Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, CALCUTTA
Vs.
RESPONDENT:
RAI BAHADUR HARDUTROY MOTILAL CHAMARIA
DATE OF JUDGMENT:
07/04/1967
BENCH:
RAMASWAMI, V.
BENCH:
RAMASWAMI, V.
SHAH, J.C.
SIKRI, S.M.
CITATION:
1968 AIR 153 1967 SCR (3) 508
CITATOR INFO :
R 1978 SC 40 (5,6)
ACT:
Indian Income-tax Act, 1922, s. 31-Powers of Appellate
Assistant Commissioner in appeal-Whether can enhance income
of assessee in respect of sources of income not considered
by Income-tax Officer for purpose of taxation.
HEADNOTE:
The account books of the respondent for the assessment year
1952-53 showed three sums of Rs. 2,50,000, Rs. 1,50,000 and
Rs. 30,000 as borrowed from parties in Nepal. The income-
tax Officer added these amounts to the total income of the
assessee as secret income falsely shown as loans. The
Income-tax Officer noted that the assessee had withdrawn at
Calcutta on March 31, 1952 a sum of Rs. 5,30,000 from a
Calcutta Bank and had sent a sum of Rs. 5,85,000 to his
Forbesganj branch on the same day to enable that branch to
pay Rs. 2,50,000 to one of the creditors. The transfer of
the money from Calcutta to Forbesganj on the same day was
considered by the Income-tax Officer to be a physical
impossibility. When the matter was in appeal before the
Appellate Assistant Commissioner, the latter not only
confirmed the addition of the -aforesaid loan amounts to the
income of the assessee but also held that the sum of Rs.
5,85,000 transferred from Calcutta to the Forbesganj branch
was also unexplained income of the assessee and after making
allowance for an earlier withdrawal added a further sum of
RS. 4,05,000 on this account to the assessed income of the
respondent. The Tribunal held that the Appellate Assistant
Commissioner had power to enhance the income as he did but
reduced the enhancement to Rs. 1,55,000. The High Court
however held, in -reference, that the Appellate Assistant
Commissioner had no power to make the addition as the sum of
Rs. 5,85,000 had not been considered by the Income-tax
Officer for the purpose of assessment. In appeal to this
Court,
HELD : The High Court was right. The power of enhancement
given to the Appellate Assistant Commissioner by s. 31(3) of
the Income-tax Act, 1922 is restricted to the sources of
income which have been the subject-matter of consideration
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by the Income-tax Officer from the point of view of
taxability. In this context ’consideration’ does not mean
’incidental’ or ’collateral’ examination of any matter by
the Income-tax Officer .in the process of assessment. [516G]
In the present case it was manifest that the Income-tax
Officer had not considered the entry of Rs. 5,85,000 from
the point of view of its taxability and therefore the
Appellate Assistant Commissioner had no jurisdiction in an
appeal under s. 31 of the Act to enhance the assessment.
[516F]
Commissioner of Income-tax, Bombay v. Shapoorji Pallonji
Mistry, 44 I.T.R. 891 followed.
Narrondas Manordass Bombay v. Commissioner of Income-tax,
Central, Bombay, 31 I.T.R. 909, Commissioner of Income tax
v. M/s. Mc-Milan & Co., [1958] S.C.R. 689, Commissioner of
Income-tax, Punjab v. Nawab Shah Nawaz Khan, 6 I.T.R. 370
and The King v. Income-tax Special Investigation
Commissioner ,[1936] 1 K.B. 487, considered.
509
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 535 of 1966.
Appeal by special leave from the judgment and order dated
March 26, 1964 of the Calcutta High Court in Income-tax
Reference No. 29 of 1961.
T. V. Vishwanath lyer, A. N. Kirpal, S. P. Navyar for R.
N. Sachthey, for the appellant.
S. T. Desai and R. C. Prasad, for the respondent.
The Judgment of the Court was delivered by
Ramaswami, J. This appeal is brought, by special leave, from
the judgment of the Calcutta High Court dated March 26, 1964
in Income-tax Reference No. 29 of 1961.
The respondent (hereinafter called the assessee) is an
individual carrying on business in Jute, Cloth and Films,
The assessment year is 1952-53, the corresponding accounting
year being the, calendar year 1951 for all business except
Katihar Cloth Importing Co. and the Jute Mills for which the
accounting year is financial year ending March 31, 1952.
