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PETITIONER: THE COMMISSIONER OF INCOME-TAX

       Vs.

RESPONDENT: M/s.  McMILLAN & CO.

DATE OF JUDGMENT: 16/10/1957

BENCH: DAS, S.K. BENCH: DAS, S.K. BHAGWATI, NATWARLAL H. KAPUR, J.L.

CITATION:  1958 AIR  207            1958 SCR  689

ACT:        Income-Tax-Assessment  -Acceptance by Income-tax Officer  of        the  assessee’s  method of  accounting--Power  of  Appellate        Assitant  Commissioner in appeal -If can reject such  method        and  adopt another Indian Income-tax Act (XI of  1922),  ss.        31, 13 Proviso-Indian Income-tax Rules, R. 33.

HEADNOTE:        The  respondent assessee, a non-resident company,  sold  and        published books and magazines in various parts of the world.        It 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.

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      There is nothing in s. 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        assessee,  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 Income-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        690        not  subjectively  or arbitrarily and any  decision  he  may        arrive at cannot be treated as final.  Neither s. 13 nor the        proviso imposes any limitation on the wide powers  conferred        on  the Appellate Assistant Commissioner by s. 31(3) of  the        Act once be is in proper seizin of the matter.        Narrondas  Manordass, Bombay v. Commissioner of  Income-tax,        [1957] 31 I.T.R. 909, approved.        K.   F.  Vakeel  v.  The Commissioner  of  Income-tax,  I.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 Rule 33 of the,  Indian        Income-tax 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  two        conditions,  on  the  fulfillment of  which  the  method  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 properly        deduced  from the method regularly employed by him, must  be        of  the  Income-tax  Officer alone 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,  I.T.        Reference NO. 21 Of 1950, Bombay High Court, approved.        Nor  are the powers of the Appellate Assistant  Commissioner        under  s. 31(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        proceedings before him and are limited to the subject-matter        of the assessment.        Narrondas  Manordass, Bombay v. The Commissioner of  Income-        tax, Bombay, [1957] 31 I.T.R. 909, referred to.        Case-law 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 in  appeal        to nullify the power which the Income-tax Officer alone  has        under the proviso.  He has no power to reject the method  of        accounting  regularly employed by the assessee suomotu.   If        he  thinks  that  the Income-tax Officer  was  in  error  in        accepting that method 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)(b) 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.        691        The questions must, therefore, be answered in the negative.

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JUDGMENT:        CIVIL APPELLATE JURISDICTION.  Civil Appeal No. 29 of 1955.        Appeal  by special leave 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. Dhebar, for the appellant.        N.   A. Palkhivala, J. B. Dadachanji, S. N. Andley Rameshwar        Nath and P. L. Vohra, for the respondents’        1957 October 16.  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 4, 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        there  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  company        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 assessee company submitted its return.  The 88        692        Income-tax  Officer  apparently accepted it and  subject  to        certain  minor  modifications  as  respects  some  items  of        expenditure  and an alleged bad debt with which we  are  not        now  concerned,  assessed the assessee on an income  of  Rs.        82,623.   The assessee appealed to the  Appellate  Assistant        Commissioner.  The latter issued 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. 1,11,616.  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        cent.   In the case of World profit and loss account I  find        that  the  gross profit earned was pound  231,070  on  total        sales of pound 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."

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      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, 1 1,616.  He did so presumably under the        proviso  to s. 13 and R. 33 of the Indian Income-tax  Rules,        1922.        693        The   assessee  company  then  appealed  to  the   Appellate        Tribunal.   The Appellate Tribunal remanded the case to  the        Appellate  Assistant  Commissioner, but  before  the  remand        could be decided came the decision of the Bombay High  Court        in K. F. Vakeel v. The Commissioner of Income-tax (1).   The        Tribunal  then  held  that in view  of  that  decision,  the        Appellate  Assistant  Commissioner had  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’s  books  of        account, which have been accepted by the Income. tax 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 income 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  somewhat        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  Income-tax  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 taken by  the  assessee  to  the        Appellate Assistant Commissioner,         (1) I.T. Reference No. 21 of 1950, Bombay High Court.        694        the  latter can re-examine the books of account to test  the        correctness  of  the assessment made.  It  is  not  disputed        before  us  that ’accounts’ must be distinguished  from  the        ’method  of  accounting’.  Section 13 and  its  proviso  are        concerned with the method of accounting.  In the context  of        the  statement  of the case,, however,  the  first  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

