# THE COMMISSIONER OF INCOME-TAX v. M/s. McMILLAN & CO

- **Citation:** [1958] 1 S.C.R. 689
- **Court:** Supreme Court of India
- **Decided:** 1958
- **Case number:** Civil Appeal No. The Co;;;;;;ssioner 29 of 1955
- **Bench:** Bhagwati, S. K. DAs, J. L. Kapur
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-commissioner-of-income-tax-v-m-s-mcmillan-co-1417
- **Pages:** 50

## Headnote

689
Income-Tax-Assessment-Acceptance by Income-tax Officer <f
he assessee's method of accounting-Power of Appellate Assistant
Commissioner in appeal-If can reject such method and adopt
a11otlzer-India11 Income-tax Act (XI of 1922), ss. 31, 13 proviso--
Indian Income-tax Rules, R. 33.
The respondent assessee, a non-resident company, sold and
published books and magazines in various parts of the world. lt
submitted for the assessment year in question a return in which a
:fixed percentage of the marked price. of all publications sold in
India, printed in India or elsewhere, was adopted as the cost of
production and this method of accounting was followed in the
return. The Income-tax Officer accepting this method, assessed
the income at Rs. 82,623. The assessee preferred an appeal on
other grounds to the Appellate Assistant Commissioner. The
Appellate Assistant Commissioner was of opinion that the true
income of the assessee could not be deduced from the method of
accounting followed by him and accepted
by the Income-tax
Officer and issued a notice under s. 31(3) of the Indian Income·
tax Act and after hearing the assessee fixed his assessable income
at Rs. 1,11,616 by applying the provisions of Rule 33 of the Indian
Income-tax
Rules. The
assessee appealed to the
Appellate
Tribunal and the Tribunal, relying on a recent decision of the
Bombay High Court, held that the Appellate Assistant Commissioner had no jurisdiction to enhance the income in the way he did
and referred the matter to the High Court at the instance of the
appellant. The High Court held against the appellant and he
appealed. The questions for decision were whether it was open to
the Appellate Assistant Commissioner in exercise of his powers
under s. 31(3} of the Act to reject the .method of accounting,
followed by the assessee and accepted by the Income-tax Officer,
under the proviso to s. 13 of the Act, and compute the income,
profits or gains of the assessee under Rule 33 of the Rules.
Held, (per S. K. Das and Kapur. JJ., Bhagwati, J., dissenting)
that the questions must be answered in the affirmative and the
appeal must succeed.
There is nothing ins. 31, read with the proviso to s. 13, of the
Indian Income-tax Act which prevents the Appellate Assistant
Commissioner, in an appeal
preferred by the asscssee,
from
exercising the powers which the Income-tax Officer can exercise
under the proviso to s. 13 of the Act. Although it is for the
Jncome-tax Officer, in the first instance, to decide what would be
the correct method of accounting under the proviso in a particular case, he has, in doing so, to act reasonably and judicially and
L2SC/61 P. V-7
1957
Oc1ober, 16.
1590
SUPREME COURT REPORTS
[1958)
1957
not subjectively or arbitrarily and any decision he may arrive at
--
cannot be treati:d as final. Neither s. \J nor the proviso imposes
The Commissioner any limitation on the wide powers conferred on the Appellate
of Income-Tax
Assistant Commissioner bys. 31(3) of the Act once he is in proper
v.
seizin of the matter.
M/s. McMi/1011
& Co.
Narrondas Manordass, Bombay v. Commissioner of Income-tax
(1957) 31 J.T.R. 909, approved.
K. F. Vakeel v. The Commissioner of Income-tax, l.T. Reference No. 21 of 1950, Bombay High Court, dissented from.
Case-law discussed.
The Appellate Assistant Commissioner has also the power in
an appeal to apply the provisions of Ruic 33 of the Indian Incometax Rules for the purpose of a correct computation of the assessee's
income although the Income-tax Officer has not done so.
Per Bhagwati,.J.-The difference in the language of the tw<>
conditions, on the fulfilment of which the meth<>d of accounting
regularly employed by the assessee can be rejected under the
proviso to s. 13 of the Indian ·Income-tax Act clearly indicates
that the Legislature intended that any determination as to the
second condition, namely, that the income, profits and gains of the
assessee cannot be property deduced from the method regularly
employed by him, must be of th

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...
S.C.R.
SUPREME COURT REPORTS
THE COMMISSIONER OF INCOME-TAX
v.
M/s. McMILLAN & CO.
(BHAGWATI, S. K. DAs and J. L. KAPUR, JJ.)
689
Income-Tax-Assessment-Acceptance by Income-tax Officer <f
he assessee's method of accounting-Power of Appellate Assistant
Commissioner in appeal-If can reject such method and adopt
a11otlzer-India11 Income-tax Act (XI of 1922), ss. 31, 13 proviso--
Indian Income-tax Rules, R. 33.
