Commissioner of Income Tax vs M/s. McMillan and Co

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 29 of 1955

Decision Date: 16 October, 1957

Coram: S.K. Das, Natwarlal H. Bhagwati, J.L. Kapur

In this matter, the Supreme Court of India heard a petition filed on 16 October 1957 by the Commissioner of Income-Tax against M/s McMillan & Co, a non-resident company engaged in the sale and publication of books and magazines worldwide. The judgment was authored by Justice S.K. Das, with Justices Natwarlal H. Bhagwati and J.L. Kapur forming the bench. The decision was reported in 1958 AIR 207 and 1958 SCR 689. The case concerned the provisions of the Indian Income-Tax Act of 1922, specifically sections 31 and the proviso to section 13, together with Rule 33 of the Income-Tax Rules.

The assessee, M/s McMillan & Co, submitted its return for the assessment year in question by adopting a method of accounting that fixed a percentage of the marked price of all publications sold in India—whether printed in India or elsewhere—as the cost of production. This method had been accepted by the Assessing Officer, who consequently assessed the company’s taxable income at ₹ 82,623. Dissatisfied with this assessment, the company appealed to the Appellate Assistant Commissioner, raising grounds other than the accounting method.

Upon reviewing the appeal, the Appellate Assistant Commissioner concluded that the true income could not be determined from the method of accounting accepted by the Assessing Officer. He therefore issued a notice under section 31(3) of the Income-Tax Act, heard the assessee, and recalculated the assessable income at ₹ 1,11,616 by applying Rule 33 of the Income-Tax Rules, which permits a different method of computation.

The assessee challenged this determination before the Appellate Tribunal. Relying on a recent decision of the Bombay High Court, the Tribunal held that the Appellate Assistant Commissioner lacked jurisdiction to increase the income in the manner he had done and remitted the matter to the High Court at the request of the appellant. The High Court, however, ruled against the appellant, prompting a further appeal to this Court.

The principal questions for determination were whether, in exercising the powers granted by section 31(3), the Appellate Assistant Commissioner could reject the accounting method that had been accepted by the Assessing Officer and, under the proviso to section 13, compute the assessee’s income, profits or gains in accordance with Rule 33. The Court answered these questions affirmatively. It held that nothing in section 31, read together with the proviso to section 13, prevents the Appellate Assistant Commissioner, when hearing an appeal preferred by the assessee, from exercising the same powers that the Assessing Officer may exercise under the same proviso. While the initial responsibility for deciding the correct method of accounting lies with the Assessing Officer, the Court observed that the Appellate Assistant Commissioner may revisit that decision in the context of an appeal and may apply Rule 33 to arrive at a correct computation of taxable income.

In the present matter, the Court observed that under the proviso, wherever it applied, the officer was required to act reasonably and judicially and could not act subjectively or arbitrarily, and any decision he reached could not be treated as final. The Court further held that neither section 13 nor its proviso placed any limitation on the extensive powers granted to the Appellate Assistant Commissioner by section 31(3) of the Act once he was in proper seisin of the matter. The authority of Narrondas Manordass, Bombay v. Commissioner of Income-tax, [1957] 31 I.T.R. 909 was approved, while the decision in K.F. Vakeel v. Commissioner of Income-tax, I.T. Reference No. 21 of 1950, Bombay High Court, was noted as dissenting. The Court also noted that the Appellate Assistant Commissioner possessed, in an appeal, the power to apply the provisions of Rule 33 of the Indian Income-tax Rules for the purpose of correctly computing the assessee’s income even where the Income-tax Officer had not done so.

Per Justice Bhagwati, the difference in the language of the two conditions required for the rejection of the method of accounting regularly employed by the assessee, as provided in the proviso to section 13, clearly indicated that the legislature intended the determination of the second condition—namely, that the income, profits and gains of the assessee could not be properly deduced from the method regularly employed by him—to be within the exclusive domain of the Income-tax Officer and not any other authority in the tax hierarchy. The decision in K.F. Vakeel v. Commissioner of Income-tax, I.T. Reference No. 21 of 1950, Bombay High Court, was approved in this respect.

The Court further held that the powers of the Appellate Assistant Commissioner under section 31(3) of the Act, however wide they might appear, were not absolute; they were circumscribed by the nature of the proceedings before him and limited to the subject-matter of the assessment. The authority in Narrondas Manordass, Bombay v. Commissioner of Income-tax, [1957] 31 I.T.R. 909 was referred to in support of this proposition. Accordingly, section 31(3) must be read together with section 13 and its proviso, and it was clear that the Appellate Assistant Commissioner had no power in an appeal to nullify the power that the Income-tax Officer alone possessed under the proviso. He could not, of his own motion, reject the method of accounting regularly employed by the assessee. If he believed that the Income-tax Officer had erred in accepting that method as proper for computing the assessee’s income, the Appellate Assistant Commissioner could only set aside the assessment and direct the Income-tax Officer to make a fresh assessment under section 31(3)(b). He could not, while enhancing the assessment under section 31(3)(a), exercise the power under the proviso to section 13, which was solely vested in the Income-tax Officer.

Consequently, the Court concluded that the questions presented to it must be answered in the negative. The judgment proceeded under the heading of Civil Appellate Jurisdiction, Civil Appeal No. 29 of 1955, an appeal by special leave from the judgment and order of the Bombay High Court dated 14 March 1953 in Income-Tax Reference No. 27 of 1952.

The appeal arose from an order dated 14 March 1953 issued by the Bombay High Court in Income-Tax Reference No 27 of 1952. The Solicitor-General of India, C K Daphtary, together with G N Joshi and R H Dhebar, appeared on behalf of the appellant. Counsel for the respondents comprised N A Palkhivala, J B Dadachanji, S N Andley, Rameshwar Nath and P L Vohra. The judgment relating to this reference was pronounced on 16 October 1957. The senior judges who delivered the judgment were S K Das and J L Kapur, with the former authoring the principal opinion and Justice Bhagwati delivering a separate judgment. Justice S K Das opened his opinion by noting that the present matter was a special-leave appeal against the Bombay High Court’s decision dated 4 March 1953, in which the Court had answered the reference’s legal questions in the negative. He observed that the resolution of those questions required an interpretation of certain provisions of the Indian Income-Tax Act of 1922, and that a disagreement already existed between two High Courts on the proper construction of those provisions. Justice Das stated that his conclusion differed from that reached by his learned senior brother, Justice Bhagwati, and set out to explain the basis of his differing view in a concise and clear manner.

The respondent-assessee before the Court was a non-resident company whose head office was located in London and which maintained branches in India. The company was engaged in the sale and publication of books and magazines worldwide. For the assessment year under consideration, the company filed its income-tax return reporting that, for all publications sold in India—whether printed domestically or abroad—it had applied a fixed percentage of the marked price as the cost of production. This percentage-based calculation constituted the method of accounting employed by the assessee in preparing its return. The Income-Tax Officer accepted this method, making only minor adjustments concerning certain expenditures and an alleged bad debt, and consequently assessed the company’s taxable income at Rs 82,623. Dissatisfied with that assessment, the assessee filed an appeal before the Appellate Assistant Commissioner. The Commissioner issued a notice under section 31(3) of the Act, conducted a hearing, and thereafter enhanced the assessment of the company’s business income to Rs 1,11,616. In reaching this enhanced figure, the Commissioner observed that the company’s total turnover for the previous year ended 30 May 1943 was Rs 16,01,973, from which a gross profit of Rs 4,09,360—equating to approximately 25.5 percent—was derived. By contrast, the world profit and loss account showed a gross profit of £231,070 on sales of £628,000, yielding a margin of over 37 percent. The Commissioner noted that this substantial disparity in gross profit ratios warranted an explanation from the appellants, particularly because the appellants did not maintain an Indian trading and profit-and-loss account analogous to the world account, but instead recorded purchases at the rates charged by the London head office rather than the actual production costs of the Indian-sold publications.

In this case the Appellate Assistant Commissioner held that the Indian trading and profit-and-loss account prepared by the assessee did not correspond to a genuine Indian account because it listed purchases at the rates charged by the London head office rather than at their actual cost. He observed that the fixed percentage of the marked price that the company used to calculate the production cost of its publications sold in India was not a true reflection of the real production cost. Consequently, the accounting method regularly employed, in his view, could not produce a correct figure of income, profit or gain. Relying on the net world profit of the assessee and applying it to the Indian turnover, he fixed the assessee’s income at one-hundred and eleven thousand six hundred sixteen rupees. He applied this calculation apparently under the proviso to section thirteen and Rule thirty-three of the Indian Income-tax Rules, 1922. The assessee appealed this assessment to the Appellate Tribunal, which remanded the matter back to the Appellate Assistant Commissioner. Before the remand could be acted upon, the Bombay High Court delivered its decision in K F Vakeel v The Commissioner of Income-tax. After that decision, the Tribunal held that the Appellate Assistant Commissioner no longer possessed jurisdiction to raise the income to one-hundred and eleven thousand six hundred sixteen rupees. The Commissioner of Income-tax, Bombay City, who was the appellant before this Court, then asked the Tribunal to refer three questions of law to the High Court of Bombay. The questions were: (1) whether an Appellate Assistant Commissioner, on appeal, may reject the assessee’s books of account that have already been accepted by the Income-tax Officer; (2) whether the Commissioner may invoke the provisions of Rule thirty-three of the Indian Income-tax Rules to compute the income of a non-resident when the Income-tax Officer has not done so; and (3) whether the Commissioner may, on the basis of definite information, enhance an assessment under the powers granted by section thirty-one sub-section three a of the Indian Income-tax Act if he believes the assessee’s income has been under-assessed. By its judgment dated four March 1953, the High Court answered the first two questions in the negative and, in our view, correctly held that the third question did not arise. The appellant subsequently obtained special leave to appeal against that judgment and order of the Bombay High Court. The first question, as framed, was quite broad and was not limited to the method of accounting referred to in section thirteen of the Act. The Income-tax Officer, even when he accepts the assessee’s method of accounting, is not bound by the profit figures shown in the accounts.

