# CALCUTTA v. SIMON CARVES LMITED August 17. 1976

- **Citation:** [1977] 1 S.C.R. 207
- **Court:** Supreme Court of India
- **Decided:** 1977
- **Bench:** H. R. Khanna, R. S. Sarkaria, Jaswant Singh
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/calcutta-v-simon-carves-lmited-august-17-1976-6905
- **Pages:** 7

## Headnote

B
Income-tax (11 of 1922) ss. 34 and 42, Income-tax Act (43 of 1961)
s. 147 and Income-tax Rules, 1922, r. 33 corresponding to r. 10 of 1962 Rules--
One of the methods mentioned in r. 33 applied for asse.\Slncnt-Higher tax
liability if another method in rule adopted-If a case of income escaping
assess1nent.
Section 42, Income-tax Act, 1922, provides for assessing the income, profits
gains deemed to accrue or arise in the taxable territories to a person not resident
C
in the ta•xable territories.
Rule 33 of the 1922-Rules is made for computing
the profits and gains of business deemed to accrue or arise in India in cases
where the income tax officer finds that the provisions of s. 42 do not provide
sufljcient criteria.
The rule mentions three methods and it would be. open to
the income-tax officer to select and apply one of the three methods mentioned
in the rule.
·
The assessee-respondent in the present case, is a non-resident company carrying on business as construction engineers both in India and in other parts of
D
the world.
The Income-tax Officer found that s. 42 of the 1922-Act did not
provide sufficient criteria for computing- the profits and gains of the assessee
deemed to accrue or arise in India and, therefore, assesseed the income applying
one of the three methods mentioned in r. 33.
As it resulted in lower tax
liability, his successor initiated proceedings und•<ir s. l47(b), Income.tax Act,
1961, adopted another method contemplated by r. 33. and assessed the income
nt a higher figure.
The_ Appellate Assistant Commissioner, the Tribunal and
High Conrt held that in making the reassessment the Income-tax Officer could
not depart from the method of computation followed in the original assessE
ment, and adopt an alternative method· of computation though permitted by the
rule.
In appeal to this Conrt, it was contended that the lower tax liability in the
original assessment showed that it was a case of escaped assessment and as
such s. 147 of the 1961-Act was attracted.
Dismissing the appeal,
F
HELD : It is open to the Income-tax Officer at the time of making the
original assessment to adopt one of the three methods mentioned in r. 33
for computing the taxable income of the assessee.
From the mere fact that
the method selected by him resulted in lower . tax liability compared to the
liability which would have resulted from the adoption of another method
under the rule, it would not follow that the discretion was not exercised by
the Income-tax Officer in a proper and judicious manner, and that it would be
a case of income escaping assessment.
[212 E-F]
-
G
(1) 'The discretion to choose one of the methods in r. 33 onght to be
exercised by the Income-tax Officer in a proper and judicious manner. In the
present case, there is nothing to show that the discretion was not so exercised
by the Income-tax Officer, nor was it suggested that he was actuated by any
oblique motive.
The Income-tax Officer ordering reassessment does not sit as
a Conrt of appeal over the officer making the original assessment, nor is it
open to him to substitute his own opinion regarding the method of computation
of the income especially when the method of computation adopted at the time
of original assessment was permissible in law.
The taxing authorities exercise
H
quasi-judicial powers, and in doing so, they must act in a
fair and
not a
partisan manner.
Although it is part of their duty to ensure that no tax,
which is legitimately due from an assessee, should remain unrecovcrcd, they
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SUPREME COURT REPORTS
[1977] 1 S.C.R.
must a,Jso at the same· time not act in a manner which indicates that the
scales are weighted against the assessee.
It is not correct to say that unless
the authorities exercise the power in a manner most beneficial to the revenue
and consequently most adverse to the assessee, they should be deemed not to
have exercised their discretion in a proper and judicious manner. [213C, 212G]
(2) The original order of the first Income

## Text

'
207
COMMISSIONER OF INCOME-TAX, WEST BENGAL-I,
A
CALCUTTA
.
v.
SIMON CARVES LMITED
August 17. 1976
[H. R. KHANNA, R. S. SARKARIA AND JASWANT SINGH, JJ.]