The respondent assessee, a non-resident company, sold and
published books and magazines in various parts of the world. lt
submitted for the assessment year in question a return in which a
:fixed percentage of the marked price. of all publications sold in
India, printed in India or elsewhere, was adopted as the cost of
production and this method of accounting was followed in the
return. The Income-tax Officer accepting this method, assessed
the income at Rs. 82,623. The assessee preferred an appeal on
other grounds to the Appellate Assistant Commissioner. The
Appellate Assistant Commissioner was of opinion that the true
income of the assessee could not be deduced from the method of
accounting followed by him and accepted
by the Income-tax
Officer and issued a notice under s. 31(3) of the Indian Income·
tax Act and after hearing the assessee fixed his assessable income
at Rs. 1,11,616 by applying the provisions of Rule 33 of the Indian
Income-tax
Rules. The
assessee appealed to the
Appellate
Tribunal and the Tribunal, relying on a recent decision of the
Bombay High Court, held that the Appellate Assistant Commissioner had no jurisdiction to enhance the income in the way he did
and referred the matter to the High Court at the instance of the
appellant. The High Court held against the appellant and he
appealed. The questions for decision were whether it was open to
the Appellate Assistant Commissioner in exercise of his powers
under s. 31(3} of the Act to reject the .method of accounting,
followed by the assessee and accepted by the Income-tax Officer,
under the proviso to s. 13 of the Act, and compute the income,
profits or gains of the assessee under Rule 33 of the Rules.
Held, (per S. K. Das and Kapur. JJ., Bhagwati, J., dissenting)
that the questions must be answered in the affirmative and the
appeal must succeed.
There is nothing ins. 31, read with the proviso to s. 13, of the
Indian Income-tax Act which prevents the Appellate Assistant
Commissioner, in an appeal
preferred by the asscssee,
from
exercising the powers which the Income-tax Officer can exercise
under the proviso to s. 13 of the Act. Although it is for the
Jncome-tax Officer, in the first instance, to decide what would be
the correct method of accounting under the proviso in a particular case, he has, in doing so, to act reasonably and judicially and
L2SC/61 P. V-7
1957
Oc1ober, 16.
1590
SUPREME COURT REPORTS
[1958)
1957
not subjectively or arbitrarily and any decision he may arrive at
--
cannot be treati:d as final. Neither s. \J nor the proviso imposes
The Commissioner any limitation on the wide powers conferred on the Appellate
of Income-Tax
Assistant Commissioner bys. 31(3) of the Act once he is in proper
v.
seizin of the matter.
M/s. McMi/1011
& Co.
Narrondas Manordass, Bombay v. Commissioner of Income-tax
(1957) 31 J.T.R. 909, approved.
K. F. Vakeel v. The Commissioner of Income-tax, l.T. Reference No. 21 of 1950, Bombay High Court, dissented from.
Case-law discussed.
The Appellate Assistant Commissioner has also the power in
an appeal to apply the provisions of Ruic 33 of the Indian Incometax Rules for the purpose of a correct computation of the assessee's
income although the Income-tax Officer has not done so.
Per Bhagwati,.J.-The difference in the language of the tw<>
conditions, on the fulfilment of which the meth<>d of accounting
regularly employed by the assessee can be rejected under the
proviso to s. 13 of the Indian ·Income-tax Act clearly indicates
that the Legislature intended that any determination as to the
second condition, namely, that the income, profits and gains of the
assessee cannot be property deduced from the method regularly
employed by him, must be of the Income-tax Officer atone and no
other authority described in the hierarchy of Income-tax authorities and defined by the Act.
K. F. Vakeel v. The Commissioner of Income-tax, J.T. Reference No. 21 of 1950, Bombay High Court, approved.
Nor are the powers of the Appellate Assistant Commissioner
under s. 3 t (3) of the Act, in however wide terms they may have
been described, absolute in character being circumscribed, as they
necessarily are, by the nature of the pr<>ceedings before him and
are limited to the subject-matter of the assessment.
Narrondas Manordass, Bombay v. The Commissioner of lncometax, Bombay, (1957) 31 l.T.R. 909, referred to.
Case-Jaw discussed.
Section 31(3) of the Act has, therefore, to be read along with
s. 13 and its proviso and so read there can be no doubt the
Appellate Assistant Commissioner has no power fir appeal t<>
nullify the power which the Income-tax Officer atone has under
the proviso. He has no power to reject the method of accounting
regularly employed by the assessee suo motu.
If he thinks that
the Income-tax Officer was in error in accepting that meth<>d as
the proper method for computing the assessee's income what he
can do is to set aside the assessment and direct the Income-tax
Officer to make a fresh assessment under s. 31(3)(h) of the Act.
Nor can he in exercising his power of enhancing the assessment
under s. 31(3)(a) exercise the power under the proviso to s. 13
which is solely vested in the Income-tax Officer.
...
'
S.C.R.
SUPREME COURT REPORTS
691
The questions must, therefore, be answered in the negative.
1957
CIVIL APPELLATE JURISDICTION. Civil Appeal No. The Co;;;;;;ssioner
29 of 1955;
of Income-Tax
Appeal by special l~ave from the judgment and
order dated the 14th March, 1953, of the Bombay High
Court in Income-tax Reference No. 27 of 1952.
