Revision confined to stated subject-matter; unproved expenditure may be added as income only under a legally recognised method.

Revisional action could not extend to outside-India activities and receipts because the notice and revisional order did not show any dispute on that subject-matter. For within-India transactions, unsubstantiated expenditure in accounts maintained under a recognised system could be treated as income, but only where the method adopted was legally recognised under domestic law. A treaty requirement for consistency of method could not validate a method lacking legal basis. The assessment therefore required fresh consideration, with the books and supporting documents to be examined on remand, and the revisional interference was confined to the surviving issue.

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Issues: (i) Whether the revisional authority was justified in disturbing the assessment in respect of outside-India activities and receipts; (ii) Whether the estimation of taxable income from within-India transactions by treating unsubstantiated expenditure as income was legally sustainable.

Issue (i): Whether the revisional authority was justified in disturbing the assessment in respect of outside-India activities and receipts.

Analysis: The material on record did not show any dispute in the notice or revisional order concerning disclosures relating to outside-India activities, receipts, or work done. The subject-matter of revision therefore did not extend to that part of the assessment.

Conclusion: The revisional direction could not validly cover the outside-India activities and receipts.

Issue (ii): Whether the estimation of taxable income from within-India transactions by treating unsubstantiated expenditure as income was legally sustainable.

Analysis: The assessee had represented that regular accounts were maintained, but could establish only part of the expenditure claimed. Where accounts are maintained under a recognised system, but some expenditure remains unproved, the unsubstantiated portion may be added to income. The method adopted by the Assessing Officer was not shown to be one unknown to the domestic law, and the treaty provision requiring the same method year by year could not justify a method lacking legal basis. The Tribunal therefore erred in holding that there was no prejudice to the Revenue merely because an income figure had been assessed.

Conclusion: The assessment of profit arising from within-India transactions could not be sustained on the basis adopted and was liable to be reconsidered by the Assessing Officer after calling for the books and supporting papers.

Final Conclusion: The appeals succeeded in part. The interference with the assessment was upheld only to the extent of within-India profit attribution, while the attempt to reopen the outside-India component was not justified; the matter was remitted for fresh consideration on the surviving issue.

Ratio Decidendi: Where an assessee maintains accounts but fails to substantiate part of the claimed expenditure, the unproved expenditure may be treated as income, but revisional or assessment action must remain confined to the actual subject-matter of the notice and to methods recognised by the applicable domestic law.

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