts of the world.
It submitted for the assessment year in question a return in which a fixed percentage of the marked price of all publications sold in India, printed in India or elsewhere, was adopted as the cost of production and this method of accounting was followed in the return. The Income-tax Officer accepting this method, assessed the income at Rs. 82,623. The assessee preferred an appeal on other grounds to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner was of opinion that the true income of the assessee could not be deduced from the method of accounting followed by him and accepted by the Income-tax Officer and issued a notice under s. 31(3) of the Indian Income-tax Act and after hearing the assessee fixed his assessable income at Rs. 1,11,616 by applying the provisions of Rule 33 of the Indian Income-Tax Rules. The assessee appealed to the Appellate Tribunal and the Tribunal, relying on a recent decision of the Bombay High Court, held that the Appellate Assistant Commissioner had no jurisdiction to enhance the income in the way he did and referred the matter to the High Court at the instance of the appellant. The High Court held against the appellant and he appealed. The questions for decision were whether it was open to the Appellate Assistant Commissioner in exercise of his powers under S. 31(3) of the Act to reject the method of accounting, followed by the assessee and accepted by the Income-tax Officer, under the proviso to s. 13 of the Act, and compute the income, profits or gains of the assessee under Rule 33 of the Rules.
Held, (per S. K. Das and Kapur, jj., Bhagwati, J., dissenting) that the questions must be answered in the affirmative and the appeal must succeed.
There is nothing in s. 31, read with the proviso to s. 13 of the Indian Income-tax Act which prevents the Appellate Assistant Commissioner, in, an appeal preferred by the assessee, from exercising the powers which the Income-tax Officer can exercise under the proviso to s. 13 of the Act.
Although it is for the Income-tax Officer, in the first instance, to decide what would be the correct method of accounting under the proviso in a particular case, he has, in doing so to act reasonably and judicially and 690 not subjectively or arbitrarily and any decision he may arrive at cannot be treated as final. Neither s. 13 nor the proviso imposes any limitation on the wide powers conferred on the Appellate Assistant Commissioner by s. 31(3) of the Act once be is in proper seizin of the matter.
Narrondas Manordass, Bombay v. Commissioner of Income-tax, [1957] 31 I.T.R. 909, approved.
K. F. Vakeel v. The Commissioner of Income-tax, I.T. Reference NO. 21 of 1950, Bombay High Court, dissented from.
Case-law discussed.
The Appellate Assistant Commissioner has also, the power in an appeal to apply the provisions of Rule 33 of the, Indian Income-tax Rules for the purpose of a correct computation of the assessee's income although the Income-tax Officer has not done so.
Per Bhagwati, J.-The difference in the language of the two conditions, on the fulfillment of which the method of accounting regularly employed by the assessee can be rejected under the proviso to s. 13 of the Indian Income-tax Act clearly indicates that the Legislature intended that any determination as to the second condition, namely, that the income, profits and gains of the assessee cannot be properly deduced from the method regularly employed by him, must be of the Income-tax Officer alone and no other authority described in the hierarchy of Income-tax authorities and defined by the Act.
K. F. Vakeel v. The Commissioner of Income-tax, I.T. Reference NO. 21 Of 1950, Bombay High Court, approved.
Nor are the powers of the Appellate Assistant Commissioner under s. 31(3) Of the Act, in however wide terms they may have been described, absolute in character being circumscribed, as they necessarily are, by the nature of the proceedings before him and are limited to the subject-matter of the assessment.
Narrondas Manordass, Bombay v. The Commissioner of Incometax, Bombay, [1957] 31 I.T.R. 909, referred to.
Case-law discussed.
Section 31(3) of the Act has, therefore, to be read along with s. 13 and its proviso and so read there can be no doubt the Appellate Assistant Commissioner has no power in appeal to nullify the power which the Income-tax Officer alone has under the proviso. He has no power to reject the method of accounting regularly employed by the assessee suomotu. If he thinks that the Income-tax Officer was in error in accepting that method as the proper method for computing the assessee's income what he can do is to set aside the assessment and direct the Income-tax Officer to make a fresh assessment under s. 31(3)(b) of the Act. Nor can he in exercising his power of enhancing the assessment under s. 31 (3)(a) exercise the power under the proviso to s. 13 which is solely vested in the Incometax Officer.
691 The questions must, therefore, be answered in the negative.
CIVIL APPELLATE JURISDICTION. Civil Appeal No. 29 of 1955.
Appeal by special leave from the judgment and order dated the 14th March, 1953, of the Bombay High Court in Income-Tax Reference No. 27 of 1952.
C. K. Daphtary, Solicitor-General of India, G. N.Joshi and R. H. Dhebar, for the appellant.
N. A. Palkhivala, J. B. Dadachanji, S. N. Andley Rameshwar Nath and P. L. Vohra, for the respondents' 1957 October 16. The judgment of S. K. Das and J. L. Kapur JJ. was delivered by S. K. Das J. Bhagwati J. delivered a separate judgment.
S. K. DAS J.--This is an appeal by special leave from the judgment and order of the High Court of Judicature at Bombay, dated March 4, 1953, in Income-tax Reference No. 27 of 1952, by which the said High Court answered certain questions of law referred to it in the negative. The answer to those questions depends upon the true scope and effect of certain provisions of the Indian Income-tax Act (XI of 1922), hereinafter referred as the Act, regarding which there has already been a difference of opinion between two High Courts in India. Unfortunately, we have come to a conclusion different from that of our learned senior brother Bhagwati J., and we are explaining in this judgment, as briefly and clearly as we can., the grounds on which our conclusion is founded.
Very briefly put, the relevant facts are these. The assessee, respondent before us, is a non-resident company which has its head office in London and branches in India.
It sells and publishes books and magazines in various parts of the world. For the assessment year in question, it submitted a return of income in which with regard to all publications sold in India, whether printed in India or elsewhere, a fixed percentage of what was known as the marked price was adopted as the cost of production. This, if one may so put it, was the method of accounting on which the assessee company submitted its return. The 88 692 Income-tax Officer apparently accepted it and subject to certain minor modifications as respects some items of expenditure and an alleged bad debt with which we are not now concerned, assessed the assessee on an income of Rs.