B
Income-tax (11 of 1922) ss. 34 and 42, Income-tax Act (43 of 1961)
s. 147 and Income-tax Rules, 1922, r. 33 corresponding to r. 10 of 1962 Rules--
One of the methods mentioned in r. 33 applied for asse.\Slncnt-Higher tax
liability if another method in rule adopted-If a case of income escaping
assess1nent.
Section 42, Income-tax Act, 1922, provides for assessing the income, profits
gains deemed to accrue or arise in the taxable territories to a person not resident
C
in the ta•xable territories.
Rule 33 of the 1922-Rules is made for computing
the profits and gains of business deemed to accrue or arise in India in cases
where the income tax officer finds that the provisions of s. 42 do not provide
sufljcient criteria.
The rule mentions three methods and it would be. open to
the income-tax officer to select and apply one of the three methods mentioned
in the rule.
·
The assessee-respondent in the present case, is a non-resident company carrying on business as construction engineers both in India and in other parts of
D
the world.
The Income-tax Officer found that s. 42 of the 1922-Act did not
provide sufficient criteria for computing- the profits and gains of the assessee
deemed to accrue or arise in India and, therefore, assesseed the income applying
one of the three methods mentioned in r. 33.
As it resulted in lower tax
liability, his successor initiated proceedings und•<ir s. l47(b), Income.tax Act,
1961, adopted another method contemplated by r. 33. and assessed the income
nt a higher figure.
The_ Appellate Assistant Commissioner, the Tribunal and
High Conrt held that in making the reassessment the Income-tax Officer could
not depart from the method of computation followed in the original assessE
ment, and adopt an alternative method· of computation though permitted by the
rule.
In appeal to this Conrt, it was contended that the lower tax liability in the
original assessment showed that it was a case of escaped assessment and as
such s. 147 of the 1961-Act was attracted.
Dismissing the appeal,
F
HELD : It is open to the Income-tax Officer at the time of making the
original assessment to adopt one of the three methods mentioned in r. 33
for computing the taxable income of the assessee.
From the mere fact that
the method selected by him resulted in lower . tax liability compared to the
liability which would have resulted from the adoption of another method
under the rule, it would not follow that the discretion was not exercised by
the Income-tax Officer in a proper and judicious manner, and that it would be
a case of income escaping assessment.
[212 E-F]
-
G
(1) 'The discretion to choose one of the methods in r. 33 onght to be
exercised by the Income-tax Officer in a proper and judicious manner. In the
present case, there is nothing to show that the discretion was not so exercised
by the Income-tax Officer, nor was it suggested that he was actuated by any
oblique motive.
The Income-tax Officer ordering reassessment does not sit as
a Conrt of appeal over the officer making the original assessment, nor is it
open to him to substitute his own opinion regarding the method of computation
of the income especially when the method of computation adopted at the time
of original assessment was permissible in law.
The taxing authorities exercise
H
quasi-judicial powers, and in doing so, they must act in a
fair and
not a
partisan manner.
Although it is part of their duty to ensure that no tax,
which is legitimately due from an assessee, should remain unrecovcrcd, they
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c
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SUPREME COURT REPORTS
[1977] 1 S.C.R.
must a,Jso at the same· time not act in a manner which indicates that the
scales are weighted against the assessee.
It is not correct to say that unless
the authorities exercise the power in a manner most beneficial to the revenue
and consequently most adverse to the assessee, they should be deemed not to
have exercised their discretion in a proper and judicious manner. [213C, 212G]
(2) The original order of the first Income-tax Officer was a legally correct
order and was not vitiated by any error. The a·bsence of an error would justify
the inference that it is not a case of income escaping assessment. There is
necessarily an element of error which becomes in cases of income escaping assessment mentioned ins. 147(b) of Act of 1961 manifest in the tight of subsequent
information received by the Income-tax Officer.
In the present case, no income
has escaped assessment due to oversight, inad~rtehce or a mistake committed
by the first Income Tax Officer. Therefore, the case would not fall within
the ambit of s. 147(b) of the 1961-Act ors. 34(l)(b) of the 1922-Act.
•
[213A-BT
CrvrL APPELLATE JuRiSDICTION: Civil Appeal No. 1313 of 1973.
(From the Judgment and Order dated 7-9-1972 of the Calcutta
High Court in Income Tax Reference No. 208 of 1966).
V. P. Raman, Addi. Solicitor Genl.
and M. N. Shroff for the
Appellant.
K. Ray and D. N. Gupta, for the Respondent.
D
The Judgment of the Court was delivered by
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KHANNA, J.
