Appellate limitation: appeals cannot assess new income; embezzlement loss and servant boarding and travel expenses allowed.

An appellate authority under the Income-tax Act cannot initiate assessment of sources not assessed by the Income Tax Officer; escaped income must be pursued under the statutory procedure, not on appeal, so the enhancement was set aside. Losses by embezzlement written off in the accounts are deductible as business expenses. Payments described as basa kharach (boarding for servants) and bidagri (servant travel expenses) are incurred solely for earning profits and qualify as allowable business expenditure; the assessee succeeds on these deductions and costs were awarded.

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Issues: (i) Whether an Assistant Commissioner hearing an appeal under Sections 30 and 31 of the Income-tax Act can assess sources of income not assessed by the Income Tax Officer; (ii) Whether a sum embezzled by an employee is deductible from assessable income; (iii) Whether basa kharach (boarding expenses of servants) is an admissible allowance; (iv) Whether bidagri (payments to servants for travel between home and employment) is an admissible allowance.

Issue (i): Whether the Appellate Authority may assess new sources of income which were not assessed by the Income Tax Officer.

Analysis: The appeal jurisdiction under Section 31 is limited by the subject-matter of the assessment made by the Income Tax Officer. Where the principal place of business fixes the officer competent to assess and other authorities report to him, the appellate authority cannot traverse beyond that subject-matter to create a new assessment of previously unassessed sources. Section 34 provides the express procedure for assessment of income that has escaped assessment and that statutory procedure should be followed rather than treating an appeal as a vehicle to initiate fresh assessments.

Conclusion: The Appellate Authority is not entitled to assess new sources of income on appeal and this issue is decided in favour of the assessee.

Issue (ii): Whether a sum embezzled by the assessee's employee is deductible in computing business profits under Section 10.

Analysis: Losses by embezzlement are not capital in nature if they arise as an incident of conducting the business and are reflected as written off in the accounts. Established practice recognises such losses as expenses of the year in which they are written off and as incidental to the business operations.

Conclusion: The loss by embezzlement is deductible and this issue is decided in favour of the assessee.

Issue (iii): Whether basa kharach (boarding expenses of servants) is an admissible allowance in computing business profits under Section 10.

Analysis: Payments described as boarding expenses for servants are made to retain and increase the efficiency of servants for the benefit of the business and do not constitute gratuities or charitable payments. Such payments are made solely for the purpose of earning business profits and fall within allowable expenditures.

Conclusion: Basa kharach is an admissible allowance and this issue is decided in favour of the assessee.

Issue (iv): Whether bidagri (payments to servants for travel between home and employment) is an admissible allowance in computing business profits under Section 10.

Analysis: Payments to meet servants' travel expenses are made to secure and retain services beneficial to the business and are not gratuitous. They are incurred solely for the purpose of earning profits and qualify as allowable business expenditure.

Conclusion: Bidagri is an admissible allowance and this issue is decided in favour of the assessee.

Final Conclusion: The combined effect of the determinations is that the Appellate Authority erred in enhancing the assessment by including previously unassessed sources, and the claimed deductions for the embezzlement loss, basa kharach and bidagri are allowable; the assessee succeeds and costs are awarded to the assessee.

Ratio Decidendi: An appellate authority hearing an appeal under the Income-tax Act cannot on appeal assess new sources of income not previously assessed by the Income Tax Officer; losses by embezzlement and payments made to retain and facilitate servants are allowable business expenditures under the income-tax provisions governing computation of business profits.

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