The Court observed that even when the Income-tax Officer accepts the taxpayer’s chosen method of accounting, he is not compelled to accept the profit figure shown in the accounts. When the taxpayer files an appeal before the Appellate Assistant Commissioner, the Commissioner is authorised to re-examine the books of account to verify the correctness of the assessment that was made. The judgment noted that it is not contested that “accounts” must be distinguished from the “method of accounting”. Section 13 and its proviso relate specifically to the method of accounting. In the factual backdrop of the present case, the first question essentially asked whether the Appellate Assistant Commissioner, on an appeal filed by the taxpayer, could for the first time reject the taxpayer’s method of accounting by invoking the proviso to section 13, on the ground that income, profits and gains cannot be properly derived from it, even though the Income-tax Officer, without expressly stating so, appears to have accepted that same method. The Court explained that the answer to this question requires a correct interpretation of sections 13 and 31 of the Act.

Section 13 of the Act provides that 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, subject to a proviso. The proviso states that if no method has been regularly employed, or if, in the opinion of the Income-tax Officer, the employed method does not allow the income, profits and gains to be properly deduced, then the computation shall be made on such basis and in such manner as the Officer may determine. Thus, the statute mandates that for profits of business, profession or vocation (section 10) and for income from other sources (section 12), the computation must follow the assessee’s regularly used method of accounting. The choice of method lies with the assessee, but the assessee must demonstrate that the method has been regularly applied for his own purposes. The provision, read together with its proviso, makes the regularly employed method a compulsory basis for computation unless the Officer is of the opinion that the income, profits and gains cannot be properly deduced from it. In such a case, or where no regular method exists, the Officer may determine the basis and manner of computation. Up to this point, there was consensus on the scope and effect of section 13 and its proviso. The divergence of opinion arose when section 13 was read in conjunction with section 31, which deals with the powers of the Appellate Assistant Commissioner.

Section 31(3) provides that when disposing of an appeal, the Appellate Assistant Commissioner may, in respect of an order of assessment, either confirm, reduce, enhance or annul the assessment, or alternatively set aside the assessment and direct the Income-tax Officer to make a fresh assessment after conducting any further inquiry that the Income-tax Officer deems appropriate or that the Appellate Assistant Commissioner may order. The Income-tax Officer must then proceed to make the fresh assessment and, where necessary, determine the tax payable on that basis. The provision further stipulates that the Appellate Assistant Commissioner shall not enhance an assessment or impose a penalty unless the appellant has been given a reasonable opportunity to show cause against such enhancement. Additionally, at the hearing of any appeal against an order of an Income-tax Officer, the Income-tax Officer is entitled to be heard either personally or through a representative.

Two principal positions were advanced before the Court. The appellant contended that Section 31 does not limit or restrict the jurisdiction of the Appellate Assistant Commissioner and therefore does not preclude the Commissioner from exercising the power conferred by Section 13 and its proviso. The respondent, on the other hand, argued that the language of the proviso, especially the phrase “in the opinion of the Income-tax Officer,” confines the authority to reject a method of accounting on the ground that income, profits and gains cannot be properly deduced to the Income-tax Officer alone, and not to any other authority listed in Section 5 of the Act. A further point of dispute concerned whether the Income-tax Officer’s determination under the proviso to Section 13, which depends on his opinion, is final. The appellant maintained that such a determination is not final, irrespective of whether it favours or disfavors the assessee, so long as the assessee files an appeal and the Appellate Assistant Commissioner acquires jurisdiction over the assessment. The respondent asserted that the determination is final when it is in favour of the assessee, even if the assessee appeals on another ground, but is not final when the determination is adverse to the assessee and the assessee challenges it. These opposing contentions were presented for the Court’s consideration. Counsel for the respondent additionally distinguished between (i) an objective determination by the Income-tax Officer, which is based on factual findings and leads to specific consequences for the assessee, and (ii) a limited category of cases where the determination is purely subjective, also resulting in consequences for the assessee.

Learned counsel reiterated his earlier submission in less abstract language, stating that the law distinguishes two classes of cases: one in which any assessing authority, whether at the initial stage or at the appellate stage, may make the determination, and another in which the determination must be made by a specifically named authority. He explained that the first class embraces the entire hierarchy of Income-tax officials, whereas the second class limits the decision-making power to the authority expressly identified by the statute. To support this view, he cited several provisions of the Act that he said also involve subjective determinations, namely section 4A (a)(iv), a.10(2)(vi), section 12B(2), section 23A and related provisions. He further observed that other sections name two or more authorities, for example sections 27, 38, 48 and similar provisions. By weaving together these statutory references in a deft and apparently plausible manner, counsel argued that, in the present matter, the opinion of the Income-tax Officer that the income, profits and gains could be properly derived from the method of accounting regularly employed by the assessee constituted a subjective determination belonging exclusively to that Officer, and that no other officer or authority could replace that opinion. Consequently, he contended that the Appellate Assistant Commissioner lacked jurisdiction to go beyond the Income-tax Officer’s view.

The Court cannot accept this line of argument and sets out its reasons. First, it appears that counsel is reading more into the expression “in the opinion of the Income-tax Officer” found in the proviso to section 13 than the language itself justifies. Whether the method of accounting is regularly employed is undeniably a matter that the Appellate Assistant Commissioner may examine once he has seizin of the appeal. It is undisputed that if the Income-tax Officer decides against the assessee and holds that the income, profits and gains cannot be properly deduced from the assessee’s accounting method, that determination is liable to be set aside on appeal by the assessee. The Court therefore questions why a subjective determination or a determination of a named authority should be treated as immutable in one circumstance and not in another. The Court has carefully scrutinised the other statutory sections cited by counsel and does not agree that their language sustains the subtle distinction he seeks to draw. For illustration, consider section 23, which governs assessment. Under subsection (3), the Income-tax Officer assesses the assessee’s total income and determines the tax payable based on that assessment. Under subsection (4), the Officer makes the assessment to the “best of his judgment,” an expression considerably stronger than the phrase “in the opinion of the Income-tax Officer.” It is not contested that, in an appeal from an assessment made under section 23, the Appellate Assistant Commissioner may interfere with the Officer’s determination, may make his own assessment, and may exercise the powers that the Income-tax Officer could exercise. This analysis shows that the statutory framework does not support the notion that the opinion expressed in the proviso to section 13 is beyond appellate review.

The Court observed that an Appellate Assistant Commissioner was empowered to interfere with the determination or judgment of the Income-tax Officer. In an appeal, the Appellate Assistant Commissioner could make his own assessment and could exercise the same powers that the Income-tax Officer was authorized to exercise. The Court noted that, since the year 1939, an appeal lay against an assessment made “to the best of judgment” under subsection (4) of section 23, although that right was limited to the amount of income assessed or the amount of tax determined. The Court then questioned why the Appellate Assistant Commissioner could not also interfere with the opinion of the Income-tax Officer under the proviso to section 13.

The Court recorded that counsel for the respondent contended that both subsections (3) and (4) of section 23 prescribed objective conditions for the exercise of the power mentioned therein. The Court agreed that, under both subsections, the assessment had to be a fair and honest estimate and could not be arbitrary or capricious. Beyond this requirement, however, the Court said it could not discern any other distinctive, objective conditions that would place those subsections in a different category.

Regarding the phrase “in the opinion of the Income-tax Officer,” the Court held that it should not be interpreted as conferring a mere discretionary power. Instead, in the context of the language used in the proviso to section 13, the phrase imposed a statutory duty on the Income-tax Officer to examine, in every case, the method of accounting and to determine (i) whether the method was regularly employed and (ii) whether the income, profits and gains could be properly deduced from that method.

The Court then turned to the procedural provisions of the Act. Section 30 gave the assessee a right of appeal against certain orders, including an order of assessment made under section 23. Section 31 dealt with the hearing of an appeal and with the powers of the Appellate Assistant Commissioner. The Court explained that, before disposing of an appeal, the Appellate Assistant Commissioner could, if he thought fit, conduct a further enquiry himself or cause such enquiry to be made by the Income-tax Officer. In disposing of the appeal, the Commissioner could, with respect to an order of assessment, confirm, reduce, enhance or annul the assessment, and could even set it aside and order a fresh assessment.

The Court found that there was nothing in the language of section 31 which imposed any restriction on the powers of an Appellate Assistant Commissioner so as to prevent him from exercising the power conferred by the proviso to section 13. Any restriction, the Court said, would have to be inferred from the wording of the proviso itself. Counsel for the respondent argued that the use of the words “in the opinion of the Income-tax Officer” in the second part of the proviso to section 13 suggested a complete elimination of the Appellate Assistant Commissioner’s jurisdiction to decide for the first time that the method of accounting was such that income, profits and gains could not be properly deduced therefrom. The Court accepted that the initial decision as to the method of accounting had to be arrived at by the Income-tax Officer after a careful scrutiny of the accounts, whether the accounts were simple or complicated, and that the appellate authority retained the power to review that opinion.