C. K.
Daphtary, Solicitor-General of India,
G. N. Joshi and R.H. D.hebar, for the appellant.
N. A. Palkhivala, J. B. Dadachanji, S. N. Andley,
Rameshwar Nath and P. L. Vohra,'for the respondents.
1957. October l6. The judgment of S. K. Das and
J. L. Kapur JJ. was delivered by S. K. Das J. Bhagwati J. delivered a separate judgment.
S. K. DAS J.-This is an appeal by special leave
from the judgment and order of the High Court of
Judicature at Bombay, dated March
~. 1953, in
Income-tax Reference No. 27 of 1952, by· which the
said High Court answered certain questions of law
referred to it in the negative. The answer to those
questions depends upon the true scope and effect of
certain provisions of the Indian Income-tax Act (XI
of 1922), hereinafter referred as the Act, regarding
which t:bere has already been a difference of opinion
between two High Courts in India. Unfortunately,
we have come to a conclusion different from that of
our learned senior brother Bhagwati J., and we are
explaining in this judgment, as briefly and clearly as
we can, the grounds on which our conclusion is
founded.
Very briefly put, the relevant facts are these. The
assessee, respondent before us, is a non-resident com-·
pany which has its head office in London and branches
in India. It sells and publishes books and magazines
in various parts of the world. For the assessment
year in question, it submitted a return of income in
which with regard to all publications sold in India,
whether printed in India or elsewhere, a fixed percentage of what was known as the marked price was
adopted as the cost of production. This, if one may
so put it, was the method of accounting on which the
assesseo company submitted its return. The Incomev.
M/s. McMillan
& Co.
s. K. Dasi.
692
SUPREME COU;RT REPORTS
[1958]
1957
ta Offi
.
.
_
~
.cer apparently accepted it and subject to cerIThe Commissioner tam mmor modifications as respects some items of
of Income-Tax expenditure and an alleged bad debt with whieh we
v.
are not now concerned, assessed the assessee on an
M/s. McMillan income of Rs. 82,623. The assessee appealed to the
& Co.
Appellate Assistant Commissioner. The latter issued
s. K. Das 1. a notice under s. 31(3) of the Act against the assessee.
and after hearing the assessee, enhanced the assessment of the assessee company's business income to
Rs. 1,ll,616. The Appellate Assistant Commissioner
found:
·
"It is noticed that on total turnover of Rs. 16,01,973
for the previous year ending 30th May, 1943, the gross
profit amounted to Rs. 4,09,360 working out to just
about 25.5 per ceni. In the case of World profit and
loss account I find that the gross profit earned was
£ 231,070 on total sales of £ 628,000 working out to
over 37 per cent. The difference in gross profit is so
wide that some explanation had to be called for from
the appellants, especially in view of the fact that the
appellants do not maintain what should be called an
Indian trading and profit and loss account on the same
lines as the World trading and profit and loss account~
The profit and loss account maintained in India shows
only the purchases at the rate at which these were
charged to the Indian branches by the London head
office instead of the real cost of these publications."
He was of the view that inasmuch as the fixed percentage of the marked price adopted by the assessee company as the production cost for its publications sold
in India did not correctly represent .the actual cost of
production, the method of accounting regularly employed is such that a true figure of income, profits
and gains is not deducible therefrom. He fixed the
income of the assessee company on the basis of the
net world profit of the assessee on its world turnover,
and applying that basis to its Indian business came to
the conclusion that the income of the assessee was
Rs. 1,11,616. He did so presumably under the proviso
to s. i3 and R. 33 of the Indian Income-tax Rules,
1922.
•
•
S.C.R.
SUPREME COURT REPORTS
693
The assessee company then appealed to the Appel1957
late Tribunal. The Appellate Tribunal remanded the Ti'h c-·..,
t th A
11
A •t
C
. .
b
e omm1s •• oner
case o
e
ppe ate
ss1s ant
omm1ss1oner,
ut of Income-Tax
before the remand could be decided came the decision
v.
of the Bombay High Court in K. F. Vakeel v. The M/s.McMillan
Commissioner of Income-tax(1). The Tribunal then
& Co.
held that in view of that decision, the Appellate Assiss. K. Das 1.
tant Commissioner rad no jurisdiction to enhance the
income to Rs. 1,11,616. Thereafter, the Commissioner
of Income-tax, Bombay City, appellant before us,
asked the Tribunal to submit certain questions of law
to the High Court of Bombay. These questions were-
"(1) Whether it is open to an Appellate Assistant
Commissioner on appeal to reject the assessee':; books
of account, which have been accepted by the Incometax Officer ?
(2) Whether it is open to an Appellate Assistant
Commissioner on appeal to invoke the provisions of
Rule 33 of the Indian Income-tax Rules for the purpose of computing the income· of a non-resident, the
Income-tax Officer not having done so ?