82,623. The assessee appealed to the Appellate Assistant Commissioner. The latter issued a notice under s. 31(3) of the Act against the assessee, and after hearing the assessee, enhanced the assessment of the assessee company's business income to Rs. 1,11,616. The Appellate Assistant Commissioner found:
" It is noticed that on total turnover of Rs. 16,01,973 for the previous year ending 30th May, 1943, the gross profit amounted to Rs. 4,09,360 working out to just about 25.5 per cent. In the case of World profit and loss account I find that the gross profit earned was pound 231,070 on total sales of pound 628,000 working out to over 37 per cent. The difference in gross profit is so wide that some explanation had to be called for from the appellants, especially in view of the fact that the appellants do not maintain what should be called an Indian trading and profit and loss account on the same lines as the World trading and profit and loss account. The profit and loss account maintained in India shows only the purchases at the rate at which these were charged to the Indian branches by the London head office instead of the real cost of these publications." He was of the view that inasmuch as the fixed percentage of the marked price adopted by the assessee company as the production cost for its publications sold in India did not correctly represent the actual cost of production, the method of accounting regularly employed is such that a true figure of income, profits and gains is not deducible there from. He fixed the income of the assessee company on the basis of the net world profit of the assessee on its world turnover, and applying that basis to its Indian business came to the conclusion that the income of the assessee was Rs. 1, 1 1,616. He did so presumably under the proviso to s. 13 and R. 33 of the Indian Income-tax Rules, 1922.
693 The assessee company then appealed to the Appellate Tribunal. The Appellate Tribunal remanded the case to the Appellate Assistant Commissioner, but before the remand could be decided came the decision of the Bombay High Court in K. F. Vakeel v. The Commissioner of Income-tax (1). The Tribunal then held that in view of that decision, the Appellate Assistant Commissioner had no jurisdiction to enhance the income to Rs. 1,11,616. Thereafter, the Commissioner of Income-tax, Bombay City, appellant before us, asked the Tribunal to submit certain questions of law to the High Court of Bombay. These questions were" (1) Whether it is open to an Appellate Assistant Commissioner on appeal to reject the assessee's books of account, which have been accepted by the Income. tax Officer ? (2) Whether it is open to an Appellate Assistant Commissioner on appeal to invoke the provisions of Rule 33 of the Indian Income-tax Rules for the purpose of computing the income of a non-resident, the Income-tax Officer not having done so ? (3) Whether it is open to an Appellate Assistant Commissioner on appeal to enhance an assessment in exercise of the powers conferred upon him by section 31(3)(a) of the Indian Income-tax Act, where as a result of definite information he is of opinion that the income of the assessee has been under-assessed?" By its judgment and order dated March 4, 1953, the High Court answered the first two questions in the negative and held-rightly in our view-that the third question did not arise. The appellant then asked for and obtained special leave to appeal from the said judgment and order of the Bombay High Court.
The first question appears to us to have been somewhat widely framed and, in the terms in which it has been expressed, is not confined to the method of accounting referred to in s. 13 of the Act. The Income-tax Officer, even when he accepts the assessee's method of accounting, is not bound by the figure of profits shown in the accounts.
If and when an appeal is taken by the assessee to the Appellate Assistant Commissioner, (1) I.T. Reference No. 21 of 1950, Bombay High Court.
694 the latter can re-examine the books of account to test the correctness of the assessment made. It is not disputed before us that 'accounts' must be distinguished from the 'method of accounting'. Section 13 and its proviso are concerned with the method of accounting. In the context of the statement of the case,, however, the first question really means this: is it open to the Appellate Assistant Commissioner, on an appeal preferred by the assessee, to reject for the first time the method of accounting, purporting to act under the proviso to s. 13 of the Act, on the ground that the income, profits and gains cannot be properly deduced there from, when the Income-tax Officer although he has not expressly said so must be taken to have accepted the self-same method of accounting ? The answer to the question depends on a correct interpretation of ss. 13 and 31 of the Act. We shall first read s. 13 of the Act:
" 13. Income, profits and gains shall be computed, for the purposes of sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee:
Provided that, if no method of accounting has been regularly employed, or if, the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine." The section enacts that for the purposes of s. 10 (profits of business, profession or vocation) and s. 12 (income from other sources) income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. The choice of. the method of accounting lies with the assessee; but the assessee must show that he has followed the method regularly for his own purposes. The section and the proviso read together clearly make such a method of accounting regularly employed by the assessee a compulsory basis of computation unless, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced there from 695 If the true income, profits and gains cannot be ascertained on the basis of the assessee's method, or where no method of accounting has been regularly employed, the income must be computed upon such basis and in such manner as the Incometax Officer may determine.
Thus far, there is no divergence of opinion as to the true scope and effect of s. 13 and its proviso. The divergence starts when s. 13 is read along with s. 31, and we come to the powers of the Appellate Assistant Commissioner. Section 31, in so far as it is relevant for our purpose, is in these terms:
" 31(3). In disposing of an appeal, the Appellate, Assistant Commissioner may, in the case of an order of assessment,-(a) confirm, reduce, enhance or annul the assessment, or (b) set aside the assessment and direct the Income-tax Officer to. make a fresh assessment after making such further inquiry as the Income-tax Officer thinks fit or the Appellate Assistant Commissioner may direct, and the Incometax Officer shall thereupon proceed to make such fresh assessment, and determine where necessary the amount of tax payable on the basis of such fresh assessment.
Provided that the Appellate Assistant Commissioner shall not enhance an assessment or a penalty unless 'the appellant has had a reasonable opportunity of showing cause against such enhancement;
Provided further that at the hearing of any appeal against an order of an Income-tax Officer the Income-tax Officer shall have the right to be heard either in person or by a representative." On one side, the argument on behalf of the appellant is that s. 31 does not in any way limit or circumscribe the power of the Appellate Assistant Commissioner so as to exclude from the ambit of his jurisdiction the power given by s. 13 and its proviso; on the other side, the argument for the respondent is that by reason of the terms of the proviso, particularly 696 the expression "in the opinion of the Income-tax Officer" occurring therein, the power or duty of rejecting the method of accounting on the ground that the income, profits and gains cannot properly be deduced therefrom is given to the Income-tax Officer alone and not to any other authority in the hierarchy of authorities mentioned in s. 5 of the Act.