The Court explained that the authority vested in the Income-tax Officer must be exercised in a reasonable and judicial manner, thereby prohibiting any subjective or arbitrary decision. Nevertheless, the Court held that such an exercise of power does not acquire an absolute final character that would place it beyond review by the Appellate Assistant Commissioner. Accordingly, when reviewing an order, the appellate authority may exercise the same powers that were available to the Income-tax Officer at the first stage. The Court noted a distinction in the wording of the two conditions laid down in the proviso to section thirteen; the first condition is satisfied when no method of accounting is regularly employed. By contrast, the second condition requires the specific opinion of the Income-tax Officer that income, profits and gains cannot be properly deduced from the regularly employed method of accounting. The Court observed that the first condition involves an objective determination that any authority examining the regularity of the method must make. In contrast, the second condition depends on a determination made by the named authority, specifically the Income-tax Officer. Counsel for the respondent argued that the difference in language indicated a legislative intention that no other officer could replace the Income-tax Officer’s opinion for the second condition. Accordingly, the argument claimed that once the Income-tax Officer accepts a method of accounting as proper, the Appellate Assistant Commissioner lacks jurisdiction to question that opinion. The Court rejected this submission, concluding that the argument could not be sustained as correct. The Court emphasized that for both conditions, the initial duty lies with the Income-tax Officer to determine whether each condition is satisfied. Moreover, the Court reasoned that if the Income-tax Officer’s opinion on the second condition were to be immutable because of the wording, it would have to be immutable in all cases. The Court added that such immutability could not apply only when the assessee appeals an adverse determination. The Court explained that the second condition is phrased as it is because it involves an inferential process that must be undertaken. The expression “in the opinion of the Income-tax Officer” is suitably used because that officer must first make the determination. However, the Court clarified that this does not necessarily mean that the Appellate Assistant Commissioner is barred from revising the determination and exercising the same power that the Income-tax Officer could have exercised. Counsel for the respondent also cited the definitions of “Appellate Assistant Commissioner” and “Income-tax Officer” in sections two three and two seven of the Act. The Court found that those definitions did not further the argument because the scope of the Appellate Assistant Commissioner’s powers must be determined by sections thirty and thirty-one. Those sections govern appeals unless the powers are curtailed by other provisions of the Act, which would be the only source of limitation.

The Court observed that the definitions contained in sections 2(3) and 2(7) of the Act, or any other provision, did not resolve the issue of finality. Counsel for the respondent then distinguished two situations concerning the Income-tax Officer’s determination in the proviso to section 13 of the Act. He argued that when the Officer declares the accounting method unacceptable because income, profits and gains cannot be properly derived, a final decision is made. Conversely, he claimed that if the Officer does not reach such a conclusion, no decision exists and the situation represents merely a non-exercise of power. Counsel advanced this distinction in order to avoid the apparent inconsistency whereby one determination would be final while another would not. The Court expressed that it was not persuaded by this argument and found the distinction overly subtle to be of practical significance. From a proper perspective, the Court held that even a non-exercise of the power under the proviso constitutes a decision, because it implicitly accepts the accounting method as capable of yielding the income, profits and gains. In the case before them, the Income-tax Officer had examined the books and had adopted the computation based on the method employed. The Court then turned to section 31 and stated that its wording clearly answered the point of law raised by the parties. It quoted the observation of Chief Justice Chagla in M/s Narrondas Manordass Bombay v. Commissioner of Income-tax, that the language of section 31 is sufficiently broad to permit the Appellate Assistant Commissioner to correct the Income-tax Officer not only on matters raised by the assessee but also on issues already considered and determined by the Officer during the assessment. The Court rejected the contention that the proviso to section 13 limits the powers granted to the Appellate Assistant Commissioner under section 31. While acknowledging that sections 13 and 31 must be read harmoniously, it observed that neither the proviso nor section 13 contains any language that curtails the Commissioner’s authority to enhance, set aside or direct a fresh assessment by the Income-tax Officer. Referring again to Chief Justice Chagla’s remarks in the Narrondas case, the Court noted that the Appellate Assistant Commissioner is constituted as a revising authority not merely for the subject-matter of the appeal but also for any decision made by the Income-tax Officer during the assessment. Thus, the Court concluded that once an appeal is before the Commissioner, he may revise not only the final computation but also the underlying processes that led to that computation.

The Court observed that the Appellate Assistant Commissioner possessed the authority to revise every step that led to the final computation or assessment. In other words, the Commissioner could not limit his review to the amount of tax finally levied; he could also re-examine each decision taken by the Income-tax Officer during the assessment, including the consideration of various incomes and deductions. The Court agreed with the earlier observations that the phrase “in the opinion of the Income-tax Officer” used in the proviso to section 13 was intended merely to indicate that the Officer must first decide, based on the regular method of accounting, whether income, profits or gains could be properly deduced. The legislature had not created a special distinction between an objective and a subjective determination as the respondent’s counsel had suggested. Moreover, the Court held that the proviso did not place any restriction on the powers granted to the Appellate Assistant Commissioner by section 31. Section 31 expressly empowers the Commissioner to revise every process that contributes to the ultimate computation or assessment, and the Court found no limitation arising from the wording of the proviso.

The Court then turned to two additional matters. First, it noted that section 33B, added by the Income-tax and Business Profits Tax (Amendment) Act of 1948, authorises the Commissioner of Income-tax to interfere with any order of the Income-tax Officer, including a determination made under the proviso to section 13, provided the statutory conditions of section 33B are satisfied. This provision contradicts the respondent’s argument that a determination under the proviso is a purely subjective or inviolate decision of a named authority; interpreting the proviso that way would render section 33B ineffective. Second, the Court considered a hypothetical scenario: suppose a determination under the proviso in the assessee’s favour could be examined by the Appellate Assistant Commissioner when the assessee raises an appeal on some other ground, and suppose the Commissioner decides to set aside the assessment because the Officer either failed to apply his mind to the proviso or reached an erroneous conclusion about the deductibility of income. The Court asked whether, in such a situation, the Commissioner could himself make a determination under the proviso, or whether he must merely direct the Income-tax Officer to reconsider the matter anew. The language of the proviso suggests one approach, while the broad language of section 31 provides the Commissioner with extensive powers to act, a tension the Court examined in detail.

In this matter, the Commissioner observed that an apparent conflict between the two provisions might seem to exist at first glance, but a careful analysis revealed that no true conflict was present. The language of the proviso, as explained, requires the Income-tax Officer initially to form his own opinion on whether the income, profits and gains can be properly deduced from the method of accounting that is regularly employed, if any such method exists. Should the Officer fail to give due consideration to the proviso or arrive at an erroneous determination—whether in favour of or against the assessee—the Appellate Assistant Commissioner is empowered to rectify the computational error, provided that he has seized the assessment on an appeal that has been filed by the assessee. In the event that the assessee does not file an appeal, the Appellate Assistant Commissioner does not become involved, because the Revenue possesses no right of appeal against an assessment made by the Income-tax Officer. Whether the appropriate remedy in a particular case is to remit the matter for fresh consideration or to allow the Appellate Assistant Commissioner to correct the error directly depends on the specific facts and circumstances of each case. The Court warned that if it were held that the Appellate Assistant Commissioner could only set aside the assessment in such situations, an absurd result would follow. For example, if the Commissioner were to conclude that, based on the method of accounting, the income, profits and gains could not be properly deduced, and if the only order available to the Appellate Assistant Commissioner were to set aside the assessment and direct the Income-tax Officer to make a new one, the Officer could simply cling to his original opinion, leading to a stalemate. Hence, the proviso to section 13 does not limit the power of the Appellate Assistant Commissioner; rather, it authorises him to correct the error in the manner most suitable to the circumstances, so long as he acts within the scope of his authority granted by section 31 of the Act.

The Court further noted that section 31(3) does not expressly state that the power to vary an assessment—including the power to increase it—is subject to any additional limitation. Having discussed the substantive issues without referring to precedent, the Court proceeded to consider the authorities that had been placed before it. The first authority examined was the decision in K. F. Vakeel v. Commissioner of Income-Tax (1). The factual background of that case involved an assessee who carried on the business of loading and unloading ships from 1 January 1943 to 30 June 1944. On 1 July 1944 the assessee entered into a partnership with his brother. The assessee maintained his accounts on a cash basis, and his accounting year corresponded to the calendar year. For the calendar year 1943, the assessee was assessed to income-tax on the cash-basis accounts that he had kept. The Court set out these facts before moving on to the subsequent developments in the case.

In the case under discussion, the assessee’s partnership with his brother began on July 1, 1944. At that date, the partnership owed outstanding amounts totaling Rs 2,13,306 and had liabilities amounting to Rs 86,650. Between July 1 and December 31, 1944, the assessee recovered Rs 202,209 and paid off the liabilities of Rs 86,650, leaving a net receipt of Rs 1,15,559 for that period. This net amount, identified as income-tax reference No. 21 of 1950, formed the subject of the present reference. The assessee argued that because the sum was realised after he had ceased his business, it constituted a capital receipt and therefore was not taxable. He further contended that, since his accounts were maintained on a cash basis, the net amount could not be recorded in the accounts for the business period from January 1 to June 30, 1944, as it had been realised only after that period.

When the matter was presented before the Appellate Assistant Commissioner, the officer held that the assessee continued his business until December 31, 1944. The officer also concluded that a sum of Rs 2,13,306, not Rs 2,02,209 as claimed by the assessee, had been recovered between July 1 and December 31, 1944. The assessee appealed this decision to the Tribunal. The Tribunal upheld the assessee’s claim that the recovered amount was Rs 2,02,209 and also affirmed that the business had terminated on June 30, 1944, not on December 31, 1944. The assessee further maintained before the Tribunal that the net amount of Rs 1,15,559 was a capital receipt rather than a revenue receipt. The Tribunal, however, concluded that the assessee should be assessed on an accrual basis rather than a cash basis. It held that the sum of Rs 1,15,559 had accrued to the assessee during the accounting period of January 1, 1944 to June 30, 1944 and was therefore taxable. The Tribunal reasoned that relying on cash-basis accounting would make it impossible to determine the assessee’s profits, and thus the appropriate method of accounting was the mercantile (accrual) basis.

The High Court’s decision was based on two grounds. First, it held that the Tribunal was wrong to independently conclude, without invitation, that cash-basis accounting was not suitable for ascertaining income, profits and gains, because the Tribunal was not empowered to form such an opinion. Second, the High Court observed that the Tribunal had no material before it that could justify its conclusion that the Income-tax Officer could not determine the income, profits and gains from the accounting method adopted by the assessee.