(3) Whether it is open to an Appellate Assistant
Commissioner on appeal to enhance an assessment in
exercise of the powers conferred upon him by section 31(3)(a) of the Indian Income-tax Act, where as
a result of definite information he is of opinion that
the in.come of the assessee has been under-assessed ?"
By its judgment and order dated March 4, 1953, the
High Court answered the first two questions in the
negative and held-rightly in our view-that the third
question did not arise. The appellant then asked for
and obtained special leave to appeal from the said
judgment and order of the Bombay High Court.
The first question appears to us to have been some:.
what widely framed and, in the terms in which it has
been expressed, is not confined to the method of accounting referred to in s. 13 of the Act. The Tucometax Officer, even when he accepts the assessee's method
of accounting, is not bound by the figure of profits shown in the accounts. If and when an appeal is
(I) I.T. Rtf<rence '-"o. 21 of 19~,o, Bombay High Court.
694
SUPREME COURT REPORTS
[1958]
1957
taken by the assessee to the Appellate Assistant ComThe CommissloMr missioner, the latter can re-examine the books of
of Income-Tax account to test the correctness of the assessment made.
v.
It is not disputed before us that 'accounts' must be
M/•. McMillan distinguished from the 'method of accounting'. Sec-
& co.
tion 13 and its proviso are concerned with the method
s. K. Das J.
of accounting. In the context of the statement of the
case, however, the fil'St question really means this : is
it open to the Appellate_ Assistant Commissioner, on
an appeal preferred by the assessee, to reject for the
first time the method of accounting, purporting to act
under the proviso to s. 13 of the Act, on the ground
that the income, profits and gains cannot be properly
deduced therefrom, .when the Income-tax Officer
although he has not expressly said so must be taken to
have accepted the self-same method of accounting ?
The answer to the question depends on a correct
interpretation of ss. 13 and 31 of the Act. We shall
first read s. 13 of the Act :
"13. Income, profits and gains shall be computed,
for the purposes of sections 10 and 12, in acl!ordance
with the method of accounting regularly employed by
the nssessee :
Provided that, if no method of accounting has been
regularly employed, or if the method employed is such
that, in the opinion of the Income-tax Officer, the
income, profits and gains cannot properly be deduced
therefrom, then the computation shall be made upon
such basis and in such manner as the Income-tax
Officer may determine."
The section enacts that for the purposes of s. 10 (pro-
. fits of business, profession or vocation) and s. 12 (income from other sources) income, profits and gains
must be computed in accordance with the method of
accounting regularly employed by the assessee. Th<!
choice of the method of accounting lies with the assessee; but the assessee must show that he has followed
the method regularly for his own purposes. The section and the proviso read together clearly make such
a method of accounting regularly employed by the
assessee a compulsory basis of computation unless, in
the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom.
-
S.C.R.
SUPREME COURT REPORTS
695
If the true income, profits and gains cannot be ascer1957
fained on the basis of the assessee's method, or where Tiie c~ssloirtr
no method of accounting has been regularly employed, of /11come-Tax
the income must be computed upon such basis and in
v.
such manner as the Income-tax Officer may determine. M/s. McMillan
Thus far, there is no divergence of opinion as to
the true scope and effect of s. 13 and its proviso. The
divergence starts when -s. 13 is read along with s. 31,
and we ~ome to the powers of the Appellate Assistant
Commissioner. Section 31, in so far as it is relevant
for our· purpose, is in these terms. :
"31(3). In disposing of an appeal, the Appellate
Assistant Commissioner may, in the case of an order
Qf assessment,-. .
/
·
(a) confirm, reduce, enhance or annul the assessment, or
(b) set aside the assessment and direct the Income_ tax Officer to make a fresh assessment after making
such further inquiry as the Income-tax Officer thinks
_fit or the Appellate Assistant Commissioner may direct,
. and the Income-tax Officer shall thereupon proceed
to ma~e such fresh assessment, and determine where
necessary the amount of tax payable on the basis of ·
such fresh assessment.
' ................................................ .
Provided that the Appellate Assistant Commissioner shall not enhance .an assessment or a penalty
unless the appellant has had a reasonable opportunity
of showing cause against such enhancement;
Provided further that at the hearing of any appeal
against an order of an Income-tax Officer the Incometax Officer shall have the right to be heard either in
person or by a representative."
On one side, the argument on behalf of the appellant is that s. 31 does not in any way limit or circumscribe the power of the Appellate Assistant Commissioner so as to exclude from the ambit of his
jurisdiction the power given by s. 13 and its proviso;
on the other side, the argument for the respondent is
thai by reason of the terms of the proviso, particularly
& Co.
