http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

PETITIONER: COMMISSIONER OF INCOME-TAX, KERALA

       Vs.

RESPONDENT: M/S.  MANICK SONS

DATE OF JUDGMENT: 14/02/1969

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. GROVER, A.N.

CITATION:  1969 AIR 1122            1969 SCR  (3) 708  1969 SCC  (1) 671

ACT: Income-tax  Act,   1922, s.  33-Tribunal’s  powers--Tribunal cannot amalgamate income of two assessment years and  divide it  equally  between  them--Cannot  take  undertaking   from assessee  to file fresh return for earlier year  and  direct Income-tax  Officer  to make  assessment  accordingly-Cannot make  allowance  for ’intangible additions’  without  giving reasons.

HEADNOTE: For the assessment year 1952-53 the Income-tax Officer added a certain amount to the assessee’s returned income as income from undisclosed sources.  For the assessment year 1953-54 a still larger amount was added on account of unexplained cash credits.  The Income-tax Appellate Tribunal when considering the  appeal for 1953-54 took the view that since the  income assessed in 1952-53 was much less than in earlier years some of  the undisclosed income of that year must have gone  into the  cash  credits  disclosed  in  1953-54.   It   therefore calculated the income for both the assessment years  1952-53 and  1953-54  together and after making some  allowance  for ’intangible   additions’  in  each  year,   determined   the amalgamated  income for the two years at Rs. 1,00,000  as  a round figure.  On this basis the assessment for 1953-54  was reduced  to Rs. 50,000 from the higher figure determined  by the  Appellate  Assistant Commissioner.  In respect  of  the year  1952-53 an undertaking was taken from the assessee  to file a fresh voluntary return for Rs. 50,000 in place of the much  lower income originally assessed.  At the instance  of the  department a reference was made to the High Court,  and Tailing there, the department appealed to this Court. HELD : The appeal must be allowed. Under  s. 33(4) of the Income-tax Act, 1922, the  Income-tax Appellate  Tribunal  may after giving both  parties  to  the appeal  an  opportunity  of being heard,  pass  such  orders thereon as it thinks fit.  The power conferred by that  sub- section is wide, but it is still a judicial power which must be exercised in respect of matters that arise in the appeal and  according to law.  The Tribunal in deciding  an  appeal before  it  must deal with questions of law and  fact  which

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

arise out of the order of assessment made by the  Income-tax Officer   and   the  order  of   the   Appellate   Assistant Commissioner.    It   cannot   assume   powers   which   are inconsistent  with the express provisions of the Act or  its scheme. [712 E-F] In  the  present case the Tribunal was entitled  to  enquire whether  the  source of cash credits was explained :  if  it held  that  they represented capital or  income  of  earlier years  it could exclude them from income liable to be  taxed in  the year to which the appeal related.  But the  Tribunal had no power to find on amalgamation of income an average of more  years  than one, and to divide it for the  purpose  of assessment    between    the   two   years    1952-53    and 1953-54--equally. [712 G; 714 D] In working out the amalgamated income for the two assessment years in question the Tribunal could not without giving  any reasons, and without supporting evidence, make allowance  as it did for "intangible add’tions". [714 G] 709 The  Tribunal  hearing  an appeal may  give  directions  for reopening assessment of the year to which the appeal relates :  it  cannot give any directions to reassess in case  of  a period  not covered by that year.  There was no sanction  in law to enforce the undertaking given by the respondent  when urging his appeal in respect of the year 1953-54, to make  a voluntary  return  for  the year 1952-53; and  even  if  the respondent  carried out that undertaking the  assessment  of 1952-53  could not be reopened otherwise than in the  manner prescribed  by the Act.  The undertaking must  therefore  be ignored.  The implied direction given by the Tribunal to the Income-tax  Officer to reassess the income for year  1952-53 was without jurisdiction. [712 D-E; 714 A] The questions raised on behalf of the revenue clearly flowed from the contentions raised before the Tribunal and  enquiry into those questions was not barred. [712 D-E; 714 A] Commissioner  of  Income-tax, Madras v.  S.  Nelliappan,  66 I.T.R. 722, distinguished.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  2459  of 1966. Appeal  by special leave from the judgment and order  dated August  2,  1965  of the Kerala  High  Court  in  Income-tax Referred Case No. 20 of 1964. Sukumar Mitra and B. D. Sharma, for the appellant. S. Swaminathan and R. Gopalakrishnan, for the respondent. The Judgment of the Court was delivered by Shah,  J. For the assessment year 1952-53  respondents  M/s. Manick  &  Sons  were assessed to tax in  the  status  of  a registered firm and their income was computed at Rs.  15,331 inclusive  of Rs. 15,000 being undisclosed income.  For  the assessment year 1953-54 the respondents returned Rs.  40,887 as  their  income  from business.   The  Income-tax  Officer discovered  an  aggregate  amount of  Rs.  74,692  as  "cash credits"  which,  in  his  view,  were  not   satisfactorily explained  by  the  respondents.   The  Income-tax   Officer accordingly  brought to tax a total income of  Rs.  1,31,179 being  Rs. 56,487 as income from business and Rs. 74,692  as income from "other sources" and assessed the respondents  as an unregistered firm.  The Appellate Assistant  Commissioner in  appeal  reduced  the  income  of  the  respondents  from business  to Rs. 38,420 and income from "other  sources"  to Rs.  46,620.   In  second appeal the  Tribunal  reduced  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