During the year of account the assessee claimed that he had
borrowed three sums of Rs. 2,50,000, 1,50,000 and Rs. 30,000
from three parties from ,Nepal, Khara- Bahadur Nepali,
Jiwanmal Santockchand and Sohanlal Subhkaran respectively.
The Income-tax Officer added these amounts to the total
income of the assessee on the ground that the assessee had
inflated the purchase of raw jute. The Income-tax Officer
was not satisfied that these three loans were genuine loans
but considered that they represented secret profits made by
the assessee by inflating the purchase of raw jute. The
Income-tax Officer noted that die assessee had withdrawn at
Calcutta on March 31, 1952, a sum of Rs. 5,30,000 from a
Calcutta bank and had sent a sum of Rs. 5,95,000 to his
Forbesganj branch on the same day to enable that branch to
make payments including the repayment of Rs. 2,50,000 to Sri
Kharag Bahadur one of the alleged creditors noted above.
The Income-tax Officer discussed the impossibility of the
amount having reached Forbesganj branch in Bihar on the very
same day in order to enable discharge of the creditors there
on March 31, 1952. In regard to this amount of Rs. 5,85,000
the Income-tax Officer observed as follows
"On 31-3-1952 the Calcutta Office has
withdrawn Rs. 5,30,000 from the Bank and has
sent Rs. 5,95,000 to Forbesganj How the cash
has reached Forbesganj (in remote corner in
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North Bihar) on the same day to enable the
branch to make payments (including the sum of
Rs. 2,50,000 to Kharag Bahadur) is something
diffi-
510
Cult to understand even in these days of fast
travel. Lloyds Bank in Calcutta would not
have obliged the assessee by paying out cash
before 10 A.M. on 31-3-1952 and the only
available train leaves in the night. The
journey including the ferry trip o
ver the
broad ganges takes over 24 hours. Hence the
entries in the book cannot be taken to ’be
genuine."
The assessee took the matter in appeal to the Appellate
Assistant Commissioner and contended that the Income-tax
Officer should not have added the three items of Rs.
2,50,000, Rs. 1,50,000 and ’Rs. 30,000 to the total
assessable income. The Appellate Assistant Commissioner did
not agree with this contention and confirmed the addition of
Rs. 4,30,000. At the same time, the Appellate Assistant
Commissioner noticed the fact of the alleged transfer of Rs.
5,85,000 from Calcutta to Forbesganj on March 31, 1952 and
its credit in the accounts books of the latter branch on the
same date. The Appellate Assistant Commissioner considered
that the amount of Rs. 5,85,000 should also be included in
the total income of the assessee, but before doing so lie
gave the assessee a deduction of Rs. 1,80,000 being the
amount withdrawn earlier from the accounts of the two
creditors, namely, Jiwanmal Santokchand and Sohanlal
Subhkaran and added the balance of Rs. 4,05,000. This
addition by the Appellate Assistant Commissioner amounted to
an enhancement of the income which the Income-tax Officer
had assessed. The assessee took the matter in further
appeal to the Appellate Tribunal which held that the
Appellate Assistant Commissioner was justified in coining to
the conclusion that the cash credits in the accounts were
not explained satisfactorily and some of the payments made
at Forbesganj branch on March 31, 1952 were not made from
the remittance from Calcutta but from secret funds. The
Appellate Tribunal pointed out that out of the payments
claimed to have been made at Forbesganj payments to Kharag
Bahadur Nepali amounting to Rs. 2,50,000 must also be
excluded because it had been held by the Income-tax Office
and the Appellate Assistant Commissioner that the loan was
not genuine; and since the loan. was not genuine it was not
logical to say that it required repayment from secret funds.
The Appellate ’tribunal accordingly reduced the enhancement
to Rs. 1,55,000. In doing so the Appellate Tribunal re-
jected the contention of the, assessee ,hat the Appellate
Assistant commissioner had no authority to enhance the
income on the ground that it was not the subject-matter of
the assessment made by the Income-tax Officer. The
Appellate Tribunal took the view that the subject-matter in
respect of which the enhancement was made was, in fact,
considered by the Income Tax Officer and accordingly the
Appellate Assistant Commissioner had jurisdiction to make
the enhancement. At the instance of the assessee the
511
Appellate Tribunal referred the following question of law
for the opinion of the High Court under s. 66 ( 1) of the
Income-tax Act, 1922 (hereinafter called the ’Act’) :
"Whether on the facts and in the circumstances
of the case the Appellate Assistant
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Commissioner was within his authority in
enhancing the assessment of the assessee by
Rs. 1,55,000 for the assessment year 1952-53
?"