Ancillary to the aforesaid two main contentions, there is a further divergence of opinion as to whether the determination of the Income-tax Officer under the proviso to s. 13, in so far as such determination depends on his opinion, is final or not. On behalf of the appellant it is contended that it is not final--whether the determination is in favour of the assessee or not--provided an appeal is preferred by the assessee and the Appellate Assistant Commissioner gets seizin of the assessment. For the respondent, the argument is that it is final when the determination is in favour of the assessee, even if the assessee prefers an appeal on any other ground; but it is not final if the determination is against the assessee and the assessee appeals against that determination. These are the rival contentions which now fall for consideration.
Learned counsel for the respondent has drawn a distinction between what he called at one stage of his arguments (i) an objective determination by the Income-tax Officer-a determination based on certain objective facts and leading to certain consequences for or against the assessee and (ii) a small category of cases where the determination is purely subjective and results in certain consequences for or against the assessee. Learned counsel has expressed the same argument in less philosophical terms by saying that in one class of cases, the determination is by whosoever may be the assessing authority at the initial or appellate stage, and in the other by a named authority only. According to him, into the first class of cases the entire hierarchy of Income-tax authorities are included; but in the second class of cases, the decision must be that of the named authority only. He has referred us to certain other sections of the Act where, according to him, the determination is also subjective, such as-s. 4A (a) (iv), 697 a.10(2)(vi), s. 12B(2), s. 23A, etc. In some other sections, it is pointed out, two or more authorities are named, e.g., ss. 27, 38, 48, etc. By what we must admit is a very adroit and plausible piecing together of some of these sections, learned counsel has built up his argument that in the present case the opinion of the Income-tax Officer that the income, profits and gains can be properly deduced from the method of accounting regularly employed by the assessee is a subjective determination of the Income-tax Officer alone, and the opinion of no other officer or authority can be substituted there for. The Appellate Assistant Commissioner had, therefore, no jurisdiction to go behind that opinion.
We are unable to accept this line of argument as correct, and our reasons are these. Firstly, we think that learned counsel is reading more into the expression " in the opinion of the Income-tax Officer, occurring in the proviso to s. 13 than what is warranted by the language used. Whether the method of accounting is regularly employed or not is undoubtedly a matter which the Appellate Assistant Commissioner can go into when he has seiz in of the appeal.
It is not challenged that if the Income-tax Officer decides against the assessee and determines that the income, profits and gains cannot properly be deduced from the assessee's method of accounting, the determination is liable to be set aside on appeal by the assessee. What then is the reason for holding that a subjective determination or the determination of a named authority (whatever expression may be used) is inviolate in one case but not so in the other ? We have carefully examined the other sections of the Act to which learned counsel for the respondent has referred; but we are unable to agree with him that the language used therein supports the very subtle distinction that he has drawn. Let us take, for example, s. 23 which deals with assessment. Under sub-s. (3), the Income-tax Officer assesses the total income of the assessee and determines the sum payable on the basis of such assessment; under sub-s. (4)the Incometax Officer the assessment to 698 the "best of his judgment"-an expression much stronger than ,in the opinion of the Income-tax. Officer." It is not disputed that in an appeal from an assessment under s. 23, the Appellate Assistant Commissioner can interfere with the determination or judgment of the Income-tax Officer, and in such an appeal the Appellate Assistant Commissioner can make his own assessment and exercise the power which the Incometax Officer could exercise. Since 1939 an appeal lies from a " best of judgment " assessment made under sub-s. (4) of s. 23, but the right is restricted to " the amount of income assessed or the amount of tax determined." Why can he not then interfere with the opinion of the Income-tax Officer under the proviso to s. 13 ? It is contended that both subss. (3) and (4) of s. 23 prescribed objective conditions for the exercise of the power referred to therein. It is true that under both sub-sections the. Assessment must be a fair and honest estimate an not arbitrary or capricious. Apart from that, however, we do not see what other distinctive, objective conditions there are which put those sub-sections in a different category.
The words 'in the opinion of the Income-tax Officer' are not to be construed in the sense of a mere discretionary power;
but in the context of the words used in the proviso to s. 13 they impose a statutory duty on the Income-tax Officer to examine in every case the method of accounting and to see (i) whether or not it is regularly employed and (ii) to determine whether the income, profits and gains can properly be deduced there from. Section 30 of the Act gives the assessee a right of appeal in respect of certain orders including an order of assessment made under s. 23. Section 31 deals with the hearing of an appeal and powers of the Appellate Assistant Commissioner. Before disposing of the appeal, the Appellate Assistant Commissioner may, if he thinks fit, make a further enquiry himself or cause it to be made by the Income-tax Officer, and in disposing of the appeal he may, in the case of an order of assessment, confirm, reduce, enhance or annul the assessment: he may set it aside and order a fresh 699 assessment. There is nothing in the language of s. 31 of the Act which imposes any restriction on the powers of an Appellate Assistant Commissioner so as to prevent him from exercising the power under the proviso to s. 13. The restriction, if any, must be inferred from the language of the proviso itself. It is contended that the use of the words " in the opinion of the Income-tax Officer " in the second part of the proviso to s. 13 suggests a complete elimination of the Appellate Assistant Commissioner's jurisdiction to decide for the first time that the method of accounting is such that the income, profits and gains cannot be properly deduced there from. It is true that the decision as to the method of accounting is to be arrived at first by the Income-tax Officer after a careful scrutiny of the accounts whether they are simple or complicated, and the power is to be reasonably and judicially exercised, which excludes any subjective or arbitrary decision by the Incometax Officer. It cannot, however, be said that a power so exercised is clothed with finality and would be excluded from review by the Appellate Assistant Commissioner; and in reviewing the order the appellate authority can exercise the same powers which the Income-tax Officer could exercise.