income from business to Rs. 28,820 and confirmed the finding that  the  source  of the cash credits  aggregating  to  Rs. 46,620 had remained unexplained.  But the Tribunal  observed that "there were certain special features in the case  which needed   proper  consideration  in  determining  the   final assessment." The Tribunal then aggregated the income for 710 the assessment years 1952-53 and 1953-54 for the two  years, which  he  rounded off at Rs. 1,00,000  and  apportioned  in equal  shares  in the two years.  For  the  assessment  year 1952-53,  the  Tribunal recorded that  the  respondents  had given  an  undertaking  to  file  a  voluntary  return   for assessment on the basis of total income of- Rs. 50,000. At  the  instance of the Commissioner  of  Income-tax,  four questions were referred to the High Court of Kerala :               "(1)   Whether   it   was   not   beyond   the               jurisdiction  of  the  Appellate  Tribunal  to               reopen the concluded assessment for assessment               year  1952-53  and to direct that  the  income               should, be revised in that year at Rs.  50,000               as against Rs. 15,331 already fixed ?               (2)   Whether  on the facts and  circumstances               of  the case and the evidence on  record,  the               Tribunal  was justified in directing that  any               portion  of  the cash credits be  assessed  to               income-tax in any year other than the  assess-               ment year 1953-54 ?               (3)   Whether on the facts and  circumstances               of  the  case  and  evidence  on  record,  the               Tribunal  was-,justified  in  finding  that  a               portion  of the cash credits were covered by               the  intangible additions made in 1952-53  and               195354 assessment ?               (4)   Whether  on the facts and  circumstances               of  the case and the evidence on  record,  the               Tribunal  *as justified in directing that  the               income  under  the  head  ’business’  for  the               assessment  year  1953-54 be  reduced  to  Rs.               50,000 ?" The  High Court declined to answer questions (1)_&  (2)  and answered  questions  (3)  & (4)  in  the  affirmative.   The Commissioner appeals with special leave. The  judgment of the Tribunal is not a reasoned decision  on the questions arising before it; it is cryptic and in  parts obscure,  and  gives  no grounds for  its  conclusion.   The judgment  again lends countenance to a method of  assessment which the Indian Income-tax Officer aggregated to Rs.  74692 which amount was the Tribunal observed that the cash credits discovered by the Income-tax Officer aggregated to Rs. 74692 which   amount  was  reduced  by  the  Appellate   Assistant Commissioner  to Rs. 50,620. (It is common ground  that  the correct  figure  should be Rs. 46,620.)  The  Tribunal  then observed  that  on the evidence on record  "these  residuary items  must  remain unexplained." But the  Tribunal  thought that because in the assessment year 1952-53 the total income of Rs. 15,331 was comparatively small compared to the 711 income  of  the earlier years "some of that  year’s  profits must  have  come into the profits of the  next  year".   The Tribunal  then set out a consolidated statement  of  account for two years : "1. Trade profits assessed for assessment      Rs.      year 1952-53                                15,331 2. Trade profits on the basis of books and    without the estimates and additions impugned