By its judgment dated March 26, 1964, the High
Court answered the question in the negative
and in favour of the assessee.
Section 31 of the Act is to the following
effect
"31. (1) The Appellate Assistant Commissioner
shall fix a day and place for the hearing of
the appeal, and may from time to time adjourn
the hearing.
(2) The Appellate Assistant Commissioner
may, before disposing of any appeal, make such
further inquiry as lie thinks fit, or cause
further inquiry to be made by the Income-tax
Officer......
(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
Income-tax 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........
In Commissioner of Income-tax, Bombay v. Shapiorji Pallonji
Alistry(1) it was held by this Court that in an appeal filed
by the assessee the Appellate Assistant Commissioner has no
power to enhance the assessment by discovering new sources
of income not mentioned in the return of the assessee or
considered by the Income-tax Officer in the order appealed
against. In that case, the assesee had received sum of Rs.
40,000. In the proceedings for the assessment year 1946-47,
this came to the notice of the Income-tax Officer. Since
the receipt fell within the accounting year relative to the
assessment year 1947-48, the Income-tax
(1)44 I.T. R. 89 1.
512
Officer did not assess the amount, making a note, "The
question will however be considered again at the time of
1947-48 assessment." In the return for the assessment year
1947-48, this amount was not shown by the assessee. The
Income-tax Officer also overlooked the note at the end of
his order in the previous year’s assessment, with the result
that this item was omitted from the assessment order. The
assessee appealed to the Appellate Assistant Commissioner
against his assessment for the year 1947 - 48. While the
appeal was pending, the Income-tax Officer wrote a letter to
the Appellate Assistant Commissioner requesting him to
assess the amount of Rs. 40,000. The Appellate Assistant
Commissioner, after issuing notice, assessed the amount and
included it in the original assessment. The question which
was debated before this Court was whether in an appeal filed
by an assessee, the Appellate Assistant Commissioner can
find a new source of income not considered by the Income-tax
Officer and assess it under his powers granted by s. 31 of
the Income-tax Act. It was held by this Court that the
powers of enhancement conferred on the Appellate Assistant
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Commissioner under s. 31 only extended to matters considered
by the Income-tax Officer and if a new source has to be
considered then the power of remand may be exercised and the
Income-tax Officer should be required to deal with that new
source of income. At page 895 of the Report, Hidayatullah,
J. speaking for the Court stated as follows :
"The only question is whether in enhancing the assessment
for any year lie can travel outside the record, that is to
say, the return made by the assessee and the assessment
order passed by the Income-tax Officer with a view to
finding out new sources of income, not disclosed in either.
It is contended by the Commissioner of Income-tax that the
word ’assessment’ here means the ultimate would it which an
assessee must pay, regard being had to the charging section
and his total income. In this view, it is said that the
words ’enhance the assessment’ are not confined to the
assessment reached through a particular process but the
amount which ought to have been computed if the true total
income had been found. There is no doubt that this view is
also possible. On the other hand, it must not be overlooked
that there are other provisions like sections 34 and 33B,
which enable escaped income from new sources to be brought
to tax after following a special procedure. The assessee
contends that the powers of the Appellate Assistant
Commissioner extend to matters considered by the Income-tax
Officer, and if a new source is to be considered, then the
power of remand should be exercised. By the exercise of the
power to assess fresh sources of
513
income, the assessee is deprived of a finding by two tri-
bunals and one right of appeal.
The question is whether we should accept the interpretation
suggested by the Commissioner in preference to the one,
which has held the field for nearly 37 years. In view of
the provisions of sections 34 and 33B by which escaped
income can be brought to tax, there is reason to think that
the view expressed uniformly about the limits of the powers
of the Appellate Assistant Commissioner to enhance the
assessment has been accepted by the legislature as the true
exposition of the words of the section."