In this case the Court observed that the Tribunal had reached the conclusion that the Income-tax Officer was not in a position to determine the income, profits and gains from the method of accounting used by the assessee. The Court held that the result could be sustained on the second ground alone, because the Tribunal had erred in law by making a finding without any material or evidence. The learned Advocate-General for the Revenue, who appeared for the Government, admitted that, given the state of the record, he could not maintain that the Tribunal’s decision was correct. He also accepted that the Tribunal was wrong in holding that the assessee could be forced to change from the cash basis, which he had regularly followed, to the accrual basis in maintaining his accounts. Consequently, although the Court agreed that the final decision in the case was undoubtedly correct, it could not accept certain observations made in relation to the first ground. The Tribunal had stated that it was for the Income-tax Officer, who is the assessing officer, to be dissatisfied with the method of accounting regularly adopted by the assessee. It further said that if the Officer found no difficulty in assessing the income, profits and gains from the method regularly employed, then no other authority could reach a different conclusion, and that any opinion formed by the Officer could be appealed to the Appellate Assistant Commissioner or the Tribunal, but that the officer must first form an opinion as required by the proviso. While the Court concurred that the Income-tax Officer, as the first assessing officer, must form an opinion on the applicability of the proviso to section 13, it rejected the proposition that no other authority lawfully seised of the assessment order could arrive at a different view on the applicability of the proviso. The Court examined the possible courses of action available to the Income-tax Officer. First, the officer could neglect the statutory duty imposed by section 13 and its proviso and simply accept the assessee’s method of accounting without considering whether the method was regularly employed or whether the income, profits and gains could be properly deduced therefrom. Second, the officer could exercise his mind and conclude that the method was both regular and acceptable, meaning that the income, profits and gains could be properly deduced. Third, the officer could decide against the assessee and hold that the method was either not regularly employed or was unacceptable. In the first alternative, the Court noted that there was a failure to perform a statutory duty.

It has not been seriously disputed that the appellate authority possesses the power to direct the Income-tax Officer to perform the statutory duty imposed by section 13. This proposition is backed by eminent authority, which will be cited shortly. In the third category of cases, the parties concede that the appellate authority may intervene and set aside the opinion or determination of the Income-tax Officer. When it does so, the appellate authority is required to form its own view as to whether the method of accounting adopted by the assessee is proper and acceptable.

The disagreement among the parties concerns only the second category of cases and, even there, it is limited to a portion of that category. Both parties accept that the question of whether a method of accounting is regularly employed is an objective fact-finding issue that the appellate authority is empowered to revisit. Under section 31(3), the Appellate Assistant Commissioner has wide powers to examine questions of fact and law, and under section 33(4), the Appellate Tribunal enjoys similarly expansive authority. Moreover, the Commissioner may revise an order of the Income-tax Officer under section 33B when the circumstances specified in that provision are satisfied. The Court sees no justification for holding that these broadly expressed statutory powers become ineffective in the one specific situation where the determination favours the assessee as to the propriety of the accounting method. It is true that the Revenue has no right of appeal under section 30, but that circumstance is not decisive. The assessee may render any assessment order of the Income-tax Officer final by simply refraining from filing an appeal, regardless of whether the order is based on a subjective or an objective finding. The issue, therefore, is not what occurs when an appeal is absent, but rather what powers the appellate authority may exercise when it is lawfully in seizin of the matter.

Consequently, the Court holds that although Vakeel ’s case (1) was correctly decided, some of the reasons advanced in support of that decision are not legally sound. The next authority considered is the decision of the Punjab High Court in Oriental Building and Furnishing Company v. Commissioner of Income-tax (2), which adopted a view contrary to that of the Bombay High Court. While the Court agrees with the conclusion reached in that judgment, the earlier decision contains no detailed discussion of the issues, offering only a bare statement that the powers of the Appellate Tribunal under section 33 are very wide. Apart from the two decisions directly bearing on the matter, there are other authorities that, although not decisive, are relevant. The most important among them, in order of priority, is the Privy Council decision in Commissioner of Income-Tax v. Sarangpur Cotton Manufacturing Co. Ltd. (3), which will be examined further in the subsequent analysis.

In the case decided by the Privy Council, the assessees each year deliberately undervalued their stock so that a “secret reserve’’ would be created, allowing profits to be retained without being reflected in the profit and loss account or the balance sheet, while those same profits remained part of the taxable income. The Income-tax Officer, without considering whether the true profits could be properly derived from the accounting method regularly employed by the assessees, simply accepted the accounts and bound the assessee to the profit figure appearing in those accounts. The Privy Council held that the figure shown in the profit and loss account and the balance sheet was not the true income for tax purposes and that the Officer could not reasonably conclude that true profits could be inferred from a gross undervaluation. Their Lordships explained that the Officer had failed to perform the statutory duty imposed on him by section 13 of the Act, amended the question accordingly, answered it negatively, and directed that it was the Officer’s responsibility to fulfil his duty under section 13. This decision therefore stands as clear authority that when the Income-tax Officer does not discharge the duty mandated by section 13, his order may be set aside even though he may have accepted the accounts and held the assessee bound by the profit figure shown therein.

Subsequent decisions have consistently held that an order of the Income-tax Officer made under the proviso to section 13 can be set aside on appeal. Notable authorities include 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 each of these cases the courts ruled that the officer’s determination under the proviso did not shield his computation from scrutiny on appeal, and that the Appellate Assistant Commissioner possessed jurisdiction, in an appeal against an assessment made under the proviso, to substitute a different method of computation. By contrast, a small number of decisions have limited the power of the Appellate Assistant Commissioner under section 31 to the subject-matter of the assessment being appealed, precluding him from enhancing the assessment by adding new sources of income. Those decisions are Jagarnath Therani v. Commissioner of Income-Tax (4), Gajalakshmi Ginning Factory v. Commissioner of Income-Tax (1), and Chowdhury Sharafat Hussain v. Commissioner of Income-Tax (2). The Court considered that these latter authorities did not address the question presently before it, because the present matter does not involve the Appellate Assistant Commissioner exceeding the jurisdiction conferred by section 31.

In the matter before the Court, it was held that the Appellate Assistant Commissioner had acted beyond the limits of the authority granted to him by section 31 of the Act. For the reasons that were previously explained, the Court answered the first of the two questions that had been referred to it in the affirmative. Regarding the second question, the Court found that only a brief statement was required. The Court referred to Rule 33 of the Indian Income-tax Rules, 1922, which reads in full: “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.” The Court noted that a similar wording appears elsewhere in the rule, namely the phrase “in any case in which the Income-tax Officer is of opinion etc.”. Applying the same reasoning that supported the affirmative answer to question 1, the Court concluded that the answer to question 2 must also be affirmative.

Consequently, the appeal was allowed. The Court set aside the judgment and order of the High Court of Bombay dated March 4, 1953, which had been reported in (1) [1952] 22 I.T.R. 502 and (2) [1956] 29 I.T.R. 759. Both of the questions that had been referred to that High Court were answered in favour of the Revenue. Because the issues involved presented difficulties of interpretation and there was a divergence of opinion on the relevant questions of law, the Court ordered that each party bear its own costs throughout the proceedings. The judgment was delivered by Justice Bhagwati. The appeal, which had been granted special leave, arose from a dispute over whether the power conferred by the proviso to section 13 of the Indian Income-tax Act (Act XI of 1922) to reject the method of accounting regularly employed by the assessee could be exercised by the Appellate Assistant Commissioner in a proceeding under section 31, when the Income-tax Officer had not exercised that power at the first stage. The respondent in the case was a limited company incorporated in England, with its registered office at St. Martin Street, London, and possessing branches in Calcutta, Bombay and Madras in India.

The respondent was engaged in publishing and selling books and magazines throughout the world. Its head office and its overseas branches invoiced the Indian branches not at the actual cost of production but at a valuation calculated as twenty-five percent of the marked price for publications priced in sterling and as thirty percent of the marked price for publications priced in other currencies. For the purpose of determining the profits of its Indian branches, the respondent treated the invoiced amounts as the cost of the publications. In the assessment year 1944-45 the respondent, which was a non-resident company, had its financial year ending on 30 April 1943. While filing its return of income for that assessment year, and during the assessment proceedings before the Income-Tax Officer, the respondent used the invoiced values as the cost of the books it had produced. The business income declared by the respondent amounted to Rs 79,131. By an assessment order dated 24 March 1945 the Income-Tax Officer accepted the accounting method employed by the respondent and accepted its books of account for the Indian business. However, the Officer added back certain expense items that appeared in the respondent’s balance-sheet and profit-and-loss account and consequently computed the assessable income at Rs 82,623. In addition, the Officer disallowed the respondent’s claim for a bad debt of Rs 3,592. The respondent challenged this disallowance by filing an appeal before the Appellate Assistant Commissioner.

The Appellate Assistant Commissioner allowed the respondent’s claim for the bad debt but held that the method of accounting adopted by the assessee—namely, treating the invoiced value as the actual cost of production—did not permit a proper deduction of profit. Accordingly, he issued a notice to the respondent under the first proviso to section 31(3) of the Act, requiring the respondent to show cause why its assessment should not be increased. After hearing the respondent, the Commissioner issued an order on 10 November 1948 in which he computed the Indian business profits on the basis that the amount should bear the same proportion to the net world profits of the respondent’s overall business as the Indian turnover bore to the total world turnover. By this method the Indian business income of the respondent was enhanced by Rs 1,111,616. The respondent then appealed this order to the Income-Tax Appellate Tribunal, contending that the Appellate Assistant Commissioner lacked jurisdiction to discard the accounting method that had been accepted by the Income-Tax Officer and to recompute the Indian business profits in the manner he had done. The respondent further argued that, for the reasons he set out, the margin of net world profits could not be applied to the Indian business. By an order dated 29 April 1950, the Tribunal remanded the matter to the Appellate Assistant Commissioner and directed that the Commissioner should allow the respondent to prove the actual cost of the goods invoiced to and sold in India. The Appellate Assistant Commissioner subsequently submitted his remand report.