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

  in this appeal (Rs. 56,487 less Rs. 45,600)40,887 3.   Trading deficiency: (a)  Palluruthy branch 1,000 (b) Pavaratty branch 5,000                      6,000 4. Unexplained cash Credits 50,620           Less set off- Intangible addition for 1952-53      Rs.  15,000 Intangible addition for 1953-54 as above.      Rs.  6,000                     21,000          29,620                                                 ----------           Assessable for both the year            91,838" and observed The  assessee has undertaken to file a voluntary return  for assessment  year 1952-53 on the basis of a total  income  of Rs.  50,000.   In these circumstances,  the  total  business income of the assessee for the year under appeal is  reduced to Rs. 50,000 only." The   unexplained  cash  credits  found  by  the   Appellate Assistant Commissioner and accepted by the Tribunal were Rs. 46,620.   The  total income of the two years  on  the  basis adopted  by the Tribunal was therefore Rs. 87,838.  But  the income of the two years was rounded off at Rs. 1,00,000  and divided  equally  between the two years.  For  making  up  a consolidated  statement  of  account the  Tribunal  gave  no reasons  nor  did  it give any  reasons  "for  debiting  the intangible  additions" of Rs. 15,000 and Rs.  6,000  against the  cash  credits.  Counsel for the  respondents  suggested that the Tribunal was presumably of the view that Rs. 15,000 brought to tax as business income in the assessment in 1952- 53  must  have been entered in the books of account  of  the next year and that Rs. 6,000 called "trading deficiency"  in the two branches was entered as cash credit. The  appeal before the Tribunal raised a  simple  question-- whether  the cash credits aggregating to Rs. 46,620  or  any part  thereof  were  liable to be taxed  as  income  of  the respondents in 712 the  year  1953-54.  For that purpose the, Tribunal  had  to consider  whether the respondents furnished any  explanation leading to a justifiable inference that the amount or a part thereof  did not represent income of the respondents In  the view   of  the  Tribunal  the  cash  credits  had   remained unexplained.   But  the  Tribunal  still  reduced  the  cash credits by Rs. 21,000, and then proceeded to amalgamate  the income  for  the two years and to divide  it  equally.   For reducing  the  cash credits by Rs. 21,000  no  reasons  have ’been  given,  and amalgamation of the income  for  the  two years and apportionment is without authority of law. An  assessment  which has become final may  be  reopened  in appeal  by  the  Appellate  Assistant  Commissioner  or  the Tribunal  or  in revision by the Commissioner, or  under  an order  of rectification of mistake, or pursuant to a  notice of  reassessment.  The Tribunal hearing an appeal  may  give directions for reopening assessment of the year to which the appeal  relates : it cannot give any directions to  reassess in  case of a period not covered by that year.’ There is  no sanction  in  law to enforce the undertaking  given  by  the respondent-when  urging  his appeal in respect of  the  year 1953-54,  to make a voluntary return for the  year  1952-53; and even if the respondents carried out that undertaking the assessment  of 1952-53 could not be reopened otherwise  than in  the  manner  prescribed by law.   The  undertaking  must therefore be ignored.  Under S. 33(4) of the Income-tax Act, 1922,  the Income-tax Appellate Tribunal may,  after  giving