Our attention has been drawn to the difference in language in which the two conditions for the application of the proviso have been expressed; the first condition is fulfilled if no method of accounting is regularly employed ;
the second condition, however, requires an opinion, viz., the opinion of the Income-tax Officer that the income, profits and gains cannot be properly deduced from the method of accounting regularly employed. It is pointed out that the first condition involves an objective determination-not by any named authority but by any and every authority which may have to consider whether the condition as to the regularity of the method employed has been fulfilled or not;
whereas the second condition involves a determination by a named authority. The argument is that by reason of the aforesaid difference in language, the Legislature clearly intended that the opinion of no, other officer can be substituted for the, 89 700 opinion of the named authority, viz., the Income-tax Officer, with regard to the fulfilment of the second condition ; therefore, once the Income-tax Officer accepts the method of accounting as proper, the Appellate Assistant Commissioner has no jurisdiction to go behind that opinion.
We are unable to accept this argument as correct. It is to be remembered that with regard to both conditions, the first and initial duty is that of the Income-tax Officer to determine whether the conditions or any of them are fulfilled ; secondly, if the opinion of the Income-tax Officer with regard to the second condition is to be inviolate by reason of the difference in language, then it should be inviolate in all cases. Why should it be inviolate in one case and not so when the assessee appeals against a determination made adverse to him ? We feel that the second condition is expressed in the terms in which it has been expressed, because it involves an inferential process and the expression 'in the opinion of the Income-tax Officer' is aptly used as that officer must in the first instance make the determination. It does not necessarily follow that the Appellate Assistant Commissioner cannot revise the determination and exercise the power which the Income-tax Officer could exercise.
A reference was also made by counsel for the respondent to the definition of 'Appellate Assistant Commissioner' and 'Income-tax Officer' in ss. 2(3) and 2(7) of the Act. These definitions do not carry the matter any further; because in order to determine the scope of the powers of the Appellate Assistant Commissioner, ss. 30 and 31 must be looked at and they will govern appeals, unless those powers are cut down by the words of ss. 2(3) and 2(7) or any other provision of the Act.
Another distinction which learned counsel for the respondent has drawn with regard to the finality of the determination of the Income-tax Officer under the proviso to s. 13 is this: he has said that where the Income-tax Officer determines that the method is unacceptable in the sense that income, profits and gains cannot be properly deduced there from, there is 701 a, decision; where, however, he does not so decide, there is no decision, and it is merely a case of non exercise of power. This distinction learned counsel for the respondent has drawn in order to get over the anomaly that follows in holding that in one case the determination is final and in another case it is not so. We are not at all impressed by this distinction. For one thing the distinction is much too subtle, then again, looked at from the proper standpoint, a non exercise of the power under the proviso is also a, decision inasmuch as it amounts to an acceptance of the method of accounting on the ground that the income, profits and gains can be properly deduced there from. In the instant case the Income-tax Officer has looked into the accounts and the computation on the basis of the method employed has been adopted by him.
Lastly, it seems to us clear that the answer to the question is provided by the language of s. 31. As observed by Chagla C. J. in M/s. Narrondas Manordass Bombay v. Commissioner of Income-tax (1), the language is wide enough to enable the Appellate Assistant Commissioner to " correct the Income-tax Officer not only with regard to a matter which has been raised by the assessee but also with regard to a matter which has been considered by the income-tax Officer and determined in the course of the assessment." We are unable to accept the argument that the proviso to s. 13 imposes a limitation on the powers of the Appellate Assistant Commissioner under s. 31. No doubt, the two sections must be read harmoniously; but s. 13 and its proviso contain no words of limitation or qualification upon the power of the Appellate Assistant Commissioner in enhancing the assessment or setting aside the assessment and directing a fresh assessment to be made by the Income-tax Officer. Dealing with the powers of the Appellate Assistant Commissioner Chagla C.J. in Narrondas's case (1) said:
" It is clear that the Appellate Assistant Commissioner has been constituted a revising authority against the decisions of the Income-tax Officer; a revising authority not in the narrow sense of revising what is (1) [1957] 31 I.T.R. 909.
702 the subject-matter of the appeal, not in the sense of revising those matters about which the, assessee makes a grievance, but a revising authority in the sense that once the appeal is before him he can revise not only the ultimate computation arrived at by the Income-tax Officer but he can revise every process which led to the ultimate computation or assessment. In other words, what he can revise is not merely the ultimate amount which is liable tax, but he is entitled to revise the various decisions given by the Income-tax Officer in the course of the assessment and also the various incomes or deductions which came in for consideration of the Income-tax Officer." We are in agreement with these observations.
The substance of the matter as it appears to us is this: the proviso to s. 13 uses the expression " in the opinion of the Income-tax Officer" merely because, in the first instance, it will fall on the Income-tax Officer to determine after considering the method of accounting regularly employed whether income, profits and gains can be properly deduced there from, in the same way as any other question of fact has to be determined initially by the Income-tax Officer; the Legislature has not drawn any such nice distinction between objective and subjective determination as is sought to be made out by learned counsel for the respondent. Lastly, the proviso to s. 13 does not import any limitation 'on the power of the Appellate Assistant Commissioner under s. 31 and the latter section gives the Appellate Assistant Commissioner power to revise every process which leads to the ultimate computation or assessment.
Two other points also require notice at this stage. In the course of the arguments before us, a reference was made to s. 33B, which was inserted by the Income-tax and Business Profits Tax (Amendment) Act, 1948. There can be no doubt that, in view of the language used in is. 33B, the Commissioner of Income-tax may interfere with any order of the Income-tax Officer, including a determination under the proviso to S. 13, provided the other conditions of the section are fulfilled. Section 33B runs counter to the contention 703 that a determination under the proviso to s. 13 is a subjective determination or a determination of a named authority, which is inviolate in character. Any such construction as is contended for by the respondent will render this section nugatory.
The other point is this: assume that a determination under the proviso to s. 13 in favour of the assessee can be gone into by the Appellate Assistant Commissioner when the assessee prefers an appeal on some other ground, and assume also that the Appellate Assistant Commissioner can set aside the assessment if he finds that the Income-tax Officer has not applied his mind to the proviso or has wrongly held that from the method of accounting, the income, profits and gains can be properly deduced; what can he (lo then.? Can be act under the proviso himself and determine the question or must he only direct the Income-tax Officer to apply his mind afresh to the proviso ? On one side, there is the language of the proviso, and on the other the language of s. 31 which gives wide power to the Appellate Assistant Commissioner.