S. K. Das J.
696
SUPREME COURT REPORTS
(1958}
~ the expression "in the opinion of the Income-tax
The commissioner Officer" occurring therein, the power or duty of
of Income-Tax rejecting the method of accounting on the ground that
v.
the income, profits and gains cannot properly be
M/s. McMillan deduced therefrom is given to the Income-tax Officer
4 co.
alone and not to any other authority in the hierarchy
s. K. Das J.
of authorities mentioned in s. 5 of the Act. Ancillary
to the aforesaid two main contentions, there is a further divergence of opinion as to whether the det~r
mination of the Income-tax Officer under the proviso
to s. 13, in so far as such determination depends on
his opinion, is final or not. On behalf of the appellant
it is contended that it is not final-whether the determination is in favour of the assessee or not-provided an appeal is preferred by the assessee and the
Appellate Assistant Commissioner gets seizin of the
assessment. For the respondent, the argument is that
it is final when the determination is in favour of the
assessee, even if the assessee prefers an appeal on any
other ground; but it is not final if the determination
is against the assessee and the assessee appeals against
that determination. These are the rival contentions
which now fall for consideration.
Learned counsel for the respondent has drawn a
distinction between what he called at one stage of his
arguments (i) an objective determination by the
Income-tax Officer-a determination based on certain
objective facts and leading to certain consequences
for or against the assessee-and (ii) a small category
of cases where the determination is purely subjecti'Je
and results in certain consequences for or against the
assessee. Learned counsel has expressed the same
argument in less philosophical terms by saying that in
one class of cases, the determination is by whosoever
may be the assessing authority at the 'initial or appellate stage, and in the other by a named authority only.
According to him, into the first class of cases the entire
hierarchy of Income-tax authorities are included;
but in the second class of cases, the decision must be
that of the named authority only. He has referred us
to certain other sections of the Act where, according
to him, the ·determination is also subjective, such as
S.C.R.
SUPREME COURT REPORTS
697
-S. 4A(a)(iv), s. 10(2)(vi), s. 12B(2), s. 23A, etc.
1957
In some other sections, it is pointed out, two or more Tfie c;;;;;;,issioner
authorities are named, e.g., ss. 27, 38, 48, etc. By what of Income-Tax
we must admit is a very adroit and plausible piecing
v. .
together of some of these sections, learned counsel has
M/s.&M~":_illan
built up his argument that in the present case the
opinion of the Income-tax Officer that the income,
s. K. Das J.
profits and gains can be properly deduced from the
method of accounting regularly employed by thE! assessee is a subjective determination of the Income-tax
Officer alone, and the opinion of no oihec officer or
authority can be substituted therefor. The Appellate
Assistant Commissioner had, therefore, no jurisdiction
to go behind that opinion.
We are unable to accept this line of argument as
correct, and our reasons are these. Firstly,· we think
that learn~d counsel is reading more into tije expression "in the opinion of the Income-tax Officer"; occurring in the proviso to s. 13 than what is warranted by
the language used. Whether the method of accounting
is regularly employed or not is undoubtedly a matter
which the Appellate Assistant Commissioner can go
into when he has seizin of the appeal. It is not challenged that if the Income-tax Officer decides against
the assessee and determines that the income, profits
and gains cannot properly be deduced from the assessee's method of accounting, the determination is liable
to be set aside on appeal by the assessee. What then is
the reason for holding that a subjective determination
or the determination of a named authority (whatever
expression may be used) is inviolate in one case but
not so in the other ? We have carefully examined the
other sections of the Act to which learned counsel for
the respondent has referred; but we are unable to
agree with him that the language used therein supports
tlie very subtle distinction that he has drawn. Let us
take, for example, s. 23 which deals with assessment,
Under sub-s. (3), the Income-tax Officer assesses the
total income of the assessee and determines the sum
payable on the basis of such assessment; under sub-s.
( 4) the Income-tax Officer makes the assessment to
698
SUPREME COURT REPORTS
[1958]
1957
the "best of his judgment"-an expression much
l'he c;,;;;;;;ssioncr stronger than "in the opinion of the Income-tax
of Income-Tax Officer". It is not disputed that in an appeal from an
v.
assessment under s. 23, the Appellate Assistant ComM/s. McMiiian missioner can interfere with the determination or
& co.
judgment of the Income-tax Officer, and in such an
s. x. Das 1.
appeal the Appellate Assistant Commissioner can
make his own assessment and exercise the power
which the Income-tax Officer could exercise. Since
1939 an appeal lies from a "best of judgment" assessment made under sub-s. ( 4) of s. 23, but the right is
restricted to "the amount of income assessed or the
amount of tax determined". Why can he not then
interfere with the opinion of the Income-tax Officer
under the proviso to s. 13 ? It is contended that both
sub-ss. (3) and ( 4) of s. 23 prescribed objective conditions for the exercise of the power referred to therein. It is true that under both sub-sections the assessment must be a fair and honest estimate and not arbitrary or capricious. Apart from that, however, we do
not see. what other distinctive, objecUve conditions
there are which put those sub-sections in a different
category.