This appeal on certificate, by the Commissioner of
Income-tax, is against the judgment of the Calcutta High Court whereby the High Court answered in a reference under the Income-tax Act
the following question in favour of the assessee-respondent and against
the revenue :
"Whether, on the facts and in the circumstances of the
case, the Tribunal was right in holding that in making the
reassessment under section 14 7 (b) of the Income-tax Act,
1961, the Income"tax Officer could not depa_rt from the
method of computation permitted in Rule 33 of the Incometax Rules and followed in the original assessment, and adopt
an alternative method of computation also permitted under
the said Rules (con:esponding to Rule 10 of the Income-tax
Rules, 1962) ?"
The matter relates to the assessment year 1959-60, the corresponding financial year for which ended on M<!rch 31, 1959.
The assessee
is a non-resident company carrying on business as construction engineers.
The Income-tax Officer made the original assessment on May
31, 1960 on a total income of Rs. 21,49,169.
On November 5, 1962
the Income-tax Officer initiated proceedings under section 147(b) of
the Income-tax Act, 1961 (hereinafter referred to as the Act)
and
completed the assessment on February 29, 1964 on a total income of
Rs. 69,85,097.
At the time of the original assessment the assessee filed the return
of income along with the auditor's certificate of the trading results of
the various contracts. One of those contracts was in respect of work
at Durgapur with the Hjndustan Steel Ltd.
In respect of that work
COMMR. OF INCOME TAX v. SIMON CARVES (Khanna !.)
209
the assessee filed a provisional estimate of incot?e whic~ was a!rived
at "by calculating the income that could be attnbutable m relat10n to
the tax deducted under section 18(B) by the Hindustan Steel Ltd."
The Income-tax Officer computed the income from that contract at
Rs. 5,33,164.
The income from the other contracts was computed at
Rs. 16,16,005 ~'as per audited statements."
In the reassessment proceedings the Income-tax Officer purported
to find as under :
(i) That the assessee's outlay in India to the total outlay in various contracts represented a fair index .of
operations carried out in India and as such 60 per
cent of the profits attributable to sterling payments
and claimed to be exempt related to operations in
India and fell to be included in the assessee's total
income;
(ii) that the figure of depreciation: required to be changed;
and
(iii) that some portion of the income had to be assessed
under section 4( 1) (A) on receipt basis.
The total income of the assessee, as already mentioned, was determined
as a result of reassessment to be Rs. 69,85,097.
In arriving at the
figure of the total income the l:lcome-tax Officer estimated the iJ.1come
in respec~ of Durgapur contract to be Rs. 5,33,164 as had been done
in the original assessment.
Regarding the other contracts, the Incometax Officer determined the income of the assessee in reassessment proceedings to be Rs. 64,51,933.
The difference in the income computed
at tlie time of the original assessment and at the time of reassessment
was due to the fact that the Income-tax Officer at the time of original
assessment adopted one method of computation under rule 33 of the
Income-tax Rules, 1922 while the Income-tax Officer making reassessment adopted another method under that rule.
On appeal it was submitted before the Appellat~ Assistant Commissioner on behalf of the assessee that the action of the Income-tax
Officer in reopening the assessment under section 147(b) was without
jurisdiction and th~t the Income-tax Officer had no jurisdiction to
change the method of computation as originally adopted in the revised
proceedings.
The Appellate Assistant Commissioner held that the
proceedings under section 14 7 (b) were bad and that the Income-tax
Officer could not adopt an alternative method of computation in the
;reasseS$ment proceedings.
He, therefore, allowed the appeal.
The
Appellate Assistant Commissioner at the same time observed that the
Income-tax Officer would be justified in computing the income to be
Rs. 22,23,231 and that tl}e assessee had no objection to such a revision.
In appeal before the
Tribunal the department urged that the
Appellate Assistant Commissioner was not justified in holding that
the Income-tax Officer (i) had no jurisdiction to start proceedings
under section 14 7 (b) of the Act; and (ii) that the Appellate Assistant
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SUPREME COURT REPORTS
[1977) 1 S.C.R.
Commissioner had erred in allowing deductions in the income of the
assessee.
The Tribunal held on the first ground that
proceedings
under section
147(b) had been validly initiated.