At first sight, there may appear some conflict between the two. But on a closer scrutiny there is, we think, no conflict. As we have said before, the language of the proviso means only this that, in the first instance, the Income-tax Officer must form his own opinion as to whether the income, profits and gains can be properly deduced from the method of accounting regularly employed, if any ; but if he fails to apply his mind to the proviso or comes to a wrong determination for or against the assessee in the computation of the income, the Appellate Assistant Commissioner can correct the error in computation, provided he has seizin of the assessment on an appeal filed by the assessee. If the assessee files no appeal, the Appellate Assistant Commissioner does not come into the picture, because the Revenue has no right of' appeal from an assessment made by the Income-tax Officer. Whether in a particular case, a remand will be the proper order or whether the error can be corrected by the Appellate Assistant Commissioner himself will depend on the circumstances of each case. If it be held that the Appellate Assistant 704 Commissioner can only set aside the assessment in such circumstances, an impossible result may follow. If the Appellate Assistant Commissioner holds that from the method of accounting the income, profits and gains cannot be properly deduced, let us assume that the only order he can pass is to set aside the assessment and direct the Incometax Officer to make a fresh assessment. But if the opinion of the Income-tax Officer is the only opinion which determines the matter, the Income-tax Officer may adhere to his opinion. That will result in a deadlock. If the proviso to s. 13 does not impose any limitation on the power of the Appellate Assistant Commissioner, as we hold it does not, then the Appellate Assistant. Commissioner has the power to correct the error in the way most suitable in the circumstances of the case, provided he acts within the ambit of his power under s. 31 of the Act. Section 31 (3) does not in terms say that the power to vary the assessment including the power to enhance it is subject to ally limitation.
We have so far dealt with the questions at issue untrammelled by any authorities. We now turn to such authorities as have been placed before us. We take up first the decision in K. F. Vakeel v. The Commissioner of IncomeTax (1). The facts of that case were these: the assessee carried on a business of loading and unloading ships from January 1, 1943 to June 30, 1944. On July 1, 1944, the assessee entered into a partnership with his brother. The assessee maintained his accounts on the cash basis and his accounting year was the calendar year. For the calendar year 1943 he was assessed to income-tax on his accounts which as stated were maintained on cash basis. On July 1, 1944, when the firm of the assessee and his brother came into existence the position was that there were out standings to the extent of Rs. 2,13,306 and there were liabilities to the extent of Rs. 86,650. Between July 1, and December 31, 1944, the assessee recovered Rs. 202,209 and he discharged the liabilities to the extent of Rs. 86,650. Therefore, the nett amount that he realised between July 1 and December 31, 1944, was Rs. 1,15,559. It is this amount (1) i.t. reference No.21 of 1950 705 which was the subject-matter of the reference. The contention of the assessee was that as this amount was realised after he ceased to do business, it was a capital receipt which was not subject to tax. His further contention was that as he kept his accounts on cash basis, this amount could not be included in his accounts of the business done from January 1 to June 30, 1944, inasmuch as this amount was not realised during that period but was realised during a period subsequent to the period for which accounts were kept. When the matter went before the Appellate Assistant Commissioner, he took the view that the assessee continued to carry on the business till December 31, 1944; he also held that a sum of Rs. 2,13,306 was recovered from July 1 to December 31, 1944, and not a sum of Rs. 2,02,209 as alleged by the assessee. When the assessee appealed to the Tribunal from the decision of the Appellate Assistant Commissioner, his contention regarding the sum of Rs. 2,02,209 was upheld by the Tribunal. His contention with regard to the termination of his business was also upheld by the Tribunal and the Tribunal held that the business came to an end on June 30, 1944, and not on December 31, 1944. The assessee further contended before the Tribunal that the nett amount of Rs. 1,15,559 which he realised was a capital receipt and not a revenue receipt.
The Tribunal came to the conclusion that the assessee should be assessed not on the cash basis but on the accrual basis and, according to the Tribunal, the sum of Rs. 1, 15,559 had accrued to the assessee during the period of accounts, viz., January 1, 1944, to June 30, 1944, and therefore it was subject to tax. The Tribunal took the view that it was not possible to discover the profits made by the assessee if the accounts were maintained on cash basis and therefore the proper method of accounting was the mercantile, that is, the accrual basis and not cash basis. The decision of the High Court was based on two grounds: first, the Tribunal was wrong in forming an opinion suo motu that the cash basis was not the proper basis from which income, profits and gains can be properly ascertained, because it was not for the tribunal to form an 706 opinion on that question at all; secondly, there was nothing before the Tribunal which could justify it in coming to the conclusion that the Income-tax Officer was not in a position to deduce the income, profits and gains from the method of accounting adopted by the assessee. The actual decision can be easily supported on the second ground itself, because the Tribunal committed an error of law in coming to a finding on no material or evidence. Indeed, the learned AdvocateGeneral appearing for the Revenue, conceded in that case that in view of the state of the record it was not possible for him to contend that the Tribunal's decision was correct and further the Tribunal was in error in holding that the assessee could be compelled to adopt the accrual basis in keeping his accounts and give up the cash basis which he had regularly maintained in the past. While, therefore, the actual decision in the case was undoubtedly correct, we are unable to accept as correct the following further observations in connection with the first ground :
" But it is for the Income-tax Officer, who is the assessing officer, to be dissatisfied with the method of accounting regularly adopted by the assessee. If he' found no difficulty in assessing the income, profits and gains from the method of accounting regularly adopted by the assessee, then it is not for any other authority to come to a different conclusion. It may be that if an opinion is formed by the Income-tax Officer that opinion may be subject to an appeal to the Appellate Assistant Commissioner or the Tribunal; but in the first instance an opinion has to be formed by the Income-tax Officer as required by the proviso." While we agree that, in the first instance, the Income-tax Officer as the first assessing officer has to form an opinion about the applicability of the proviso to s.