The Appellate Assistant Commissioner promised to submit a remand report in due course. While that report was pending, the High Court delivered its judgment in the case of K.F. Vakeel v. The Commissioner of Income-tax. That judgment held that, under the proviso to section 13 of the Income-tax Act, no authority other than the Income-tax Officer possessed jurisdiction to act. Relying on this precedent, the respondent advanced two specific contentions before the Tribunal. First, the respondent argued that the Appellate Assistant Commissioner was not competent, on appeal, to reject the method of accounting that had previously been accepted by the Income-tax Officer. Second, the respondent contended that the Appellate Assistant Commissioner could not, on appeal, compute the Indian business profits of the respondent under rule 33 of the Indian Income-tax Rules when the Income-tax Officer had not performed such a computation. The Tribunal found these contentions persuasive and, by an order dated 16 October 1951, allowed the respondent’s appeal. Following the appellant’s request, the Tribunal then framed the issues for determination and referred three questions of law to the High Court for its opinion under section 66(1) of the Act. The questions were: (1) whether an Appellate Assistant Commissioner, on appeal, could reject the assessee’s books of account that had been accepted by the Income-tax Officer; (2) whether an Appellate Assistant Commissioner, on appeal, could invoke rule 33 of the Indian Income-tax Rules to compute the income of a non-resident when the Income-tax Officer had not done so; and (3) whether an Appellate Assistant Commissioner, on appeal, could enhance an assessment under the power conferred by section 31(3) of the Indian Income-tax Act when, based on definite information, he was of the opinion that the assessee’s income had been under-assessed.

The High Court heard the reference on 4 March 1953. Applying the principle it had articulated in K.F. Vakeel’s case, the Court answered the first two questions in the negative, holding that the Appellate Assistant Commissioner could not reject the books of account or invoke rule 33 in the circumstances described. The Court observed that the third question did not arise for consideration. Subsequently, 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 the application was denied. The appellant then sought and obtained special leave to appeal from this Court under Article 136 of the Constitution. The matters for determination on appeal therefore include the interpretation of section 13, which provides that 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, subject to the proviso that where no regular method exists or where, in the opinion of the Income-tax Officer, the method employed does not permit a proper deduction of income, profits or gains, the computation shall be made in such manner as the Income-tax Officer may determine.

The statute provides that where the method of accounting regularly employed by the taxpayer is either not regularly applied or is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot be properly deduced therefrom, the computation of income shall be made on a basis and in a manner that the Income-tax Officer may determine.

Section thirty-one, which governs the hearing of an appeal, enables the Appellate Assistant Commissioner, when disposing of an appeal that involves an order of assessment, to take one of two alternative courses. First, the Commissioner may either confirm the assessment, reduce it, enhance it, or annul it. Second, the Commissioner may set aside the assessment and direct the Income-tax Officer to make a fresh assessment after conducting any further enquiry that the Income-tax Officer considers appropriate or that the Commissioner directs. Upon such direction, the Income-tax Officer must proceed to make the fresh assessment and, where necessary, determine the amount of tax payable on the basis of that fresh assessment. However, the provision also imposes a limitation: the Appellate Assistant Commissioner may not enhance an assessment or a penalty unless the appellant has been given a reasonable opportunity to show cause against such enhancement.

Rule thirty-three of the Indian Income-Tax Rules, 1922, addresses situations in which the Income-tax Officer is of the opinion that the actual amount of income, profits or gains accruing or arising to any person residing outside the taxable territories cannot be ascertained. This difficulty may arise whether the income is derived directly or indirectly through a business connection, through property, through an asset or source of income, or through money lent at interest that is brought into the taxable territories in cash or in kind. In such circumstances, the Rule authorises the Officer to calculate the amount of income, profits or gains for assessment purposes by applying a reasonable percentage of the turnover that accrues or arises, or by deriving an amount that bears the same proportion to the total profits of the business as the receipts that accrue or arise bear to the total receipts of the business. The calculation must be made in accordance with the provisions of the Indian Income-tax Act, and the Officer may also employ any other method that he deems suitable.

The learned Solicitor-General appearing for the appellant contended that, although the Revenue does not possess a statutory right of appeal against an assessment order made by the Income-tax Officer, the filing of an appeal by the assessee before the Appellate Assistant Commissioner removes the finality of the assessment order. He argued that once the appeal is before the Commissioner, the entire assessment becomes subject to review, and consequently the Revenue may raise all the arguments it could have raised before the Income-tax Officer. According to this view, the Revenue may request the Commissioner to reopen the entire enquiry and, effectively, to reassess the assessee and even to increase the assessment. The Solicitor-General emphasized that this power to enhance the assessment would be exercised only after the Commissioner has afforded the assessee a reasonable opportunity to show cause against the proposed enhancement, as required by the statutory limitation.

The Court observed that the powers of the Commissioner are not limited by any explicit restriction and may therefore be exercised freely. In this exercise, the Appellate Assistant Commissioner may also reject the method of accounting that the assessee habitually uses, even if the Income-tax Officer has not done so, provided the Assistant Commissioner is of the opinion that such a method does not enable the proper deduction of income, profit or gain. When the Assistant Commissioner reaches this conclusion, he is authorised to apply the computation method prescribed in rule 33 of the Indian Income-tax Rules.

Counsel for the respondent argued that the question of whether the assessee’s regular method of accounting is unsuitable for properly ascertaining income, profit or gain belongs exclusively to the Income-tax Officer. That determination, the counsel said, is a condition precedent to any further consequence, such as the rejection of the assessee’s accounting method. Accordingly, the decision of another authority cannot replace the Officer’s finding; although an appellate authority may review whether the Officer’s decision was correct, it cannot substitute its own view. Once the Income-tax Officer decides that the case does not fall within the proviso of section 13, no other authority may revisit that question, and the principal provision of section 13 then governs. Under that provision, the income, profit and gain of the assessee must be computed for the purposes of sections 10 and 12 in accordance with the regularly employed accounting method. The Court further noted that both the Income-tax Officer and the Appellate Assistant Commissioner are bound by the terms of section 13, and that section 31(3), which permits the Assistant Commissioner to enhance an assessment, does not override or nullify the mandatory terms of section 13 and its proviso, which vest the power to reject a method of accounting solely in the named authority. The Court also remarked that there is limited precedent on the construction of section 13. It referred to an unreported judgment of the High Court dated 11 October 1950 in K.F. Vakeel v. Commissioner of Income Tax and E.P. Tax, where the Tribunal for the first time held that when accounts are kept on a cash basis and the profits cannot be ascertained, the appropriate method of accounting is the mercantile or accrual basis, even though the Income-tax Officer had originally accepted the cash basis.

The Court noted that both the assessee and the Appellate Assistant Commissioner were in agreement with the method of accounting that had been used. The issue that was put before the High Court was whether the Tribunal possessed the authority to make a determination on the suitability of that accounting method. In interpreting section 13 of the Act, the High Court expressed the view that the responsibility to form an opinion that income, profits and gains cannot be correctly computed from the method adopted by the assessee rests exclusively with the Income-tax Officer. The Court explained that if the Income-tax Officer reaches such a conclusion, the computation of income, profits and gains must then be carried out in the manner and on the basis that the Officer determines. Conversely, the Court held that it is the assessing officer who must be dissatisfied with the regular method of accounting employed by the assessee; if the officer encounters no difficulty in assessing the income, profits and gains using the regular method, no other authority may arrive at a different conclusion. The Court further observed that an opinion formed by the Income-tax Officer may be subject to appeal before the Appellate Assistant Commissioner or the Tribunal, but the initial opinion must first be formed by the Income-tax Officer as required by the proviso to section 13. On the facts before it, the Court found that no such opinion had ever been expressed by the Income-tax Officer regarding the adequacy of the assessee’s regular accounting method. Instead, the Tribunal, on its own motion, concluded that a cash basis was not the proper basis for deducing income, profits and gains. The High Court held that the Tribunal was plainly wrong in arriving at that conclusion, emphasizing that it was not within the Tribunal’s jurisdiction to form an opinion on that question. The Tribunal’s appellate powers could be exercised only on the basis of an opinion formed by the Income-tax Officer, and nothing before the Tribunal justified a finding that the Officer was unable to deduce the income, profits and gains from the regular method or that the Officer had formed any opinion on the matter. Accordingly, the High Court set aside the Tribunal’s decision on that point. In response to the High Court’s decision, the appellant relied upon a decision of the Punjab High Court at Simla in Oriental Building and Furnishing Co. v. Commissioner of Income-tax, Delhi. In that case, the Income-tax Officer, acting under section 13 read with section 23(3) of the Act, had made certain disallowances which were subsequently reduced on appeal by the Appellate Assistant Commissioner. The Department then appealed the order passed by the Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal, after examining the assessee’s method of accounting, proceeded further.

In the proceedings, the records that were placed before the Income-tax Authorities were found to show that the basis of computation adopted by those authorities was faulty and that the account books did not reflect the correct account of the assessee. Consequently, the authorities computed the income of the assessee under the proviso to section 13 of the Act. The question that arose for the Court’s consideration was whether the Income-tax Appellate Tribunal possessed jurisdiction to make such a computation.

The High Court expressed the view that (1) the Tribunal’s power to deal with an order passed by an Appellate Assistant Commissioner was plenary and was expressed in section 33(4) of the Act as widely as could be conceived, and (2) in an appeal under section 33 the Tribunal was competent to decide both facts and law and possessed the authority to substitute its own assessment order for the order that was under appeal. The High Court cited two decisions, namely the earlier case reported in (1)[1952] 21 I.T.R. 105, as the only authorities that dealt with the construction of the proviso to section 13 of the Act and that addressed the question of whether the Appellate Assistant Commissioner or, as the case may be, the Income-tax Appellate Tribunal could, for the first time, exercise the power of rejecting the method of accounting regularly employed by the assessee while entertaining an appeal, if the Income-tax Officer had not done so at the first instance.