Regarding the
second ground, the Tribunal observed in agreement with the Appellate
Assistant Commissioner that the mode of computation adopted in the
original assessment was one permitted under rule 33 of the Incometax Rules 1922 and that the mode adopted in reassessment was another
alternative method.
The tribunal held that both the methods being
permissible, it could not be said that any mistake was committed in
computing the income at the time of the original assessment on a
particular basis adopted with reference to rule 33.
In the opinion
of the Tribunal, the Income-tax Officer could not in reassessment proceedings depart from the method of
computation
adopted in the
original assessment.
The Tribunal directed that the reassessment be
made "adopting the same method of computation as in the original
assessment subject to any adjustments which may be justified such as
excess depreciation being charged in the account and so on."
At the instance of the revenue,
the question reproduced above
was referred to the High Court. The High Court, while answering the
question against the revenue, referred to the connotation of the words
"escaped income"and observed
" .... it means an income which the assessee has succeeded in getting away with or has eluded observation or search
or notice of the tax authorities. In other words, it cann0t
mean an item of income which has not been taxed by purusing a method approved by law. In the
instant case, the
excess income was not taxable under the third method bnt it
has become taxable by following another method sanctio1rnd
by the same rule, namely, rule 33. This is not, therefore, a
case of escaped income which has not been brought into the
orbit of taxation in the reassessment proceedings."
In appeal before us learned
Additional Solicitor
General has
assailed the judgment of the High Court and has contended that the
High Court was in error in holding that the instant case was not one
of income escaping assessment.
As against that, Mr. Ray on behalf
of the assessee_~respondent has canvas~ed for the correctness _of the
view taken by the High Court.
Before dealing with the contentions advanced, it may be apposite
to refer to_ the relevant provisions. According to section 4 ( 1 )( c) of
the Indian Income-tax Act, 1922, subject to the provisions of that
Act, the total income of any previous year of any {>erson i~clu~ks all
income, profits and gains from whateve~ s~urce ~enved which if such
person is not resident in the taxable te~ntones .du~mg such year, acc!ue
or arise or are deemed to accrue or anse to him m the taxable terntoties during such year.
Sub-sectio~ ( 1) of section 42 o~ the Act. of
1922, inter alia, provides that all mcome, profits or gams acci:umg
or arising, whether directly or indirectly, through or from any b?smess
connection in the taxable territories, shall be deemed to be mcome
\
COMMR. OF INCOME TAX v. ,SIMON CARVES (Khanna !.)
211
accruing or arising within the taxable tertitories, and where the person
entitled to the income, profits or gains is not resident in the taxable
territories, shall be chargeable to income-tax either in his name or in
the· name of his agent.
According to sub-section (3) of section 42,
in the case of a business of which all the operations are not carried
out in the taxable territories, the profits and gains of the business
deemed under this section to accrue or arise in the taxable territories
shall be only such profits and gains as are reasonably attributable to
that part of the operations carried out in th~ ~axable territories.
The assessee-respondent in the present case carried on business as
construction engineers both . in India and other parts of the world.
The Income-tax Officer, it seems, found that the provisions. of section
42 of the Act of 1922 did not provide sufficient criteria for computing
the profits and gains of business deemed to accrue or arise in India.
Resort was accordingly had to rule 33 of the 1922 Rules. The above
rule has been made to meet such an eventuality, and read~ as under
"In any case in which the Income-tax Officer is of
opinion that the actual amount of the income, profits or gains
accruing or arising to any person residing out of the taxable
territories whether directly or indirectly through or from any
business connection· in the taxable territories or through or
from any property in the taxable territories, or through
or from any asset or source of income in the taxable
territories, or through or from any money lent at interest
and brought into the ·taxable territories in cash or in kind
cannot be ascertained, the amount of such income, profits
or gains for the purposes of assessment to income-tax may
be calculated on such percentage of the turnover so accruing or arising as the !Ii.come-tax Officer may consider to
be reasonable, or on an amount which bears the same proportion to the total profits of, the business. of such person
(such profits being computed in accordance with the provisions of the Indian Income-tax Act) as the receipts so
accruing or arising bear to the total receipts of the business or in such other manner as the Income-tax Officer
may deem suitable."