13, we do not agree that it is not open to any other authority, which is lawfully in seizin of the order of assessment of which the method of accounting under s. 13 is only a part, to come to a different conclusion with regard to the applicability of the proviso. Let us examine this point a little more 707 closely. The Income-tax Officer may proceed in one of three ways-(1) he may fail to apply his mind to the statutory duty imposed on him by s. 13 and its proviso and may accept the assessee's method of accounting without at all considering if (a) the method was regularly employed and (b) if the income, profits and gains of the assessee can be properly deduced therefrom; (2) he may apply his mind and decide in favour of the assessee that the method is both regular and acceptable (in the sense that income, profits and gains can be properly deduced therefrom) ; or (3) he may decide against the assessee and hold that the method is either not regularly employed or is unacceptable. In the first case, there is a, failure to perform a statutory duty and it has not been seriously disputed that the appellate authority can direct the Income-tax Officer to perform that duty. This is supported by high authority to which we shall presently refer. In the third case, it is conceded that the appellate authority can interfere and set aside the opinion or determination of the Income-tax Officer, and in doing so the appellate authority must form his opinion if the method of accounting is proper and acceptable. The dispute or divergence of opinion relates only to the second case and to a part of it only, because it is not disputed that the finding as to whether the method of accounting is regularly employed or not is an objective determination which the appellate authority can revise. Both the Appellate Assistant Commissioner and the Appellate Tribunal have wide powers to go into questions of fact and law, the Appellate Assistant Commissioner under s. 31(3) and the Appellate Tribunal under s. 33(4). Even the Commissioner can revise an order of the Income-tax Officer under s. 33B in certain circumstances stated therein. We see no justification for holding that these powers, so widely expressed by the statute, become ineffective in one particular case only, namely, when the determination or opinion is in favour of the assessee as respects the propriety of the method of accounting. It is true that the Revenue has no right of appeal under s. 30, but hat is not a decisive circumstance.
The assessee can 90 708 make any order of assessment by the Income-tax Officer final by not appealing therefrom-whether the order is based on a subjective or objective determination. The point is not what happens when there is no appeal ; but the point is when the appellate authority is lawfully in seizin of the matter, what powers it can exercise.
We are, therefore, of the view that though Vakeel's case, (1) was rightly decided, some of the reasons given in support of the decision are not correct in law.
Next comes the decision of the Punjab High Court in Oriental Building and Furnishing Company v. Commissioner of Incometax (2) where a view contrary to that of the Bombay High Court was taken. Though we hold that the conclusion arrived at in this decision is correct, there is no detailed discussion in the judgment of the issues involved, except the bare statement that the powers of the Appellate Tribunal under s. 33 are very wide.
Apart from the aforesaid two decisions which directly bear on the question under our consideration, there are some other decisions which have an indirect but not a decisive bearing on the question. First, in order of priority, is the decision of the Privy Council in Commissioner of IncomeTax v. Sarangpur Cotton Manufacturing Co. Ltd. (3). In that case, the assessees had for years past adopted regularly the method of valuation of stocks by taking some price well below both cost and market price and they followed this method in the relevant accounting year. The object of this striking under-valuation was the creation of a " secret reserve " which involved the retention of profits so as not to be included in the profits shown to the shareholders by the profit and loss account and the balance sheet, but which constituted part of the taxable profits. The Income-tax Officer, without applying his mind to the question whether the true profits could be deduced from the method of accounting regularly employed by the assessees, accepted the accounts and held the assessees bound by the figure of profit shown in the accounts. The Privy Council held that the 709 profit shown in the profit and loss account and the balance sheet was not the true figure for income-tax purposes and the Income-tax Officer could not reasonably conclude that the true profits could be properly deduced from a gross under-valuation. It is clear from the decision that their Lordships proceeded on the footing that the Income-tax Officer had failed to perform the statutory duty imposed on him; they amended the question accordingly, answered it in the negative, and directed that it would be for the Incomes Officer to proceed to the proper discharge of his duty under s. 13. The decision is clear authority for the view that where there has been a failure to perform the statutory duty imposed on the Income-tax Officer under s. 13 of the Act, his order is liable to be set aside, even though he may have accepted the accounts and held the assessee bound by the figure of profit shown in the accounts.
There are a number of decisions where it has been held that an order of the Income-tax Officer under the proviso to s. 13 against an assessee is liable to be set aside on appeal.
We need only mention some of them here: see Lala Sarju Prasad In re (1); Pearey Lal Shukla of Cawnpore In re (2);
and Commissioner of Income-Tax v. Kameshwar Singh of Darbhanga (3). In these cases, it was held that the determination of the Income-tax Officer under the proviso to s. 13 did not exempt his computation from examination on appeal, and the Appellate Assistant Commissioner had jurisdiction, in an appeal against an assessment under the proviso to s. 13, to substitute a different method of computation.
Lastly, we refer to a few only of the decisions in which the power of the Appellate Assistant Commissioner under s. 31 has been held to be confined to the subject-matter of the assessment appealed against, so that he has no power to enhance the assessment by assessing new sources of income:
Jagarnath Therani v. Commissioner of Income-Tax (4) Gajalakshmi Ginning (1) [1943] 11 I.T. R. 525.
(3) A.I.R. 1933 P.C. 108.
(2) [1942] 10 I.T.R. 239.
(4) (1925) 21 T.C. 4.
710 Factory v. Commissioner of Income-Tax (1); Chowdhury Sharafat Hussain v. Commissioner of Income-Tax (2). We do not think that these decisions touch the question at issue before us. The present is not a case where the Appellate Assistant Commissioner has traveled outside the ambit of his jurisdiction under s. 31 of the Act.