The High Court of Bombay held that the Tribunal was not competent to exercise such a power, whereas the High Court of Punjab held that, because there was no limitation on the Tribunal’s power, the Tribunal could, while exercising its appellate powers, decide both facts and law and substitute its own assessment order for the order under appeal.

The reasoning of the Punjab High Court offered little assistance, while the Bombay High Court appeared to have examined the terms of the proviso to section 13 of the Act more closely. It stated that it was the Income-tax Officer, who was the assessing officer, who should be dissatisfied with the method of accounting regularly employed by the assessee. If the Officer found no difficulty in assessing the income, profits and gains from that method of accounting, no other authority could reach a different conclusion. The Income-tax Officer was described as the authority entrusted by the Act with the duty of computing the assessee’s income, profits and gains under the relevant provisions. It was for the Officer to form an opinion on whether the method of accounting regularly employed by the assessee was such that the income, profits and gains could not be properly deduced therefrom; only if he formed such an opinion would the proviso come into operation, and the computation of the income, profits and gains would be made on the basis and in the manner that the Officer might determine.

In this appeal the appellant cited a decision of the Allahabad High Court in Pearey Lal Shukla of Cawnpore, In re (1). That decision held that the basis and manner of assessment made by the Income-tax Officer under the proviso to section 13 of the Act could be subject to interference on appeal by the Assistant Commissioner and by the Commissioner. The Court, however, observed that the cited decision does not illuminate the question that must be decided in the present appeal. The reason is that the Allahabad decision assumes that the Income-tax Officer had already formed the opinion that the accounting method normally used by the assessee was such that the income, profit and gains could not be properly ascertained from it, and therefore the proviso was triggered, requiring the officer to compute the income on the basis and in the manner of his own choosing. The Court clarified that when the Income-tax Officer adopts a particular basis and manner of computation, that choice may be reviewed by the Appellate Assistant Commissioner or the Commissioner while they are exercising the appellate powers granted to them by the statute. The Allahabad case therefore is not authority for the proposition that the power to reject the regular method of accounting exercised by the Income-tax Officer can also be exercised by the Appellate Assistant Commissioner or the Commissioner when hearing an appeal against the officer’s order. The Court then referred to a Privy Council decision, Commissioner of Income-tax, Bombay v. Sarangpur Cotton Manufacturing Co., Ltd (2), which sheds light on the construction of section 13 and on the scope of the power conferred on the Income-tax Officer by the proviso. In that case the assessees employed a regular system of accounting, but for several years they also regularly applied a method of valuing stock at a price lower than both cost and market price in order to create a “secret” reserve, thereby retaining profits that were not shown to shareholders. The assessees presented a profit and loss account that disclosed a profit of Rs 2,64,086 and filed a return of total income showing Rs 1,99,086, the lower figure reflecting the effect of the undervalued stock. The Income-tax Officer, without first determining whether the true income could be derived from the accounting method used, held that the assessees were bound by the profit shown in the balance-sheet. On appeal, the Appellate Assistant Commissioner affirmed the assessment, and the assessees subsequently sought a review of that order from the Commissioner of Income-tax, Bombay, invoking section 33 of the Act, or alternatively, they requested that a reference of the legal questions be made to the High Court under section 66(2).

The Commissioner of Income-Tax refused both to review the assessment order and to make a reference under the provisions of the Act. Consequently, the assessee filed an application before the High Court invoking section 66(3) of the Act, seeking to compel the Commissioner to make such a reference. In response to this application, the High Court directed the Commissioner to issue the reference, and the Commissioner duly complied by making the reference in question. The High Court then modified the reference by inserting the following amended question: “Whether in the circumstances of the case the Income-tax Officer was entitled to compute the income, profits and gains of the assessee on the basis of the printed copy of the profit and loss account sent with the letter of the assessee dated 18 July 1931, without regard to any undervaluation of the stock which may have been or may be proved to have been made.” The Court held that the covering letter accompanying the profit and loss account formed an integral part of the method of accounting used by the assessee, as contemplated by section 13 of the Act. Accordingly, the High Court concluded that the Income-tax Officer could not dissect the method of accounting and consider the profit and loss statement in isolation from the covering letter. It was observed that the Officer had, in effect, accepted only a fragment of the overall accounting method, which was beyond the scope of his authority. Because the matter remained unresolved for the proper determination by the Income-tax Officer, the High Court answered the amended question in the negative, thereby indicating that the issue required further adjudication.

Subsequently, the Commissioner of Income-tax appealed the High Court’s decision to the Privy Council. The Lords of the Privy Council expressed disagreement with the High Court’s interpretation of section 13 of the Act. They opined that the section referred to a method of accounting that the assessee regularly employed for its own business purposes, rather than a method used to prepare the statutory return for tax assessment. Moreover, they emphasized that section 13 makes such a regularly employed method of accounting a compulsory basis for computing taxable income, except where the Income-tax Officer, in his opinion, cannot properly deduce the income, profits and gains therefrom. The duty of the Income-tax Officer, therefore, was to examine whether the true profits could be derived from the accounts and to exercise the judgment prescribed in the proviso of the section. The Lords articulated that when an assessee has a regular method of accounting, the Officer must not automatically accept the profits and gains shown; instead, he must assess whether those figures can be properly inferred from the accounts and act in accordance with his own judgment on the matter. Applying this principle to the facts before them, the Privy Council concluded that the Income-tax Officer had acted in line with the view expressed by the Appellate Assistant Commissioner and had failed to fulfil the duty required by section 13. Insofar as the evidence demonstrated that the regularly employed method of accounting did not reveal the true income, profits or gains, the Officer had not performed the necessary assessment of the accounts as mandated by the statute.

In the course of the proceedings the assessors admitted that the method of accounting regularly employed by the assessors did not disclose the true income, profits or gains. Consequently the parties sought to amend the question before the Court, framing it as follows: “Whether, in view of the provisions of Section 13 of the Income Tax Act or otherwise, the Income-tax Officer was correct in computing, for the purpose of Section 10 of that Act, the income, profits and gains in accordance with the method of accounting regularly employed by the assessee when that method in fact does not show the true income, profits and gains.” The Court answered this amended question in the negative. The Court further observed that, upon arriving at this conclusion, the duty to act fell to the Income-tax Officer, who was required to carry out the proper discharge of his functions under Section 13, taking into account the opinion expressed by the Court, and to reach a appropriate decision based on that guidance.

The judgment expressly rejected the notion that the Income-tax Officer has a prima facie obligation to accept the profit figures shown in the assessee’s accounts merely because a method of accounting is regularly used. It laid down that whenever a method of accounting is employed, the Officer must examine whether the income, profits and gains can be properly deduced from that method. The Officer is therefore required to make a determination on that issue. If, after careful consideration, the Officer forms the opinion that the accounting method does not enable a proper deduction of the true income, profits or gains, the Officer is bound to reject that method and to compute the tax liability on a basis and in a manner that he may determine. The Officer must apply his own mind to this aspect and arrive at his own conclusion; if he simply accepts the figures shown in the accounts while the method actually does riot show the true income, profits and gains, his action is erroneous and may be set aside by the higher Tribunal. The judgment left open the question of whether a higher Tribunal, upon reaching such a conclusion, could substitute its own opinion for that of the Income-tax Officer and assess the assessees by applying the proviso to Section 13 of the Act. The Privy Council, however, declined to do so. It observed that the responsibility to discharge the duty under Section 13 remained with the Income-tax Officer himself, in light of the Court’s opinion. The Council did not remit the matter back to the Commissioner of Income-tax, Bombay, nor to the Assistant Commissioner of Income-tax. After answering the amended question in the negative, the Court simply noted that the Income-tax Officer would, in all probability, proceed to make a proper decision in accordance with his statutory duties.

The Court observed that the duty to apply the proviso to section 13 of the Act was not to be performed by the Commissioner of Income-tax nor by the Assistant Commissioner of Income-tax. Instead, the Court directed that this duty should be performed by the Income-tax Officer, who alone possessed the authority under the terms of the proviso to section 13. In arriving at this conclusion, the Court referred to several decisions that interpreted section 33B of the Act and relied on observations contained in those cases regarding the powers of the Appellate Assistant Commissioner while hearing appeals filed by the assessee. The decisions cited were Commissioner of Income-tax v. Tejaji Farasram Kharawala (1), Commissioner of Income-tax v. Amritlal Bhogilal & Co. (2) and Smt. Durgabatti and Smt. Narmadabala Gupta v. Commissioner of Income-tax, Bihar and Orissa (3). The Court noted that the Revenue has no right of appeal before the Appellate Assistant Commissioner against an assessment order issued by the Income-tax Officer; only the assessee is granted such a right under section 30 of the Act.

The Court further explained that when the Appellate Assistant Commissioner entertains an appeal, which is necessarily instituted by the assessee, the Income-tax Officer is entitled to be heard, either in person or through a representative, to justify the assessment order that he made. The legislature, in its wisdom, did not confer upon the Revenue a substantive right to challenge the Income-tax Officer’s order. Consequently, the decision of the Income-tax Officer is, with respect to the Revenue, final and the officer is not regarded as an aggrieved party against his own decision. The officer represents the Revenue, and therefore he cannot question his own determination, which is deemed, for all practical purposes, a proper decision made after considering all circumstances of the case. The assessee remains the sole individual entitled to appeal against the Income-tax Officer’s decision. If the assessee elects not to file an appeal, the officer’s decision attains finality both as to the Revenue and to the officer himself. Conversely, if the assessee exercises the right of appeal, the matter is heard by the Appellate Assistant Commissioner, who again affords the Income-tax Officer the opportunity to be heard, either personally or through a representative. In such proceedings, the contest is essentially between the Revenue on one side and the assessee on the other. The powers exercised by the Appellate Assistant Commissioner in hearing these appeals are statutory powers conferred upon him by section … of the Act.