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      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  accordance  with  the        method of accounting regularly employed by the assessee:        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  (profits        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.  The 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        695        If the true income, profits and gains cannot be  ascertained        on the basis of the assessee’s method, or where no method of        accounting  has been regularly employed, the income must  be        computed  upon such basis and in such manner as the  Income-        tax Officer may determine.        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 come  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  of        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  make  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  Income-tax  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 that by reason of the terms of  the  proviso,

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      particularly        696        the  expression "in the opinion of the  Income-tax  Officer"        occurring therein, the power or duty of rejecting the method        of  accounting  on the ground that the income,  profits  and        gains  cannot properly be deduced therefrom is given to  the        Income-tax  Officer alone and not to any other authority  in        the  hierarchy 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        determination 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        subjective  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. 4A (a) (iv),        697        a.10(2)(vi),  s.  12B(2),  s.  23A,  etc.   In  some   other        sections,  it  is pointed out, two or more  authorities  are        named, e.g., ss. 27, 38, 48, etc.  By what we must admit  is        a  very  adroit and plausible piecing together  of  some  of        these  sections, learned counsel has built up  his  argument        that  in  the  present case the opinion  of  the  Income-tax        Officer  that the income, 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  other  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  learned        counsel is reading more into the 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

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      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  the 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 the assessment to        698        the "best of his judgment"-an expression much stronger  than        ,in  the  opinion of the Income-tax.  Officer."  It  is  not        disputed  that in an appeal from an assessment under s.  23,        the Appellate Assistant Commissioner can interfere with  the        determination or judgment of the Income-tax Officer, and  in        such an 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 an not arbitrary or capricious.   Apart        from  that, however, we do not see what  other  distinctive,        objective 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  to  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 in 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        699        assessment.   There is nothing in the language of s.  31  of        the  Act which imposes any restriction on the powers  of  an        Appellate  Assistant Commissioner so as to prevent him  from        exercising  the  power  under the proviso  to  s.  13.   The        restriction,  if any, must be inferred from the language  of        the  proviso  itself.  It is contended that the use  of  the        words  " in the opinion of the Income-tax Officer "  in  the        second  part  of the proviso to s. 13  suggests  a  complete        elimination   of  the  Appellate  Assistant   Commissioner’s        jurisdiction to decide for the first time that the method of

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      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 finality 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, 89        700        opinion  of  the  named  authority,  viz.,  the   Income-tax        Officer,  with  regard  to  the  fulfilment  of  the  second        condition  ; therefore, once the Income-tax Officer  accepts        the method of accounting as proper, the Appellate  Assistant        Commissioner has no jurisdiction to go behind that  opinion.        We are unable to accept this argument as correct.  It is  to        be 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  Income-tax        Officer  with  regard  to  the second  condition  is  to  be        inviolate  by reason 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.  It 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  Commissioner’  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

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      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        701        a, decision; where, however, he does not so decide, there is        no  decision,  and  it is merely a case  of  nonexercise  of        power.  This distinction learned counsel for the  respondent        has  drawn in order to get over the anomaly that follows  in        holding  that in one case the determination is final and  in        another  case it is not so.  We are not at all impressed  by        this distinction.  For one thing the distinction is much too        subtle, then again, looked at from the proper standpoint,  a        nonexercise  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 observed by Chagla        C. J. in M/s.  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 s. 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 Narrondas’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        the  subject-matter  of  the appeal, not  in  the  sense  of        revising  those  matters about which the, assessee  makes  a        grievance,  but a revising authority in the sense that  once        the appeal is before him he can revise not only the ultimate        computation arrived at by the Income-tax Officer but he  can        revise  every process which led to the ultimate  computation        or  assessment.  In other words, what he can revise  is  not        merely  the ultimate amount which is liable 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  instance,        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

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      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.  There can be  no  doubt        that,  in  view  of  the  language  used  in  is.  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        703        that  a  determination  under  the proviso to  s.  13  is  a        subjective  determination  or  a determination  of  a  named        authority,  which  is  inviolate  in  character.   Any  such        construction  as  is contended for by  the  respondent  will        render this section nugatory.        The  other point is this: assume that a determination  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 (lo then.?  Can be  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  has 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        704        Commissioner  can  only  set aside the  assessment  in  such        circumstances,  an  impossible result may  follow.   If  the        Appellate Assistant Commissioner holds that from the  method        of  accounting  the  income, profits  and  gains  cannot  be