Shorn of the parts with which we are not concerned, the rule provides
that in any case in which the Income-tax Officer is of the opinion th:lt
the actual amount of income, profits or gains accruing or arising to
any person residing· out of the taxable territories, whether directly or
indirectly, through or from any business connectiofi in the taxable
territories cannot be ascertained, the amount of such income, profits
<Jr gains for the purpose of assessment to income-tax may be calculated
(i) on such percentage of the turnover so accruing or
arising as the Income-tax Officer may consider to be
reasonable, or
(ii) on an amount which bears the same proportion to the
total profits of the business of such .person (such
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SUPREME COURT REPORTS
[1977) 1 S.C.R.
profits being computed in accordance with the provisions of the Indian Income-tax Act) as the receipts
so accruing or arising bear to the total receipts of the
business, or
(iii) in such other manner as the Income-tax Officer may
deem suitable.
The above rule makes it clear that if other conditions mentioned in
the rule are satisfied, it would be open to the Income-tax Officer in
computing the income, profits or gains to apply
one of the three
methods mentioned in the rule. It is the common case of the parties,
and that is also the underlying assumption of the question referred to
the High Court, that the Income-tax Officer in making the original
assessment adopted one method while the Income-tax Officer making
reassessment adopted another method contemplated by rnle 33.
The
question with which we are concerned is whether it would be a case
of income escaping assessment if the Income-tax Officer adopts a
method of computation which is permissible under the law but which
method results in lower tax liability compared to the other method
which too is permissible in law.
According to the learned Additional
Solicitor General, the adoption of a method even though permitted by
rule 33 which _results in lower tax liability of the assessee compared to
the other method mentioned in the rule would warrant the conclusion
that income has escaped assessmen~ and as such section 147 of the
Act of 1961 would get attracted. After giving the matter our earnest
consideration, we find it difficult to accept the above contention. It
was open, as already mentioned, to the Income-tax Officer at the time
of making the original assessment to adopt one of the three methods
mentioned in rule 33 for computing the taxable income of the assessee.
Discretion was vested by rule 33 in the Income-tax Officer for the purpose of making his choice of the methods, and the same was to be
exercised in a proper and judicious manner. There is nothing before
us to show that the discretion was not exercised by the said officer in a
proper or judicious manner. It is also not suggested that the Incometax Officer was actuated by some oblique motive. From the mere fact
that the method selected by him was such as resulted in lower tax
liability of the assessee compared to the liability which would have
resulted from the adoption of other method, it would not follow that
the discretion was not exercised in a proper and judicious manner.
The taxing authorities exercise quasi judicial powers and in doing so
they must act in a fair and not a partisan manner. Although it is part
of their duty to ensure that no tax which is legitimately due from an
assessee should remain unrecovered, they must also at the same time
not act in a manner as might indicate that scales are weighted against
the assessee. We are wholly unable to subscribe to the view that unless
those authorities exercise the power in a manner most beneficial to the
revenue and consequently most adverse to the assessee they should
be deemed not to have exercised it in a proper and judicious manner_.
The order made by the Income-tax
Officer at the time ?~ the
original assessment was a legally correct order and was not v1tlated
COMMR. OF INCOME TAX v. SIMON CARVES (Khanna J.)
213
by any error.
The absence of an error in that order would justify
the inference that the present is not a case of income. escaping assessment.
There is necessarily an element of error in cases of income
escaping assessment mentioned in section 147(b) of the Act of 1961.
Such error resulting in income escaping assessment becomes manifest
in the light of information coming subsequently into the possession
of the Income-tax Officer.
Where, as in the present case, the order
.making the original assessment was a legally correct order and was
not vitiated by any error, the case would not be one which would fall
within th.e ambit of section 147(b) of the Act of 1961 or section
34(1) (b) of the Act of 19~2. We may add that the Income-tax
Officer ordering reassessment does not sit as a court of appeal over
the Income-tax Officer making the original assessment. Nor is it open
to the Income-tax Officer ordering reassessment to substitute his own
opinion regarding the method of computing the income for that of the
Income-tax Officer who made the original assessment, especially when
the method of computation adopted at the time of original assessment
was permissibl~ in law.
The fact that the adoption of a different
method of com_putation would have resulted in higher yield of tax
would not in such a case justify the reopening of the assessment.
It has been argued on behalf of the appellant that reassessment
under section 14 7 (b) would be justified where in the original assessment income liable to tax· has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer.
The
present however, we find, is a case which does not fall in any of
those categories.
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We would, therefore, uphold the judgment of the High Court and
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.dismiss the appeal with costs.
V.P.S.
Appeal dismissed.