Section 31 of the Income-Tax Act confers on the Appellate Assistant Commissioner certain statutory powers to deal with an order of assessment. In exercising those powers, the Commissioner may either (a) confirm the assessment, reduce it, enhance it, or annul it, or (b) set aside the assessment and direct the Income-Tax Officer to make a fresh assessment. When the fresh assessment is directed, the Income-Tax Officer must first conduct any further inquiry that he considers appropriate, or any inquiry that the Appellate Assistant Commissioner may prescribe, and then proceed to make the new assessment. The Officer is also required, where necessary, to determine the amount of tax payable based on that fresh assessment.

If the Appellate Assistant Commissioner decides to use the first alternative and chooses to enhance the assessment, the proviso to section 31(3) obliges him to give the appellant a reasonable opportunity to show cause against the enhancement. While the statute does not expressly lay down detailed limits on this power, the Court noted that such limits must be derived from the nature of the proceedings themselves, and that these inherent limitations would be explained at a later stage in the judgment. The Court then referred to a decision of the High Court of Bombay in Commissioner of Income-Tax v. Amritlal Bhogilal & Co., emphasizing that section 33B was enacted to give the Commissioner a power, in the interest of public revenue, to revise the Income-Tax Officer’s orders when the assessee had not appealed. The High Court observed that even if the officer’s order was erroneous or prejudicial to revenue, the assessee could render that order final by refusing to appeal. To remedy this gap, Parliament introduced section 33B, which allows the Commissioner to intervene when no appeal has been filed. However, once an appeal is lodged, the department may raise any issue before the Appellate Assistant Commissioner that it considers relevant to public revenue, and the Income-Tax Officer is entitled to be heard either in person or through a representative. The High Court further explained that the Commissioner’s power under section 33B is only available when no other legal remedy exists to revise the officer’s order; when a legal remedy does exist, the Commissioner may not invoke the powers of section 33B. Consequently, when an appeal for the year 1949-50 was pending before the Appellate Assistant Commissioner, the Commissioner was fully entitled to seek revision of the Income-Tax Officer’s order in any appropriate manner.

The Court observed that the remarks referred to only interpreted section thirty-three-B of the Act and did not illuminate the scope of powers given to the Appellate Assistant Commissioner under section thirty-one. Moreover, those observations failed to explain the authority expressly granted to the Income-tax Officer by the proviso to section thirteen. That proviso permits the officer to reject the assessee’s regular method of accounting if, in his opinion, the method prevents proper deduction of income, profits or gains. Consequently, the decision did not support the appellant’s argument that, when the Income-tax Officer had not exercised that power, the Appellate Assistant Commissioner could initially apply it while hearing the assessee’s appeal. The position presented by the appellant, drawn from the cited Bombay High Court decision, was contrary to the position expressed by the same court in the earlier K. F. Vakeel case. The Court was clearly of the view that the Bombay High Court judges did not intend to establish such a rule. In this respect, the Court emphasized that statutory construction must consider the specific language of each provision rather than infer broader authority from unrelated sections. Accordingly, the Court concluded that the appellate jurisdiction under section thirty-one remained limited to the matters expressly brought before the Appellate Assistant Commissioner by the assessee.

The Court also referred to an unpublished decision of the Bombay High Court in M/s. Narrondas Manordass, Bombay v. The Commissioner of Income-tax, Bombay (1), which clarified the scope of the Appellate Assistant Commissioner’s powers. That judgment observed that, although the language of section thirty-one may appear expansive, the authority conferred is not absolute and must be read in light of the nature of the proceedings. The Court quoted the Bombay High Court’s remarks that the only party entitled to invoke the appellate mechanism is the assessee who chooses to contest the assessment order. If the assessee refrains from filing an appeal, the assessment becomes final, subject only to any revisionary power the Commissioner may exercise under section thirty-three-B, as noted in (1) [1957] 31 I.T.R. 909. Consequently, the Court warned against likening the Appellate Assistant Commissioner’s role to that of a Court of Appeal under the Civil Procedure Code. It stressed that the Appellate Assistant Commissioner does not function as an ordinary appellate court because only one side of the original dispute is permitted to appeal. This unique characteristic, the Court observed, precludes any comparison with a typical appellate tribunal where both parties normally have the right to be heard. Accordingly, the Court held that the Appellate Assistant Commissioner’s competence extends over the whole assessment and allows correction of any matter, whether or not raised by the assessee. However, such power is still circumscribed by the statutory limits and the procedural context in which the appeal is filed. The Court therefore concluded that the appellant could not rely on the earlier High Court decision to claim a broader authority for the Appellate Assistant Commissioner.

In this case the Court observed that the Legislature has given the Appellate Assistant Commissioner very extensive powers, but those powers become effective only when the taxpayer actually files an appeal against the assessment order of the Income-Tax Officer. When the taxpayer is satisfied with the assessment and does not appeal, the Appellate Assistant Commissioner has no authority to intervene, even if the assessment is later found to be erroneous. However, once the taxpayer initiates an appeal, the Commissioner’s jurisdiction expands far beyond the limited scope of a typical civil Court of appeal. The statute expressly provides that after an appeal is presented, the Commissioner may examine the entire assessment, not merely the points raised by the appellant. He may therefore correct the Income-Tax Officer on any issue that was considered and decided during the original assessment, whether or not the appellant specifically complained about it. The Court quoted the statute’s language to the effect that the Appellate Assistant Commissioner is a revising authority with respect to the Income-Tax Officer’s decision; this revising power is not confined to the narrow matters that form the subject of the appeal. Rather, the Commissioner may review the final computation of tax as well as every procedural step that led to that computation. In other words, the Commissioner may alter not only the amount of tax finally assessed but also the various determinations made by the Income-Tax Officer concerning income items, deductions and other matters that were taken into account during the assessment. The Court then referred to the observations of the Patna High Court in Jagarnath Therani v. Commissioner of Income-Tax, noting that section 31(3) of the Income-Tax Act was enacted primarily for the benefit of the taxpayer and, to a limited extent, for the benefit of the State, and that the subject-matter of the appeal is the assessment itself. Accordingly, the appellate authority cannot exceed the scope of the assessment and is not entitled to assess income that was not part of the original return. The Court also cited the judgment of the Madras High Court in Gajalakshmi Ginning Factory v. Commissioner of Income-Tax, as approved by the Patna High Court in Bishwanath Prasad Bhagwat Prasad v. Commissioner of Income-Tax, which stressed that the Appellate Assistant Commissioner does not have the power to introduce new sources of income when exercising his power of enhancement.

The Court observed that the power of enhancement available to the Appellate Assistant Commissioner must be confined to the income that constituted the subject-matter of the assessment made by the Income-tax Officer. In support of this principle the Court referred to the unreported judgment of the High Court of Bombay in Sharrif Jima and Co. Ltd., Mombassa v. Commissioner of Income-tax, Bombay City, where it was held that when the Appellate Assistant Commissioner exercises his power of enhancement, he is dealing with the subject-matter of the appeal and the enhancement is limited to those sources or items that were taken into account by the Income-tax Officer in the original assessment. The Court then considered the authorities cited earlier and recorded that, although the powers conferred by section 31(3) of the Act are described as very wide and essentially unfettered, the critical question was whether any limitation existed on those powers and, if so, what the nature of that limitation was. It was emphasized that the Appellate Assistant Commissioner does not possess completely unqualified authority; rather, his authority is restricted to the subject-matter of the assessment, a point that the Court endeavoured to define with reference to the earlier rulings.

From this discussion the Court concluded that, despite the textual breadth of section 31(3) granting the Appellate Assistant Commissioner the power to enhance assessments, there are well-recognised limits to that power, one of which was accepted by the Bombay High Court in the unreported decision mentioned above. The Court then turned to the question of whether any further limitation could be found in section 13 of the Act and its proviso. It noted that the authorities directly interpreting section 13 did not illuminate this issue, except for the observations of the Bombay High Court in K. F. Vakeel’s case, which has not been challenged anywhere. Those observations suggest that the sole authority to decide whether the method of accounting adopted by the assessee prevents a proper deduction of income, profits or gains rests with the Income-tax Officer alone. The Court also observed that a comparison with other provisions of the Act, such as sections 4A(a)(iv), 10(5), 12B(2), 22(2), 23(2), 23A, 34, 42(2) and sections 28(1)-(2), 37, 38, 48, 49E, which vest determinations in the Income-tax Officer or in multiple authorities, did not provide additional guidance. Consequently, the focus remained on the express wording of section 13 to ascertain any further limitation on the Appellate Assistant Commissioner’s power of enhancement.

The Court observed that sections such as 22(4), 23(2), 23A, 34 and 42(2), as well as those provisions that name authorities other than the Income-tax Officer for making determinations – namely sections 28(1) and (2), 37, 38, 48 and 49E – must be compared with the provisions contained in section 13 and its proviso. The Court held that it was unnecessary to investigate the legislative purpose behind each of those various provisions. For the matter before it, it was sufficient to examine section 13 itself and to reach a conclusion based on the clear language of that section. In turning to the text of section 13, the Court found that the principal rule laid down by the section required that income, profits and gains be computed for the purposes of sections 10 and 12 in accordance with the method of accounting that the assessee regularly employs. The Court explained that, if this rule stood alone, its mandatory character would compel the Income-tax Officer and every authority in the income-tax hierarchy to accept the assessee’s regular method of accounting for the computation of income, profits and gains under sections 10 and 12. However, the Court stressed that the method of accounting, although regularly used by the assessee, was not bestowed with an immutable character; it was subject to the proviso appended to section 13. According to that proviso, if either no method of accounting has been regularly employed, or if the method employed is, in the opinion of the Income-tax Officer, such that income, profits and gains cannot be properly deduced therefrom, then the computation must be made on a basis and in a manner determined by the Income-tax Officer. The Court identified two distinct conditions that trigger the rejection of the assessee’s regular method of accounting. The first condition occurs when no method of accounting has been regularly employed; the second condition arises when the method employed is, in the officer’s opinion, incapable of yielding a proper deduction of income, profits and gains. The Court noted that these two conditions are expressed in markedly different terms. In the first situation, the mere absence of a regularly employed method is sufficient to activate the proviso. In the second situation, the Income-tax Officer must first form an opinion that the employed method fails to allow proper deduction of income, profits and gains before the proviso can take effect. The Court concluded that the officer’s determination of such an opinion is itself the condition for rejecting the assessee’s regular method of accounting, and that until the officer reaches that conclusion, he cannot reject the method nor compute the assessee’s income, profits and gains on any alternative basis of his own choosing.