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      properly  deduced, let us assume that the only order he  can        pass  is to set aside the assessment and direct the  Income-        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  ally        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  (1).  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.  On 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. 202,209 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         (1) i.t. reference No.21 of 1950        705        which   was  the  subject-matter  of  the  reference.    The        contention  of  the  assessee was that as  this  amount  was        realised  after he ceased to do business, it was  a  capital        receipt   which  was  not  subject  to  tax.   His   further        contention  was that as he kept his accounts on cash  basis,        this  amount  could not be included in his accounts  of  the        business  done from January 1 to June 30, 1944, inasmuch  as        this  amount  was not realised during that  period  but  was        realised during a period subsequent 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.,

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      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 forming 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 was  not  for  the        tribunal to form an        706        opinion on that question at all; secondly, there was nothing        before the Tribunal which could justify it in coming to  the        conclusion that the Income-tax Officer was not in a position        to  deduce the income, profits and gains from the method  of        accounting adopted by the assessee.  The actual decision can        be easily supported on the second ground itself, because the        Tribunal committed an error of law in coming to a finding on        no  material  or evidence.  Indeed,  the  learned  Advocate-        General  appearing  for the Revenue, conceded in  that  case        that in view of the state of the record it was not  possible        for him to contend that the Tribunal’s decision was  correct        and  further the Tribunal was in error in holding  that  the        assessee  could be compelled to adopt the accrual  basis  in        keeping his accounts and give up the cash basis which he had        regularly  maintained  in the past.  While,  therefore,  the        actual decision in the case was undoubtedly correct, we  are        unable   to   accept  as  correct  the   following   further        observations in connection with the first ground :        " But it is for the Income-tax Officer, who is the assessing        officer,  to be dissatisfied with the method  of  accounting        regularly  adopted  by  the  assessee.   If  he’  found   no        difficulty  in assessing the income, profits and gains  from        the method of accounting regularly adopted by the  assessee,        then  it  is  not  for any other  authority  to  come  to  a        different  conclusion.   It  may be that if  an  opinion  is        formed by the Income-tax Officer that opinion may be subject        to an appeal to the Appellate Assistant Commissioner or  the        Tribunal;  but  in the first instance an opinion has  to  be        formed  by  the  Income-tax  Officer  as  required  by   the        proviso."  While we agree that, in the first  instance,  the        Income-tax  Officer  as the first assessing officer  has  to        form an opinion about the applicability of the proviso to s.        13,  we  do  not  agree that it is not  open  to  any  other        authority,  which  is  lawfully in seizin of  the  order  of        assessment of which the method of accounting under s. 13  is        only  a part, to come to a different conclusion with  regard        to  the applicability of the proviso.  Let us  examine  this        point a little more                                707        closely.  The Income-tax Officer may proceed in one of three        ways-(1) he may fail to apply his mind to the statutory duty        imposed  on him by s. 13 and its proviso and may accept  the        assessee’s  method of accounting without at all  considering        if  (a)  the method was regularly employed and  (b)  if  the        income,  profits and gains of the assessee can  be  properly        deduced  therefrom; (2) he may apply his mind and decide  in        favour  of the assessee that the method is both regular  and        acceptable (in the sense that income, profits and gains  can        be  properly  deduced  therefrom) ; or  (3)  he  may  decide        against the assessee and hold that the method is either  not        regularly  employed or is unacceptable.  In the first  case,        there  is a, failure to perform a statutory duty and it  has        not been seriously disputed that the appellate authority can