The words 'in the opinion of the Income-tax Officer'
are not to be construed in the sense of a mere discretionary power; but in the context of the words used
in the proviso to s. 13 they impose a statutory duty on
the Income-tax Officer to examine in every case the
method of accounting and t-0 see (i) whether or not
it is regularly employed and (ii) to determine whether
the income, profits and gains can properly be deduced
therefrom. Section 30 of the Act gives the assessee
a right of appeal ih respect of certain orders including
an order ·of assessment made under s. 23. Section 31
deals with the hearing of an appeal and powers of the
Appellate Assistant Commissioner. Before disposing
of the appeal, the Appellate Assistant Commissioner
may, if he thinks fit, make a further enquiry himself
or cause it to be made by the Income-tax Officer, and
in disposing of the appeal he may, in the case of an
order of assessment, confirm, reduce, enhance or annul
the assessment : he may set it aside and order a fresh
-
S.C.R.
SUPREME COURT REPORTS
699
assessment. There is nothing in the language of s. 31
~
of the Act which imposes any restriction on the powers The Commlssione1
of an Appellate Assistant Commissioner so as to preof Income-Tax
vent him from exercising the power under the proviso
v.
M/s. McMi//011
to s. 13. ·The restriction, if any, must be inferred from
c
&
o.
the language of the proviso itself. It is contended that
the use of the words "in the opinion of the Income-tax s. K. Das J.
Officer" in the second part of the proviso to s. 13 suggests a complete elimination of the Appellate Assistant
Commissioner's jmisdiction to decide for the first time
that the method of accounting is such that the income,
profits and gains cannot be properly deduced therefrom. It is true that the decision as to the method of
accounting is to be arrived at first by the Income-tax
Officer after a careful scrutiny of the accounts whether
they are simple or complicated, and the power is to
be reasonably and judicially exercised, which excludes any subjective or arbitrary ·decision by the
Income-tax Officer. It cannot, however, be said that
a power so exercised is clothed with finalijy and would
be excluded from review by the Appellate Assistant
Commissioner; and in reviewing the order the appellate authority can exercise the same powers which the
Income-tax Officer could exercise. Our attention has
been drawn to the difference in language in which the
two conditions for the application of the proviso have
been expressed; the first condition is fulfilled if no
method of accounting is regularly employed;· the
second condition, however, requires an opinion, viz.,
the opinion of the Income-tax Officer that the income,
profits and gains cannot be properly deduced from
the method of accounting regularly employed. It is
pointed out that the first condition 'involves an objective determination-not by any named authority but
by any and every authority which may have to consider whether the condition as to the regularity of the
method employed has been fulfilled or not; whereas
the second condition involves a determination by a
named authority. The argument is that by reason of
the aforesaid difference in language, the Legislature
clearly intended that the opinion of no other officer can
be substituted for the opinion of the named authority,
700
SUPREME COURT REPORTS
[19581
1957
viz., the Income-tax Officer, with regard. to the fulfilThe c;,;;;;;issionerment of the second condition; therefore, once the
of Income-Tax Income-tax Officer accepts the method of accounting
v.
as proper, the Appellate Assistant Commissioner has
M/s. McMiiian no jurisdiction to go behind that opinion. We are un4 Co.
able to accept this argument as correct. It is to be
s. K. Das J.
remembered that with regard to both conditions, the
first and initial. duty is that of the Income-tax Officer
to determine whether the conditions or any of them
are fulfilled; secondly, if the opinion of the Incometax Officer with regard to the second condition is to
be inviolate by reas1m of the difference in language,
then it should be inviolate in all cases. Why should
it be inviolate in one case and not so when the assessee
appeals against a determination made adverse to him ?
We feel that the second condition is expressed in the·
terms in which it has been expressed, because it involves an inferential process and the expression 'in
the opinion of the Income-tax Officer' is aptly used as
that officer must in the first instance make the determination. If does not necessarily follow that the
Appellate Assistant Commissioner cannot revise the
determination and exercise the power which the
Income-tax Officer could exercise
A reference was also made by counsel for the respondent to the definition of 'Appellate Assistant Com-·
missioner' and 'Income-tax Officer' in ss. 2(3) and
2(7) of the Act. These definitions do not carry the
matter any further; because in order to determine the
scope of the powers of the Appellate Assistant Commissioner, ss. 30 and 31 must be looked at and they
will govern appeals, unless those powers are cut down
by the words of ss. 2(3) and 2(7) or any other provision of the Act.
Another distinction which learned counsel for the
respondent has drawn with regard to the finality of
the determination of the Income-tax Officer under the
proviso to s. 13 is this : he has said that where the
Income-tax Officer determines that the method is unacceptable in the sense that income, profits and gains
cannot be properly deduced therefrom, there is a deci-
S.C.R.
SUPREME COURT REPORTS
701
.sion; where, however, he does not so decide, there is
19S7
.no decision, and it is merely a case of non-exercise of The Commissioner
power. This distinction learned counsel for the resof Income-Tax
pondent has drawn in order to get over the anomaly
v.
that follows in holding that in one case the determinaM/s. McMillan
tion is final and in another case it is not so. We are
cl Co.
not at all impressed by this distinction. for one thing s. K. Das 1•
the distinction is mueh too subtle, then again, looked
at from the proper standpoint, a non-exercise of the
power. under the proviso is also a decision inasmuch
.as it amounts to an acceptance of the method of
accounting on the ground that the income, profits. and
,gains can be properly deduced therefrom. In the instant case the Income-tax Officer has looked into the
.accounts and the computation on the basis of the
method employed has been adopted by him.
