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PETITIONER: COMMISSIONER OF INCOME-TAX, WEST BENGAL-1,CALCUTTA

       Vs.

RESPONDENT: SIMON CARVES LIMITED

DATE OF JUDGMENT17/08/1976

BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ SARKARIA, RANJIT SINGH SINGH, JASWANT

CITATION:  1976 AIR 2368            1977 SCR  (1) 207  1976 SCC  (4) 435

ACT:             Income-tax  (11 of 1922) ss. 34 and 42,  Income-tax  Act         (43 of 1961) s.147 and Income-tax Rules, 1922, r. 33  corre-         sponding  to  r. 10 of 1962 Rules--One of the  methods  men-         tioned in r. 33 applied for assessment--Higher tax liability         if  another method in rule adopted--If a  case   of   income         escaping assessment.

HEADNOTE:             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 in the  taxable         territories.  RuLe 33 of the 1922-Rules is made for  comput-         ing  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  sufficient         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  engi-         neers  both in India. and in other parts of 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,  assessed the income applying  one  of  the         three  methods mentioned in r. 33.  As it resulted in  lower         tax liability, his successor initiated proceedings under  s.         147(b), Income-tax Act, 1961, adopted another method contem-         plated by r. 33. and assessed the income at a higher figure.         The Appellate Assistant Commissioner, the Tribunal and  High         Court  held that in making the reassessment  the  Income-tax         Officer  could  not depart from the  method  of  computation         followed  in the original assessment, and adopt an  alterna-         tive method of computation though permitted by the rule.             In appeal to this Court, 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,             HELD:  It is open to the Income-tax Officer at the  time

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       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 select-         ed  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]             (1) The discretion to choose one of the methods in r. 33         ought to be exercised by the Income-tax Officer in a  proper         and judicious manner.  In the present ease, there is nothing         to  show  that the discretion was not so  exercised  by  the         Income-tax Officer, nor was it suggested that he was actuat-         ed  by any oblique motive.  The Income-tax Officer  ordering         reassessment  does  not sit as a Court 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         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         208         must  also at the same time not act in a manner which  indi-         cates 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 absence 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 in s. 147(b) of Act  of         1961  manifest  in the light of subsequent  information  re-         ceived  by the Income-tax Officer.  In the present case,  no         income has escaped assessment due tO oversight, inadvertence         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 or s. 34(1)(b) of the 1922-Act.                                                            [213A-B]

JUDGMENT:         CIVIL 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, Addl. Solicitor Genl.   and   M.N.                  Shroff for the Appellant.                  K.  Ray  and D.N. Gupta, for  the  Respondent.  The                  Judgment of the Court was delivered by                      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

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                the   case, the Tribunal was right in holding  that                  in  making  the  reassessment under section  147(b)                  of  the Income-tax     Act,  1961,  the  Income-tax                  Officer  could not  depart from     the  method  of                  computation permitted in Rule 33 of the  Income-tax                  Rules and followed in the original assessment,  and                  adopt  an  alternative method of  computation  also                  permitted  under the said Rules  (corresponding  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 March 31, 1959.  The assessee is  a  non-                  resident company carrying on business as  construc-                  tion  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 (herein-                  after  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  Hindustan                  Steel Ltd.  In respect of that work                  209                  the assessee filed a provisional estimate of income                  which  was  arrived at "by calculating  the  income                  that  could be attributable in relation 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 Income-tax         Officer estimated the income in respect of Durgapur contract         to be Rs. 5,33,164 as had been done in the original  assess-         ment.  Regarding the other contracts, the Income-tax Officer         determined  the income of the assessee in reassessment  pro-         ceedings to be Rs. 64,51,933.  The difference in the  income         computed  at the 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 adopt-         ed another method under that rule.             On appeal it was submitted before the Appellate  Assist-         ant  Commissioner on behalf of the assessee that the  action

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       of the Income-tax Officer in reopening the assessment  under         section  147(b)  was  without  jurisdiction  and  that   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 147(b) were bad and that  the         Income-tax Officer could not adopt an alternative method  of         computation in the reassessment 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 the 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  jurisdic-         tion  to start proceedings under section 147(b) of the  Act;         and (ii) that the Appellate Assistant         210         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  initiat-         ed.   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 Income-tax Rules 1922 and         that  the mode adopted in reassessment was another  alterna-         tive 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  origi-         nal 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  assess-         ment.   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  asses-                  see  has  succeeded  in getting away  with  or  has                  eluded  observation or search or notice of the  tax                  authorities.   In  other words, it cannot  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  but  it  has become  taxable  by  following                  another method sanctioned 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  canvassed 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

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       previous year of any person includes all income, profits and         gains  from whatever source derived which if such person  is         not  resident in the taxable territories during  such  year,         accrue  or arise or are deemed to accrue or arise to him  in         the  taxable territories during such year.  Sub-section  (1)         of section 42 of the Act of 1922, inter alia, provides  that         all  income, profits or gains accruing or  arising,  whether         directly or indirectly, through or from any business connec-         tion  in  the  taxable territories, shall be  deemed  to  be         income         211         accruing  or  arising within the  taxable  territories,  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 the taxable 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 reads 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  ascer-                  tained, 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 Income-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  busi-                  ness  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  that  the                  actual amount of income, profits or gains  accruing                  or arising to any person residing out of the  taxa-                  ble  territories, whether directly  or  indirectly,                  through  or  from any business  connection  in  the                  taxable  territories  cannot  be  ascertained,  the                  amount  of  such income, profits or gains  for  the                  purpose  of assessment to income-tax may be  calcu-                  lated

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                    (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  propor-                  tion  to the total profits of the business of  such                  person (such                  212                  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 condi-                  tions 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  underly-                  ing 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 rule 33. The  ques-                  tion  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  computa-                  tion  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 assessment  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  men-                  tioned,  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  judi-                  cious  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 Income-tax Officer  was                  actuated by some oblique motive. From the mere fact                  that the method selected by him was such as result-                  ed 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

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                to subscribe to the view that unless those authori-                  ties 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  exer-                  cised it in a proper and judicious manner.             The order made by the Income-tax  Officer at the time of         the original assessment was a legally correct order and  was         not vitiated         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 the ambit of section  147(b)         of  the Act of 1961 or section 34(1)(b) of the Act of  1922.         We  may add that the Income-tax Officer  ordering  reassess-         ment’ 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 adopt-         ed  at  the time of original assessment was  permissible  in         law.   The fact that the adoption of a different  method  of         computation  would  have resulted ’in higher  yield  of  tax         would  not in such a case justify the reopening of  the  as-         sessment.             It  has  been  argued on behalf of  the  appellant  that         reassessment  under section 147(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.             We  would,  therefore, uphold the judgment of  the  High         Court and dismiss the appeal with costs.         V.P.S.                                          Appeal  dis-         missed.         214