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

both  parties to the appeal an opportunity of  being  heard, pass  such  orders  thereon as it  thinks  fit.   The  power conferred  by  that sub-section is wide, but it is  still  a judicial  power  which  must be exercised  in  respect  of matters that arise in the appeal and according to law.   The Tribunal  in  deciding an appeal before it  must  deal  with questions  of law and fact which arise out of the  order  of assessment  made by the Income-tax Officer and the order  of the  Appellate  Assistant Commissioner.   It  cannot  assume powers which are inconsistent with the express provisions of the Act or its scheme. The  Tribunal was entitled to enquire whether the source  of the  cash  credits  was  explained: if  it  held  that  they represented  capital  or income of earlier years,  it  could exclude  them from income liable to be taxed in the year  to which the appeal related.  But the Tribunal had no power  to find on amalgamation of income an average of more years than one,  or  to  give  credit for  what  is  called  intangible additions, without explaining why credit was given. There  is no warrant for the claim made by counsel  for  the respondents  that  the order passed by the Tribunal  was  by consent.   The Tribunal has not stated so, and if the  order was made by consent of the departmental ’authorities and the respondents, 713 the objection should have been prominently raised when  the Commissioner asked for a reference to the High Court. Counsel  urged that the final order passed by  the  Tribunal operates  to  the  prejudice of  the  respondents,  and  the Commissioner  is not aggrieved by that order.  Counsel  said that  even  though  the Tribunal has found  that  the  total income  for the two years in question was approximately  Rs. 91,838  (which if a correction account had been  made  would have been Rs. 87,838), the Tribunal has directed  assessment of Rs. 50,000 in the year 1952-53 and another Rs. 50,000  in the  year  1953-54.  But this is only a superficial  way  of looking  at the matter.  In the assessment year  195253  the respondents were assessed in the status of a registered firm and the income of the firm had to be distributed amongst the partners,  and the shares of the partners could be  assessed to  tax  in  their hands.  The rate of tax  on  this  income unless  the partners have large individual income  would  be comparatively low.  In the year 1953-54 the respondents were an   unregistered   firm  and  the  total  income   of   the unregistered firm was liable to be taxed. It  was  also coin-tended that the arguments  raised  before this  Court were never set up either before the Tribunal  or before  the  High Court and should not be  permitted  to  be raised.    The  question  raised  clearly  flow   from   the contentions  raised before the Tribunal and  contemplate  an enquiry into matters urged by counsel by the Commissioner. The  decision  of  this Court  Commissioner  of  Income-tax, Madras  v. S. Nelliappan(1) on which reliance was placed  by counsel for the respondents has little bearing in this case. In  S. Nelliappan’s case(2) it was held that the  conclusion whether a cash credit in the books of account of an assessee is properly explained is one on a question of fact on  which no  reference can be made to the High Court under s.  66  of the  Indian Income-tax Act.  The Court in that case did  not lay  down  that  it  is  open to  the  Tribunal  to  make  a consolidated assessment of tax in respect of the  assessment of  income for the two years and then divide the  income  in equal shares.   Turning   then  to  the  questions  :  counsel   for   the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

respondents  conceded that the Tribunal had no  Jurisdiction to  direct the Income-tax Officer to reopen  the  assessment for the year 195253. He submitted however that the  Tribunal did  not  give any such directions : it merely  recorded  an undertaking   given  by  the  respondents  that  they   will voluntarily  submit  a return for Rs. 50,000  for  the  year 1952-53.   But the context in which the statement  recording the undertaking occurs in paragraph 7 of the (1)  66 I.T.R. 722. 714 judgment  of  the  Tribunal  and  the  direction  given   in paragraph  8 leave no room for doubt that the  Tribunal  did give a direction to the Income-tax Officer to reassess  the income  for  the year 1952-53.  On the answer to  the  first question  no  further  enquiry need be made  on  the  second question. The  Tribunal  has given no reasons in support of  the  view that the "intangible additions" of Rs. 21,000 covered a part of  the  cash  credits.  Our attention  has  also  not  been invited  to  any  evidence which  establishes  a  connection between  the cash credits for Rs. 21,000 and the  additions of  Rs. 15,000 made in the assessment for 1952-5.3  and  Rs. 6,000 added in 1953-54. The  fourth  question contemplates an  inquiry  whether  the Tribunal  was justified in directing that the  income  under the  head  "’business" for the assessment  year  1953-54  be reduced to Rs. 50,000.  The question is somewhat misleading. The  direction of the Tribunal was that the total income  of the respondents be reduced to Rs. 50,000 for the year  1953- 54,  the business income being Rs. 28,820 and  the  balance being  income from other sources.  For reasons  already  set out  the Tribunal had no jurisdiction to proceed to  combine the  income  for  the two years 195253 and  1953-54  and  to divide  it  for the purpose of assessment  between  the  two years  equally.  The Tribunal had to assess the  income  for the year in question. The appeal is allowed, and the answers to the questions  re- corded by the High Court are discharged.  The answers to the questions will be as follows : Q.   (1)-Tribunal had no jurisdiction. Q.   (2)-Tribunal had no jurisdiction. Q.   (3)-in the negative. Q.   (4)-in the negative. There will be no order as to costs in this appeal. G.C.               Appeal allowed. 715