Appellate enhancement cannot add a new source of income when the original assessment proceeded on a different basis.

Appellate enhancement under section 31(3) of the Income-tax Act, 1922 is confined to the source of income actually considered by the Income-tax Officer and cannot introduce a new and distinct source of income. Here, the Income-tax Officer had examined the assessee's connection with the company and its profits, but taxed the matter on the basis that the company was a benamidar and that current profits were business income. The Appellate Assistant Commissioner sought instead to assess outstanding loans as deemed dividend under sections 2(6A)(e) and 12(1B), which was a different legal basis and source. The enhancement was therefore not competent, and the issue was decided in favour of the assessee.

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Issues: Whether the Appellate Assistant Commissioner had jurisdiction under section 31(3) of the Income-tax Act, 1922, to enhance the assessee's assessment by introducing a deemed-dividend item under sections 2(6A)(e) and 12(1B) on facts examined by the Income-tax Officer but not on that legal basis.

Analysis: The power to enhance an assessment is confined to the sources of income processed by the Income-tax Officer and cannot be used to bring in a new source of income not considered in the assessment order. Although the Income-tax Officer had examined the assessee's relationship with the company and the existence of accumulated profits and loans, he proceeded on the distinct basis that the company was the assessee's benamidar and taxed the company's current profits as business income under section 10. The Appellate Assistant Commissioner, by contrast, proceeded on a wholly different source, namely outstanding loans treated as deemed dividend under sections 2(6A)(e) and 12(1B). The facts were similar, but the source and the basis of taxation were fundamentally different, and the Income-tax Officer had not applied his mind to taxation of the loans as dividend income.

Conclusion: The Appellate Assistant Commissioner was not competent to enhance the assessment on that basis; the question was answered against the Revenue and in favour of the assessee.

Ratio Decidendi: Appellate enhancement under section 31(3) cannot extend beyond the source of income actually processed by the Income-tax Officer, and it cannot be used to introduce a new and distinct source of income not considered in the original assessment.

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