Lastly, it seems to us clear that the answer to the
question: .is provided by the language of s. 31.
As
observ~d by Chagla C.J. in Mis. Narrondas Manordass,
Bombay v. Commissioner of Income-tax(1-), the language is wide enough to enable the Appellate Assistant ·
Commissioner to "correct the Income-tax Officer not
only with regard to a matter which has been raised
by the assessee but also with regard to a matter which
has been considered by the Income-tax Officer and
determined in the course of the assessment." We are
unable to accept the argument that the proviso, to s. 13
imposes a limitation on the powers of the Appellate
Assistant Commissioner under it. 31.. No doubt, the
two sections must be read harmoniously; but s. 13 and
its proviso contain no words of limitation or qualification upon the power of the Appellate Assistant Commissioner in enhancing the assessment or setting aside
the assessment and directing a fresh assessment to be
made by the Income-tax Officer. Dealing with the
powers of the Appellate Assistant Commissioner
Chagla C.J. in N arrondas' s case ( 1 ) said
"It is clear that the Appellate Assistant Commissioner has been constituted a revising authority against
the decisions of the Income-tax Officer; a revising
authority not in the narrow sense of revising what is
(1) (1957] 31 I.T.R. 909.
702
SUPREME COURT REPORTS
(1958}
I9J7
the subject-matter of the appeal, not in the sense of
'The c0,_1,s1oner revising those matters about which the assessee makes
of Income-Tax a grievance, but a revising authority in the sense that
v.
once the appeal is before him he can revise not only
M/s.McMl//an the ultimate computation arrived at by the Income-
&·ca.
tax Officer but he can revise every process which led
s. K. DasJ.
to the ultimate computation or assessment. In other
words, what he can revise is not merely the ultimate
amount which is liable to tax, but he is entitled to
revise the various decisions given by the Income-tax
Officer in the course of the assessment and also the
various incomes or deductions which came in for
consideration of the Income-tax Officer." We are in
agreement with these observations.
The substance of the matter as it appears to us is
this : the proviso to s. 13 uses the expression "in the
opinion of the Income-tax Officer" merely because, in
the first illstance, it will fall on the Income-tax Officer
to determine after considering the method of accounting regularly employed whether income, profits and
gains can be properly deduced therefrom, in the same
way as any other question of fact has to be determined
initially by the Income-tax Officer; the Legislature
has not drawn any such nice distinction between objective and subjective determination as is sought to
be made out by learned counsel for the respondent.
Lastly, the proviso to s. 13 does not import any limitation on the power of the Appellate Assistant Commissioner under s. 31 and the latter section gives the
Appellate Assistant Commissioner power to revise
every process which leads to the ultimate computation or assessment.
Two other points also require notice at this stage.
In the course of the arguments before us, a reference
was made to s. 33B, which was inserted by the Income-tax and Business Profits Tax (Amendment)
Act,. 1948. '!'here can be
no
doubt
that, in
view
of
the
language
used in· s. 33B, the
Commissioner ·of Income-tax may interfere with
any order of the Income-tax Officer, including
a
determination under the proviso to s. 13,
provided the other conditions of the section are fulfilled.
Section 33B runs counter to the contention
S.C.R.
SUPREME COURT REPORTS
703
that a determination under the proviso to s. 13 is a
1957
subjective determination or a determination of a The c;;;;;;ssiontr
named authority, which is inviolate in character. Any OJ Income-Tax
such construction as is contended for by the respondent
v.
will render this section nugatory.
Mfs. McMillan
& Co.
The other point is this : assume that a determinas. K. Das 1.
tion under the proviso to s. 13 in favour of the assessee
can be gone into by the Appellate Assistant Commissioner when the assessee prefers an appeal on some
other ground, and assume also that the Appellate
Assistant Commissioner can set aside the assessment
if he finds that the Income-tax Officer has not applied
his mind to the proviso or·has wrongly held that from
the · method of accounting, the income, profits and
gains can be properly deduced; what can he do then ? ·
Can he act under the proviso himself and determine
the question or must he only direct the Income-tax
Officer to apply his mind afresh to the proviso ? On
one side, there is the language of the proviso, and on
the other the language of s. 31 which gives wide power
to the Appellate Assistant Commissioner. At first
sight, there may appear some conflict between the
two. But on a closer scrutiny there is, we think, no
conflict. As we have said before, the language of the
proviso means only this that, in the first instance, the
Income-tax Officer must form his own opinion as to
whether the income, profits and gains can be properly
deduced from the method of accounting regularly employed, if any; but if he fails to apply his mind to the
proviso or comes to a wrong determination for or
against the assessee in the computation of the income,
the Appellate Assistant Commissioner can correct the
error in computation, provided he ha-s seizin of the
assessment on an appeal filed by the assessee. If the
assessee files. no appeal, the Appellate Assistant Commissioner does not come into the picture, because the
Revenue has no right of appeal from an assessment
made by the Income-tax Officer. Whether in a particular case a remand will be the proper order or
whether the error can be corrected by the Appellate
Assistant Commissioner himself will depend on the
circumstances of each case. If it be held that the
Appellate Assistant Commissioner can only set aside
704
SUPREME COURT REPORTS
(1958]
1957
the assessment in such circumstances, an impossible
The commissioner result may follow. If the Appellate Assistant Como/ Income-Tax missioner holds that from the method of accounting
v.