The Court observed that the Legislature had deliberately used different wording for the two conditions. It explained that when an assessee had not employed any method of accounting on a regular basis, this fact could be evident to any Income-tax Officer simply by examining the statement of accounts submitted by the assessee; no detailed mental exercise or formal determination was required for that condition. In contrast, the second condition demanded a far more elaborate mental process. The Officer had to consider whether, even though the assessee had regularly used a particular method of accounting, the income, profits and gains could not be properly derived from that method. The Officer was required to reach a definite opinion that the income, profits and gains could not be properly deduced. Upon arriving at such a conclusion, the proviso to section 13 would immediately apply, allowing the Officer to reject the assessee’s method of accounting and to compute the income, profits and gains in the manner he deemed appropriate. The Court stressed that this was not the simple mental step required for the first condition; rather, it was a deliberate application of mind to the question of deducibility, and the determination was to be made solely by the Income-tax Officer himself, not by any higher authority in the hierarchy. The Court further noted that the term “Income-tax Officer” was defined in section 2(7) of the Act, while “Appellate Assistant Commissioner” was defined in section 2(3). These were distinct officers, each possessing separate jurisdiction, and one could not be interpreted to include the other. Consequently, when the proviso to section 13 referred to the Income-tax Officer, it meant only the officer defined in section 2(7), and not the Appellate Assistant Commissioner or any other officer. To read the provision otherwise would require deleting the words “Income-tax Officer” and the phrase “in the opinion of the Income-tax Officer” from the proviso, an outcome the Court found implausible. The Court refused to attribute negligence or oversight to the Legislature and rejected any suggestion that the wording was redundant. It concluded that the Legislature intended the Income-tax Officer’s determination to be a condition for the operation of the provise, with the attendant consequence that the Officer could reject the regular method of accounting and compute the liability in the manner he himself decided.

In interpreting the language of the statute, the Court understood that the Legislature intended the determination made by the Income-tax Officer to be a condition precedent for the operation of the proviso in section 13. The effect of that intention is that the method of accounting must be rejected on a regular basis and in the manner prescribed by the Income-tax Officer himself. Accordingly, the Court found the decision of the High Court of Bombay in K. F. Vakeel v. Commissioner of Income-tax & E. P. Tax to be correct, as it accords with this construction. However, it was submitted that such an interpretation would render the Income-tax Officer’s determination final as to the Revenue, because the Revenue would have no right of appeal, while the assessee would retain a right of appeal under section 30 of the Act to the Appellate Assistant Commissioner. It was further argued that when the assessee initiates an appeal before the Appellate Assistant Commissioner, the finality of the Income-tax Officer’s determination would be destroyed, thereby allowing the Revenue, through the appeal process, to raise any ground – including those that would bring the case within the proviso of section 13 – even though the Income-tax Officer had not originally considered them.

The Court rejected the first contention as untenable. When the Income-tax Officer entertains proceedings, he does so as the representative of the Revenue; thus the contest is between the Revenue, as embodied by the Officer, and the assessee. If the Revenue decides the issue in its own favour during the assessment, it cannot later claim a lack of right of appeal against the Officer’s decision, because the Officer is acting fully on the Revenue’s behalf. Consequently, the only aggrieved party capable of appealing the Officer’s determination is the assessee. Even when the assessee files an appeal before the Appellate Assistant Commissioner, the Revenue continues to be represented by the Income-tax Officer, who may appear personally or through a representative. In that forum, the Revenue’s role is limited to supporting the original decision made by its own officer. Hence, no grievance can be sustained by the Revenue regarding the absence of an appeal right, and the argument that finality applies inconsistently to the two parties lacks merit.

It was observed that the Revenue, when it decides a matter in the initial assessment, acts through the Income-tax Officer who represents it fully in those proceedings. Consequently, the Revenue could not validly claim that it possessed no right of appeal against the decision of the Income-tax Officer, because the Officer was already acting as the Revenue’s representative. The only aggrieved party, therefore, could be the assessee, and the assessee alone could be granted the right to appeal the Officer’s decision. When the assessee filed an appeal before the Appellate Assistant Commissioner, the Revenue was again represented, either directly by the Income-tax Officer or by his appointed representative. In that setting, the Revenue’s presence was complete, and its contribution was limited to supporting the original decision that had been rendered by its own representative in the assessment stage. No grievance could thus be asserted on the ground that the Revenue had been denied a right of appeal, nor could it be contended that the assessee, by choosing not to appeal, was left without any remedy. In reality, there was no grievance at all that could be corrected by the Appellate Assistant Commissioner, and if the Revenue could not be treated as an aggrieved party, the entire argument would lose its significance. Accordingly, the appellant’s attempt to claim finality in one context while denying it in another was deemed futile.

The second contention raised by the appellant was similarly found to be without merit. The powers of the Appellate Assistant Commissioner were statutory and were confined strictly to the four corners of section 31 of the Income-tax Act. The nature and scope of those powers had already been discussed, and it was emphasized that such powers were not absolute; they were limited in the manner described in the earlier judgment of the High Court of Bombay. The Income-tax Officer appearing before the Appellate Assistant Commissioner, whether in person or through a representative, was there to defend his own decision. Therefore, he could not be heard to assert that the decision he had reached under the proviso to section 13 was erroneous in any respect. Although the Appellate Assistant Commissioner exercised appellate authority, he could not, on his own account, determine that the method of accounting regularly employed by the assessee was such that the income, profits, and gains could not be properly ascertained. His role was limited to evaluating the record and the material presented by both the assessee and the Income-tax Officer. If, after such consideration, he concluded that the assessment made by the Income-tax Officer under the proviso to section 13 was improper, the only remedy available to him was to set aside that assessment pursuant to section 31(3)(b) and to direct the Income-tax Officer to make a fresh assessment after conducting any further enquiry he deemed appropriate. The Appellate Assistant Commissioner possessed no jurisdiction to independently determine the adequacy of the assessee’s method of accounting; that function remained exclusively with the Income-tax Officer as expressly provided by the proviso to section 13, and the Commissioner could not usurp that function by disregarding the clear terms of that provision.

The Court observed that the authority to reject the method of accounting regularly employed by the assessee and to compute the income, profits and gains of the assessee on that basis, in the manner that the Income-tax Officer may determine, was exclusively vested in the Income-tax Officer as defined in section 2(7) of the Act. It further held that the power to enhance an assessment, which was conferred on the Appellate Assistant Commissioner by section 31(3)(a), could not be interpreted to allow the Appellate Assistant Commissioner to exercise that power on his own within the meaning of the proviso to section 13 where the Income-tax Officer had not first exercised such power. The Court stressed that the powers given to the Appellate Assistant Commissioner under section 31(3)(a) must be read subject to the additional limitation that, although he may enhance an assessment, he cannot do so by exercising the function that belongs to the Income-tax Officer under the proviso to section 13 of the Act. Accordingly, section 31(3) must be read harmoniously with the provisions of section 13 and its proviso, and when read together they lead to the conclusion that, despite the wide powers granted to the Appellate Assistant Commissioner by section 31(3), he cannot set aside or nullify the express power that is vested in the Income-tax Officer by the proviso to section 13. The learned Solicitor-General argued that if the proviso to section 13 were interpreted in this manner, it would deprive the Appellate Assistant Commissioner of the ability to put the proviso to section 13 into operation where appropriate, and would also strip the Commissioner of the power to revise the Income-tax Officer’s assessment order under section 33B of the Act. The Court responded that it was not called upon to interpret section 33B, and further noted that no such provision existed in the Act at the relevant time. Assuming, however, that the Commissioner’s power to revise the Income-tax Officer’s orders under section 33B should be considered, the Court found nothing in the wording of that section that conflicted with the construction of the proviso to section 13. The Court explained that if the Commissioner believes that any order made by the Income-tax Officer in any proceeding under the Act is erroneous and prejudicial to the interests of the Revenue, the Commissioner may, after giving the assessee a reasonable opportunity to be heard as he deems necessary, pass an order to correct the error as the circumstances justify. The Court further stated that, should the Commissioner conclude that the Income-tax Officer erred in accepting the…

The Court explained that if the Commissioner examined the method of accounting that the assessee regularly used and concluded that such a method made it impossible to correctly determine the income, profits and gains, the Commissioner was authorised to record that view. In that situation, the Commissioner could issue an order cancelling the existing assessment and directing that a fresh assessment be made. Such an order fell within the Commissioner’s competence and was the only order that the particular facts of the case could justify. The Court held that issuing this order would not cause any injustice to the Revenue. It also observed that justice would be served equally well if, instead of merely cancelling the assessment, the Commissioner also remanded the matter back to the Income-tax Officer, directing the Officer to reconsider the facts properly and to decide the issue that lay within the Officer’s exclusive jurisdiction under the proviso to section 13 of the Act.

The Court further stated that it could not perceive any difficulty of the sort suggested by the learned Solicitor-General. Accordingly, the Court rejected the appellant’s contention. It affirmed that the conclusion reached by the High Court of Bombay was correct and that the answers given by that Court to questions numbered one and two were right in the negative. The Court noted that, as the High Court had indicated, question number three did not arise for consideration. Consequently, the Court dismissed the appeal, ordered that it be dismissed with costs, and recorded that each party would bear its own costs throughout. The judgment concluded that, in line with the majority opinion, the appeal was allowed and that each side would bear its own costs.