1957 (10) TMI 5 - SC - Income Tax

Supreme Court Allows Appeal, Affirms AAC's Authority to Reject Accounting Method (3)(a)

Commissioner Of Income-Tax. Versus McMillan And Company.

The Supreme Court allowed the appeal, setting aside the Bombay High Court's judgment. It ruled in favor of the Revenue, affirming the Appellate Assistant ... Whether it is open to an Appellate Assistant Commissioner on appeal to reject the assessee's books of account, which have been accepted by the Income-tax Officer ? Whether it is open to an Appellate Assistant Commissioner appeal to invoke the provisions of rule 33 of the Indian Income-tax on Rules for the purpose of computing the income of a non-resident, the Income-tax Officer not having done so ? Held that:- While we agree that, in the first instance, the Income-tax Officer as the first assessing officer has to form an opinion about the applicability of the proviso to section 13, we do not agree that it is not open to any other authority, which is lawfully in seizin of the order of assessment of which the method of accounting under section 13 is only a part, to come to a different conclusion with regard to the applicability of the proviso. The present is not a case where the Appellate Assistant Commissioner has travelled outside the ambit of his jurisdiction under section 31 of the Act. For the reasons given above, we would answer question No. 1 in the affirmative. As to question No. 2, only a few words are necessary. A similar expression occurs in the rule : 'In any case in which the Income-tax Officer is of opinion etc.' For the same reasons which we have given with regard to question No. 1, the answer to question No. 2 is also in the affirmative. Appeal allowed. The judgment and order of the High Court of Bombay dated 4th March, 1953, is set aside and the two questions referred to the said High Court are answered in favour of the Revenue Issues Involved:1. Jurisdiction of the Appellate Assistant Commissioner to reject the method of accounting accepted by the Income-tax Officer.2. Authority of the Appellate Assistant Commissioner to invoke Rule 33 of the Indian Income-tax Rules if not done by the Income-tax Officer.3. Powers of the Appellate Assistant Commissioner to enhance an assessment under section 31(3)(a) of the Indian Income-tax Act.Issue-wise Detailed Analysis:1. Jurisdiction of the Appellate Assistant Commissioner to Reject the Method of Accounting:The primary issue was whether the Appellate Assistant Commissioner (AAC) could reject the method of accounting employed by the assessee, which had been accepted by the Income-tax Officer (ITO). The Supreme Court analyzed Section 13 and Section 31 of the Indian Income-tax Act, 1922. Section 13 stipulates that income, profits, and gains should be computed based on the method of accounting regularly employed by the assessee unless the ITO opines that the income cannot be properly deduced from such method. The Court concluded that the AAC has the authority to re-examine the books of accounts and is not bound by the ITO's acceptance of the method of accounting. The AAC can reject the method of accounting if it does not reflect the true income, profits, and gains, thereby exercising the power under the proviso to Section 13.2. Authority of the Appellate Assistant Commissioner to Invoke Rule 33:The second issue was whether the AAC could invoke Rule 33 of the Indian Income-tax Rules for computing the income of a non-resident when the ITO had not done so. Rule 33 allows the ITO to compute income on a reasonable percentage of turnover if the actual amount cannot be ascertained. The Supreme Court held that the AAC, upon having seizin of the appeal, possesses the same powers as the ITO, including the authority to invoke Rule 33, thus affirming that the AAC can compute the income using Rule 33 even if the ITO had not done so initially.3. Powers of the Appellate Assistant Commissioner to Enhance an Assessment:The third issue was whether the AAC could enhance an assessment under Section 31(3)(a) based on new information indicating that the income had been under-assessed. The Court emphasized the wide powers conferred upon the AAC under Section 31(3), which allows the AAC to confirm, reduce, enhance, or annul the assessment. The AAC's power to enhance the assessment is not restricted to the grounds raised by the assessee in the appeal but extends to any matter related to the assessment. Therefore, the AAC can enhance the assessment if it finds that the income has been under-assessed, provided the assessee is given a reasonable opportunity to show cause against such enhancement.Conclusion:The Supreme Court allowed the appeal, setting aside the judgment and order of the Bombay High Court. It answered both questions in favor of the Revenue, affirming the AAC's authority to reject the method of accounting and invoke Rule 33. The Court also upheld the AAC's power to enhance the assessment under Section 31(3)(a). The judgment clarified that the AAC has broad revisional powers to ensure the correct computation of income, profits, and gains, aligning with the statutory framework of the Income-tax Act. Each party was directed to bear its own costs throughout the proceedings.