Reference may be made, in this connection, to the decision
in Narrondas Manordass, Bombay v. Commissioner of Income-
tax, Central, Bombay(1) in which the scope of the power of
the Appellate Assistant Commissioner under s. 31(3) was
considered by the Bombay High Court. In that case, the
assessee carried on business at Rajkot and at Bombay, the
accounting years at Rajkot and Bombay being different. With
regard to the profits of Rajkot, the Income-tax Officer
assessed them proportionately at R.,. 1,17,643. He also
found that there were remittances to the extent of Rs.
4,00,000 from Rajkot to Bombay, but in view of the
concession allowed by the Part B States Taxation Concession
Order he did not include this amount in the assessable
income. The assessee appealed with respect to the sum of
Rs. 1,17,643 contending that the Rajkot business had no
profits at all but only loss. The Appellate Assistant
Commissioner thereupon set aside the assessment and remanded
the matter to the Income-tax Officer for reassessment after
enquiring into tile matters contained in the second report.
It was held by the Bombay High Court that the power
conferred upon the Appellate Assistant Commissioner was not
confined to the matter of Rs. 1,17,643 in respect of which
the assessee had appealed, but he had power to revise the
whole process of assessment once an appeal had been
preferred, and the order remanding the case was not invalid
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in law. The decision of this case was approved by this
Court in The Commissioner of Income-tax v. M/s Mc-Millan &
Co. (2 ) The question to be considered in that case was
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. It was held by
this Court that the question must be answered in the
affirmative and there was nothing in s. 31 read
(1) 31 I. T. R. 909.
L7Sup .C.I./67-3
(2) [1958] S. C. R. 689.
514
with the provisions of s. 13 of the Act which prevented the
Appellate Assistant Commissioner, in an appeal preferred by
the assessee from exercising the powers which the Income-tax
Officer could exercise under the proviso to s. 13 of the Act
and to enhance the taxable income of the assessee. At page
701 of the Report, S. K. Das, J. quoted with approval the
following passage from the judgment of Chagla, C.J. in
Narronadas’s case(1)
"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 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 ran 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 to
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."
It is necessary to bear in mind, in this connection, that it
is the assessee who has a right conferred under s. 31 to
prefer an appeal against the order of assessment made by the
Income-tax Officer. If the assessee does not choose to
appeal, the order of assessment becomes final subject to any
power of revision that the Commissioner may have under s.
33B of the Act. Therefore, it would be wholly erroneous to
compare the powers of the Appellate Assistant Commissioner
with the powers possessed by a court of appeal, under the
Civil Procedure Code. The Appellate Assistant Commissioner
is not an ordinary court of appeal. It is impossible to
talk- of a court of appeal when only one party to the
original decision is entitled to appeal and not the other
party, and in view of this peculiar position the statute has
conferred very wide powers upon the Appellate Assistant
Commissioner once an appeal is preferred to him by the
assessee. It is necessary also to emphasise that the
statute provides that once an assessment comes before the
Appellate Assistant Commissioner, his competence is not
restricted to examining those aspects of the assessment
which are complained of by the assessee; his competence
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ranges over the whole assessment and it is open to him to
correct the Income-tax Officer not only with regard to a
matter raised by the assessee but also with regard to a
matter which has been considered by the
(1) 31 I. T.R.909
515
Income-tax Officer and determined in the course of the
assessment. It is also well-established that an assessee
having once filed an appeal cannot withdraw it. In other
words, the Assessee having filed an appeal and brought the
machinery of the Act into working, cannot prevent the
Appellate Assistant Commissioner from ascertaining and
settling the, real sum to be assessed, by intimation of his
withdrawal of the appeal. Even if the assessee refuses to
appeal at the hearing, the Appellate Assistant Commissioner
can proceed with the enquiry and if he finds that there, has
be-en an under-assessment, he can enhance the assessment
Commissioner of Income-tax, Punjab v. Nawab Shah Nawaz
Khan(1). In this context reference may be made to the
decision of the Court of Appeal in The King v. Income Tax
Special Commissioners(2) in which the taxpayer sought to
withdraw a notice, of appeal which had been given on his
behalf against an additional assessment under Sch. D. The
Commissioners of Inland Revenue were not satisfied that the
assessment was adequate The Special Commissioners then
proposed to proceed with the hearing of the appeal in the
ordinary way. At that stage the taxpayer sought a writ of
prohibition to prohibit the Special Commissioners from
hearing the appeal. It was held by the Court of Appeal that
notice of appeal having once been given, the Commissioners
were bound to proceed in accordance with the Income Tax Acts
and determine the true amount of the assessment. At page
493 of the Report Lord Wright observed as follows :
" -in making the assessment and in dealing
with the appeals, the Commissioners are
exercising statutory authority and a statutory
duty which they are bound to carry out. They
are not in the position of judges deciding an
issue between two particular parties. Their
obligation is wider than that. It is to
exercise their judgment on such material as
comes before them and to obtain any material
which they think- is necessary and which they
ought to have, and on that material to make
the assessment or the estimate which the law
requires them to make. They are not deciding
a case interparties; they are assessing or
estimating the amount on which, in the
interests of the country at large, the tax-
payer ought to be taxed."
