Appellate power to correct income computation extends to rejecting accounting methods and applying rule 33 on appeal.

Section 13 of the Indian Income-tax Act, 1922 and rule 33 of the Income-tax Rules, 1922 were construed as subject to appellate correction under section 31(3): the majority held that, on an assessee's appeal, the Appellate Assistant Commissioner could reject the accounting method earlier accepted by the Income-tax Officer and could also apply rule 33 where the assessment had omitted to do so. The reasoning was that the officer's initial opinion under the proviso to section 13 and under rule 33 was not final against review, and the appellate authority could examine and correct every process leading to assessment. Bhagwati, J. dissented, treating the power to reject the accounting method as vested exclusively in the Income-tax Officer.

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Issues: (i) Whether, on an assessee's appeal, the Appellate Assistant Commissioner could reject for the first time the method of accounting accepted by the Income-tax Officer under the proviso to section 13 of the Indian Income-tax Act, 1922. (ii) Whether the Appellate Assistant Commissioner could invoke rule 33 of the Indian Income-tax Rules, 1922, for computing the income of a non-resident when the Income-tax Officer had not done so.

Issue (i): Whether, on an assessee's appeal, the Appellate Assistant Commissioner could reject for the first time the method of accounting accepted by the Income-tax Officer under the proviso to section 13 of the Indian Income-tax Act, 1922.

Analysis: Section 13 requires computation in accordance with the method of accounting regularly employed by the assessee, but its proviso permits rejection of that method where the Income-tax Officer forms the opinion that income, profits and gains cannot properly be deduced therefrom. Reading section 13 with section 31(3), the majority held that the Appellate Assistant Commissioner, once seised of a valid appeal, may examine and correct every process leading to the assessment and is not barred from revising the Income-tax Officer's conclusion on the accounting method. The words "in the opinion of the Income-tax Officer" indicate the officer who must first form the opinion, but they do not confer finality against appellate review. The appellate power to enhance or set aside assessment is wide enough to correct an erroneous acceptance of the accounting method.

Conclusion: The Appellate Assistant Commissioner could reject the accounting method and the answer was in the affirmative, in favour of the Revenue.

Issue (ii): Whether the Appellate Assistant Commissioner could invoke rule 33 of the Indian Income-tax Rules, 1922, for computing the income of a non-resident when the Income-tax Officer had not done so.

Analysis: Rule 33, like the proviso to section 13, uses the expression that the Income-tax Officer must be of opinion that the actual income cannot be ascertained. The majority held that this does not make the officer's view immune from appellate correction. If the Appellate Assistant Commissioner, while hearing the assessee's appeal, is lawfully in seisin of the assessment and finds that the statutory conditions for invoking rule 33 are satisfied, he may apply the rule in exercise of the wide powers under section 31(3). The appellate authority may thus adopt the statutory mode of computation where the assessment order wrongly omitted to do so.

Conclusion: The Appellate Assistant Commissioner could invoke rule 33 and the answer was in the affirmative, in favour of the Revenue.

Final Conclusion: The appellate authority's statutory power to revise an assessment extended to correcting the Income-tax Officer's failure to apply the proviso to section 13 and rule 33, so the assessee's appeal failed and the Revenue succeeded.

Ratio Decidendi: The Appellate Assistant Commissioner's appellate powers under section 31(3) are wide enough to correct every process leading to assessment, including an erroneous acceptance of the assessee's accounting method and the corresponding mode of computation, because the proviso to section 13 requires an initial opinion by the Income-tax Officer but does not make that opinion final against appellate review.

Dissenting Opinion: Bhagwati, J. held that the proviso to section 13 vested the power of rejecting the accounting method exclusively in the Income-tax Officer and that the Appellate Assistant Commissioner could not exercise that power for the first time on appeal; he would therefore have dismissed the appeal.

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