Commissioner of Income-Tax, Calcutta Vs.
Rai Bahadur Hardutroy Motilal Chamaria  INSC 97 (7 April 1967)
07/04/1967 RAMASWAMI, V.
CITATION: 1968 AIR 153 1967 SCR (3) 508
CITATOR INFO :
R 1978 SC 40 (5,6)
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.
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 incometax 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 The Income-tax Officer noted that the assessee had withdrawn at Calcutta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 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
[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.,  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 , 1 K.B. 487, considered.
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
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, KharaBahadur 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 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 diffi510 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
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
The Appellate 'tribunal accordingly reduced
the enhancement to Rs. 1,55,000. In doing so the Appellate Tribunal rejected
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 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
(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 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 tribunals 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 Incometax, 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 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)  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 Incometax Officer; a revising authority not in the narrow sense of revising
what is the subjectmatter 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 talkof 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 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 thinkis
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 taxpayer 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 Incometax Officer and which is not disclosed either in the returns filed
by the assessee (1) 6 T. T. R. 370. (2)  1.
K. D. 487.
516 or in the assessment order, and
therefore. the Appellate Assistant Commissioner cannot travel beyond the
subjectmatter 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 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 remittance 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.