The principle that emerges as a result of the authorities of
this Court is that the Appellate Assistant Commissioner has
no jurisdiction, under s. 31(3) of the Act, to assess a
source of income which has not been processed by the Income-
tax Officer and which is not disclosed either in the returns
filed by the assessee
(1) 6 T. T. R. 370. (2) [1936] 1.
K. D. 487.
516
or in the assessment order, and therefore. the Appellate
Assistant Commissioner cannot travel beyond the subject-
matter of the assessment. In other words, the power of
enhancement under s. 31 (3) of the Act is restricted to the
subject-matter of assessment or the sources of income which
have been considered expressly or by clear implication by
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the Income-tax Officer from the point of view of the
taxability of die assessee. It was argued by Mr. Vishwanath
lyer on behalf of the appellant that by applying the
principle to the present case, the Appellate Assistant
Commissioner had jurisdiction to enhance the quantum of
income of the assessee. It was pointed out that the fact of
alleged transfer of Rs. 5,85,000 to Forbesganj branch was
noted by the Income-tax Officer and also the fact that it
did not reach Forbesganj on the same day. So, it was argued
that in the appeal the Appellate Assistant Commissioner had
jurisdiction to deal with the question of the taxability of
the amount of Rs. 5,85,000 and to hold that it was taxable
as undisclosed profits in the hands of the assessee. We are
unable to accept the argument put forward on behalf of the
appellant as correct. It is true that the Income-tax
Officer has referred to the remittance of Rs. 5,85,000 from
the Calcutta branch, but the Income-tax Officer considered
the despatch of this amount only with a view to test the
Genuineness of the entries relating to Rs. 4,30,000 in the
books of the Forbesganj branch. It is manifest that the
Income-tax Officer did not consider the remittance of Rs.
5,85,000 in the process of assessment from the point of view
of its taxability. It is also manifest that the Appellate
Assistant Commissioner has considered the, amount of remit-
tance of Rs. 5,85,000 from a different aspect, namely, the
point of view of its taxability. But since the Income-tax
Officer has not applied his mind to the question of the
taxability or nontaxability of the amount of Rs. 5,85,000,
the Appellate Assistant Commissioner had no jurisdiction, in
the circumstances of the present case, to enhance the
taxable income of the assessee on the basis of this amount
of Rs. 5,85,000 or of any portion thereof. As we have
already stated. it is not open to the Appellate Assistant
Commissioner to travel outside the record, i.e., the return
made by the assessee or the assessment order of the Income-
tax Officer with a view to find out new sources of income
and the power of enhancement under s. 31(3) of the Act is
restricted to the sources of income which have been the
subject-matter of consideration by the Income-tax Officer
from the point of view of taxability. In this context
"consideration" does not mean "incidental" or "collateral"
examination of any matter by the Income-tax Officer in the
process of assessment. There must be something in the
assessment order to show that the Income-tax Officer applied
Ms mind to the particular subject-matter or the particular
source of income with a view to its taxability or to its
non-taxability and not to any incidental connection. In the
present case it is manifest that the
517
Income-tax Officer has not considered the entry of Rs.
5,85,000 from the point of view of its taxability and
therefore the Appellate Assistant Commissioner had no
jurisdiction, in an appeal unders. 31 of the Act, to enhance
the assessment.
For these reasons we hold that the High Court rightly
answered the question in favour of the assessee and this
appeal must be dismissed with costs.
G.C. Appeal dismissed.
518