For the reasons given above, we would answer question No. 1 in the affirmative. As to question No. 2, only a few words are necessary. Rule 33 of the Indian Income-tax Rules, 1922, is in these terms:
" 33. In any case in which the Income-tax Officer is of opinion that the actual amount of the income, profits or gains accruing or arising to any person residing out of the taxable territories whether directly or indirectly through or from any business connection in the taxable territories or through or from any property in the taxable territories, or through or from. any asset or source of income in the, taxable territories, or through or from any money lent at interest and brought into the taxable territories in cash or in kind cannot be ascertained, the amount of such income, profits or gains for the purpose of assessment to income-tax may be calculated on such percentage of the turnover so accruing or arising as the Income-tax Officer may consider to be reasonable, or on an amount which bears the same proportion to the total profits of the business of such person (such profits being computed in accordance with the provisions of the Indian Income-tax Act) as the receipts so accruing or arising bear to the total receipts of the business, or in such other manner as the Income-tax Officer may deem suitable." A similar expression occurs in the rule :-"in any case in which the Income-tax Officer is Of opinion etc.". For the same reasons which we have given with regard to question No. 1, the answer to question No. 2 is also in the affirmative.
The appeal must, therefore, be allowed; the judgment and order of the High Court of Bombay dated (1) [1952] 22 I.T.R. 502. (2) [1956] 29 I.T.R. 759.
711 March 4, 1953, is set aside and the two questions referred to the said High Court are answered in favour of the Revenue. In view of the difficulty of interpretation and the divergence of opinion as respects the questions of law involved, we think that the parties must bear their own costs throughout.
BHAGWATI J.--This appeal with special leave from the judgment and order of the High Court of Judicature at Bombay raises an interesting question as to whether the power under the proviso to s. 13 of the Indian Income-tax Act (Act XI of 1922) hereinafter referred to as " the Act " of rejecting the method of accounting regularly employed by the assessee can be exercised by the Appellate Assistant Commissioner while hearing an appeal of the assessee under s. 31 of the Act, if the Income-tax Officer had not done so in the first instance.
The respondent is a limited company registered in England having its registered office at St. Martin Street, London.
In India it has its branches at Calcutta, Bombay and Madras.
The respondent publishes as well as sells books and magazines in various parts of the world. The Head Office and branches outside India invoice publications to the Indian branches not at cost but at a valuation which is 25% of the marked price for sterling publications and 30% of the marked price for currency publications For the purposes of computing the profits of its Indian branches, the respondent takes the said valuation as the cost of the publications.
For the assessment year 1944-45 the respondent was assessed under the Act as a non-resident company. Its year of account ended on April 30, 1943. In submitting its return of income for the said assessment year 1944-45 and in the assessment proceedings before the Income-tax Officer for that year, the respondent took the aforesaid invoice value as representing the cost of the books produced by it. The business Income returned by the respondent was Rs. 79,131.
By his assessment order dated March 24, 1945, the Income tax Officer accepted the method of accounting employed by the respondent and its books of account 712 for the Indian business. He,, however, added back certain items of expenses shown in the respondent's balance-sheet and profit and loss account and computed the income at Rs. 82,623 and disallowed the respondent's claim for a bad debt of Rs. 3,592.
The respondent appealed against the said disallowance to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner allowed the respondent's claim for bad debt.
He was, however, of the view that the assessee's method of accounting, viz., taking the aforesaid invoice value as representing the respondent's actual cost of production was such that the respondent's profits could not be properly deduced there from and issued notice to the respondent under the first proviso to s. 31(3) of the Act, calling upon the respondent to show cause why its assessment should not be enhanced. After hearing the respondent the Appellate Assistant Commissioner made an order dated November 10, 1948, calculating the Indian business profits of the respondent on an amount which bore the same proportion to the net world profits of the respondent's business as the Indian turnover bore to the world turnover and enhanced the Indian business income of the respondent by Rs. 1, 1 1,616.
The respondent preferred an appeal to the Income-tax Appellate Tribunal against this order of the Appellate Assistant Commissioner and contended inter alia that the Appellate Assistant Commissioner had no jurisdiction to discard the respondent's method of accounting and recomputing the respondent's Indian business profits in the manner he had purported to do and that in any event for the reasons mentioned by the respondent the margin of net world profits could not be applied to the Indian business. By its order dated April 29, 1950, the Tribunal remanded the case to the Appellate Assistant Commissioner with a direction that be should allow the respondent to prove the actual cost of the goods invoiced to and sold in India.
The Appellate Assistant Commissioner submitted his remand report in due course. In the meanwhile, however, the High Court had delivered its judgment in 113 K.F. Vakeel v. The Commissioner of Income-tax(1)to the effect that no authority other than the Income-tax Officer had jurisdiction to act tinder the proviso to s. 13 of the Act.
Relying upon that judgment, the respondent raised two contentions before the Tribunal and they were (a) that it was not competent to the Appellate Assistant Commissioner on appeal to reject the respondent's method of accounting which had been accepted by the Income-tax Officer and (b) that it was not competent to the Appellate Assistant Commissioner on appeal to compute the Indian business profits of the respondent under r. 33 of the Indian Income Tax Rules, the Income-tax Officer not having done so. The Tribuna accepted these contentions of the respondent and by its order dated October 16, 1951, allowed the appeal.
At the instance of the appellant, the Tribunal stated a case and referred the following questions of law to the High Court for its opinion under s. 66(1) of the Act:
" (1) Whether it is open to an Appellate Assistant Commissioner on appeal to reject the assessee's books of account, which have been accepted by the Incometax Officer? (2) Whether it is open to an Appellate Assistant Commissioner on appeal to invoke the provisions of Rule 33 of the Indian Income-tax Rules for the purposes of computing the income of a non-resident, the Income-tax Officer not having done so? (3) Whether it is open to an Appellate Assistant Commissioner on appeal to enhance an assessment in exercise of the powers conferred upon him by section 31(3) of the Indian Income-tax Act, where as a result of definite information he is of opinion that the income of the assessee has been under-assessed ? The said reference was heard by the High Court on March 4, 1953, and the High Court following its own decision in K. F.
Vakeel's case (supra), answered the referred questions Nos. 1 & 2 in the negative and stated that the referred question No. 3 did not arise.
(1) I. T. Reference No. 21 of 1950, Bombay High Court.
714 The appellant applied to the High Court for a certificate of fitness to appeal to this Court under section 66A(2) of the Act but without success. The appellant thereupon applied for and obtained from this Court special leave to appeal under Art. 136 of the Constitution.