the income, profits and gains cannot be properly
Mfs. McMillan deduced, let us assume that the only order he can pass
& co.
is to set aside the assessment and direct the Incomes. K. Das J.
tax Officer to make a fresh assessment. But if the
opinion of the Income-tax Officer is the only opinion
which determines the matter, the Income-tax Officer
may adhere to his opinion. That will result in a
deadlock. If the proviso to s. 13 does not impose any
limitation on the power of the Appellate Assistant
Commissioner, as we hold it does not, then the Appellate Assistant Commissioner has the power to correct
the error in the way most suitable in the circumstances of the case, provided he acts within the ambit
of his power under s. 31 of the Act. Section 31 ( 3) does
not in terms say that the power to vary the assessment including the power to enhance it is subject to
any limitation.
We have so far dealt with the questions at issue
untrammelled by any authorities. We now turn to
such authorities as have been placed before us. We
take up first the decision in K. F. Vakeel v. The Commissioner of Income-Tax('). The facts of that case
were these : the assessee carried on a business of loading and unloading ships from January 1, 1943 to June
30, 1944. Oi:t July 1, 1944, the assessee entered into a
partnership with his brother. The assessee maintained his accounts on the cash basis and his accounting
year was the calendar year. For the calendar year
1943 he was assessed to Income-tax on his accounts
which as stated were maintained on cash basis. On
July 1, 1944, when the firm of the assessee and his
brother came into existence the position was that there
were outstandings to the extent of Rs. 2,13,306 and
there were liabilities to the extent of Rs. 86,650.
Between July 1 and December 31, 1944, the assessee
recovered Rs. 2,02,209 and he discharged the liabilities
to the extent of Rs.
86,650.
Therefore, the nett
amount that he realised between July 1 and December 31, 1944, was Rs. 1,15,559. It is this amount which
(1) 1.T. H.("f!'r("nce No. 21of1950.
, .
J.
'
S.C.R.
SUPREME COURT REPORTS
705
was the su}?ject-inatter of the reference. The contention
19.S7
of the assessee was that as this amount was realised The Commissioner
after he ceased to do business, it was a capital receipt of 1nc0me·Tax
which was not subject to tax. His further contention
v.
was that as he kept his accounts on cash basis, this M/s. McMTUan
amount could not be included in his accounts of the
& co.
business done from January 1 to June 30,
1944,
s. K. Das J.
inasmuch as this amount was not realised during that
period but was realised during a period S'\.lbsequent to
the period for which accounts were kept. When the
matter went before the Appellate Assistant Commissioner, he took the view that the assessee continued
to carry on the business till December 31, 1944; he
also held that a sum of Rs. 2,13,306 was recovered
from July 1 to December 31, 1944, and not a· sum of
Rs. 2,02,209 as alleged by the assessee. When the
assessee appealed to the Tribunal from the decision of
the Appellate Assistant Commissioner, his contention
regarding the sum of Rs. 2,02,209 was upheld by the
Tribunal. His contention with regard to the termination of his business was also upheld by the Tribunal
and the Tribunal held that the business came to an
end on June 30, 1944, and not on December 31, 1944.
The assessee further contended before the Tribunal
that the nett amount of Rs. 1,15,559 which he realised
was a capital receipt and not a revenue receipt. The
Tribunal came to the conclusion that the assessee ·
should be assessed not on the cash basis but on the
accrual basis and, according to the Tribunal, the sum
of Rs. 1,15,559 had accrued to the assessee during the
period of accounts, viz., January 1, 1944, to June 30,
1944, and therefore it was subject to tax. The Tribunal took the view that it was not possible to discover the profits made by the assessee if the accounts
were ·maintained on cash basis and therefore the proper method of accounting was the mercantile, that is,
the accrual basis and not cash basis. The decision of
the High Court was based on two grounds : first, the
Tribunal was wrong in fo:rniing an opinion suo motu
that the cash basis was not the proper basis from
which income, profits and gains can be properly ascertained, because it wa.s not for the Tribunal to form an
L2SC/61 PV-8
706
SUPREME COURT REPORTS
[1958]
1957
opinion on that question at all; secondly, there was
The commisslontr nothing before the Tribunal which could justify it in
of Inct?me-Tax coming to the conclusion that the Income-tax Officer
v.
was not in a position to deduce the income, pro.lits
M/s. McMillan and gains from the method of accounting adopted by
" co.
the assessee. The actual decision can be easily sups. K. Das 1.