The provisions of the Act and the rules framed there under that fall to be considered in this appeal are the following:
" Section 13 `Method of Accounting':
Income, profits and gains shall be computed for the purpose of sections 10 and 12 in accordance with the method of accounting regularly employed by the assessee:
Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced there from, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.
Section 31: Hearing of Appeal:
(3) In disposing of an appeal, the Appellate Assistant Commissioner may, in the case of an order of assessment :
(a) confirm, reduce, enhance or annul the assessment, or (b) set aside the assessment and direct the Income-tax Officer to make fresh assessment after making such further enquiry as the Income-tax Officer thinks fit or the Appellate Assistant Commissioner may direct, and the Incometax Officer shall thereupon proceed to make such fresh assessment, and determine where necessary the amount of tax payable on the basis of such fresh assessment...................................................
Provided that the Appellate Assistant Commissioner shall not enhance an assessment or a penalty unless the appellant has had a reasonable opportunity of showing cause against such enhancement; ................
715 Rule 33 of the Indian Income-Tax Rules, 1922:
"In any case in which the Income-tax Officer is of opinion that the actual amount of the income, profits or gains accruing or arising to any person residing out of the taxable territories whether directly or indirectly through or from any business connection in the taxable territories or through or from any property in the taxable territories, or through or from any asset or source of income in the taxable territories, or through or from any money lent at interest and brought into the taxable territories in cash or in kind cannot be ascertained, the amount of such income, profits or gains for the purposes of assessment to incometax may be calculated on such percentage of the turnover so accruing or arising as the Income-tax Officer may consider to be reasonable, or on an amount which bears the same proportion to the total profits of the business of such person (such profits being computed in accordance with the provisions of the Indian Income-tax Act) as the receipts so accruing or arising bear to the total receipts of the business, or in such other manner as the Income-tax Officer may deem suitable. " It is contended by the learned Solicitor-General for the appellant that even though no right of appeal is conferred upon the Revenue against an assessment order made by the Income-tax Officer, once the assessee carries an appeal before the Appellate Assist. ant Commissioner the assessment order is wholly robbed of its finality and the whole of the assessment is at large before the Appellate Assistant Commissioner with the result that it is then open to the Revenue to urge all the contentions which it could have done before the Income-tax Officer and ask the Appellate Assistant Commissioner to reopen the whole enquiry and, in effect, reassess the assessee and even enhance the assessment, provided of course, that the Appellate Assistant Commissioner shall not enhance the assessment unless and until he has afforded the assessee a reasonable opportunity of showing cause against such enhancement. It is further contended that the powers which the Appellate 91 716 Assistant Commissioner thus exercises are not circumscribed by any limitations and are unfettered and in the exercise of such powers it is competent to the Appellate Assistant Commissioner also to reject the method of accounting regularly employed by the assessee even though the Incometax Officer had not done so provided he, the Appellate Assistant Commissioner, is of the opinion that the method of accounting employed is such that the income, profits and gains cannot properly be deduced there from and in that event the Appellate Assistant Commissioner is also entitled to adopt the mode of computation of the income prescribed by r. 33 of the Indian Income-tax Rules.
It is, on the other hand, contended by the learned counsel for the respondent that the determination whether the method of accounting regularly employed by the assessee is such that the income, profits and gains cannot properly be deduced therefrom is within the exclusive province of the named authority, viz., the Income-tax Officer and such determination by the named authority is the condition precedent to a certain consequence following thereupon, viz., the rejection of the method of accounting regularly employed by the assessee. Such determination then cannot be substituted by that of another authority, though while entertaining an appeal at the instance of the assessee such authority might consider whether the named authority has correctly determined the question. Once the named authority has determined that the case does not fall within the proviso, no other authority has jurisdiction to determine that question and the main provision of s. 13 operates and the income, profits and gains of the assessee can only be computed for the purpose of ss. 10 and 12 in accordance with the method of accounting regularly employed by the assessee.
Not only is the Income-tax Officer bound in such a case to compute the income, profits and gains in accordance therewith by reason of the mandate contained in the main provision of s. 13 but the Appellate Assistant Commissioner also is similarly bound and the terms of s. 31(3) which gives the 717 Appellate Assistant Commissioner power even to enhance the assessment cannot be construed as abrogating or setting at naught the imperative terms of s. 13 and the proviso thereto which vest such power only in the named authority and no other.
There is paucity of authority on the construction of s. 13 of the Act. The High Court in deciding the reference in question relied upon an unreported judgment of its own delivered on October 11, 1950, in K. F. Vakeel v. The Commissioner of Income Tax and E. P. Tax (1). In that case the Tribunal for the first time came to the conclusion that it was not possible to discover the profits made by the assessee it' the accounts were maintained on cash basis and therefore the proper method of accounting was the mercantile, i.e., the accrual basis and not the cash basis, even though the Income-tax Officer had accepted the method of accounting regularly employed by the assessee and the Appellate Assistant Commissioner had concurred in the same.
The question that arose before the High Court was whether the Tribunal had jurisdiction to do so. The High Court construed the provisions of s. 13 of the Act and was of opinion that :
"....... it is for the Income-tax Officer to form the opinion that income, profits and gains cannot properly be deduced from the method adopted by the assessee and if such an opinion is formed by the Income-tax Officer then the computation of income, profits and gains has to be made upon such basis and in such manner as the Income-tax Officer may determine. But it is for the Income-tax Officer, who is the assessing officer, to be dissatisfied with the method of accounting regularly adopted by the assessee. If he found no difficulty in assessing the income, profits and gains from the method of accounting regularly adopted by the assessee then it is not for any other authority to come to a different conclusion. It may be that if an opinion is formed by the Income-tax Officer that opinion may be subject to an appeal to the Appellate Assistant Commissioner or the Tribunal; but in the first instance an opinion has to be formed by the Income tax Officer as required by the proviso." 718 On the facts of the case before it, no opinion had been formed by the Income-tax Officer that the method of accounting regularly employed by the assessee was not satisfactory. It was the Tribunal that suo motu came to the conclusion that cash basis was not the proper basis from which income, profits and gains could be properly deduced.
The High Court was of opinion that the Tribunal was clearly wrong in forming that opini