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      direct the Income-tax Officer to perform that duty.  This is        supported  by  high authority to which  we  shall  presently        refer.  In the third case, it is conceded that the appellate        authority  can  interfere  and  set  aside  the  opinion  or        determination of the Income-tax Officer, and in doing so the        appellate  authority must form his opinion if the method  of        accounting  is  proper  and  acceptable.   The  dispute   or        divergence of opinion relates only to the second case and to        a  part  of  it only, because it is not  disputed  that  the        finding as to whether the method of accounting is  regularly        employed  or  not is an objective  determination  which  the        appellate   authority  can  revise.   Both   the   Appellate        Assistant Commissioner and the Appellate Tribunal have  wide        powers  to go into questions of fact and law, the  Appellate        Assistant  Commissioner  under s. 31(3)  and  the  Appellate        Tribunal  under s. 33(4).  Even the Commissioner can  revise        an  order of the Income-tax Officer under s. 33B in  certain        circumstances  stated therein.  We see no justification  for        holding  that  these  powers, so  widely  expressed  by  the        statute,  become  ineffective in one particular  case  only,        namely,  when the determination or opinion is in  favour  of        the  assessee  as respects the propriety of  the  method  of        accounting.   It  is true that the Revenue has no  right  of        appeal under s. 30, but hat is not a decisive  circumstance.        The assessee can 90        708        make any order of assessment by the Income-tax Officer final        by  not appealing therefrom-whether the order is based on  a        subjective  or  objective determination.  The point  is  not        what happens when there is no appeal ; but the point is when        the appellate authority is lawfully in seizin of the matter,        what powers it can exercise.        We  are, therefore, of the view that though  Vakeel’s  case,        (1)  was  rightly  decided, some of  the  reasons  given  in        support of the decision are not correct in law.        Next comes the decision of the Punjab High Court in Oriental        Building  and Furnishing Company v. Commissioner of  Income-        tax  (2)  where a view contrary to that of the  Bombay  High        Court was taken.  Though we hold that the conclusion arrived        at  in  this  decision  is correct,  there  is  no  detailed        discussion  in the judgment of the issues  involved,  except        the bare statement that the powers of the Appellate Tribunal        under s. 33 are very wide.        Apart  from the aforesaid two decisions which directly  bear        on  the  question under our consideration,  there  are  some        other  decisions which have an indirect but not  a  decisive        bearing  on the question.  First, in order of  priority,  is        the decision of the Privy Council in Commissioner of Income-        Tax v. Sarangpur Cotton Manufacturing Co. Ltd. (3).  In that        case, the assessees had for years past adopted regularly the        method  of  valuation of stocks by taking  some  price  well        below  both  cost and market price and  they  followed  this        method in the relevant accounting year.  The object of  this        striking  under-valuation  was the creation of  a  "  secret        reserve " which involved the retention of profits so as  not        to  be included in the profits shown to the shareholders  by        the profit and loss account and the balance sheet, but which        constituted  part  of the taxable profits.   The  Income-tax        Officer,  without applying his mind to the question  whether        the  true  profits  could  be deduced  from  the  method  of        accounting regularly employed by the assessees, accepted the        accounts  and  held  the assessees bound by  the  figure  of        profit  shown in the accounts.  The Privy Council held  that        the        709

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      profit shown in the profit and loss account and the  balance        sheet  was not the true figure for income-tax  purposes  and        the  Income-tax Officer could not reasonably  conclude  that        the  true  profits could be properly deduced  from  a  gross        under-valuation.   It is clear from the decision that  their        Lordships  proceeded  on  the footing  that  the  Income-tax        Officer had failed to perform the statutory duty imposed  on        him;  they amended the question accordingly, answered it  in        the negative, and directed that it would be for the  Incomes        Officer to proceed to the proper discharge of his duty under        s.  13.  The decision is clear authority for the  view  that        where there has been a failure to perform the statutory duty        imposed  on the Income-tax Officer under s. 13 of  the  Act,        his order is liable to be set aside, even though he may have        accepted  the  accounts and held the assessee bound  by  the        figure of profit shown in the accounts.        There are a number of decisions where it has been held  that        an  order of the Income-tax Officer under the proviso to  s.        13 against an assessee is liable to be set aside on  appeal.        We  need  only  mention some of them here:  see  Lala  Sarju        Prasad  In re (1); Pearey Lal Shukla of Cawnpore In re  (2);        and  Commissioner  of  Income-Tax  v.  Kameshwar  Singh   of        Darbhanga  (3).   In  these  cases, it  was  held  that  the        determination of the Income-tax Officer under the proviso to        s.  13  did not exempt his computation from  examination  on        appeal, and the Appellate Assistant Commissioner had  juris-        diction,  in  an  appeal against  an  assessment  under  the        proviso  to  s.  13, to substitute  a  different  method  of        computation.        Lastly, we refer to a few only of the decisions in which the        power  of the Appellate Assistant Commissioner under  s.  31        has  been held to be confined to the subject-matter  of  the        assessment  appealed  against, so that he has  no  power  to        enhance  the assessment by assessing new sources of  income:        Jagarnath   Therani  v.  Commissioner  of   Income-Tax   (4)        Gajalakshmi Ginning        (1)  [1943] 11 I.T. R. 525.        (3)  A.I.R. 1933 P.C. 108.        (2)  [1942] 10 I.T.R. 239.        (4)  (1925) 21 T.C. 4.        710        Factory   v.  Commissioner  of  Income-Tax  (1);   Chowdhury        Sharafat  Hussain v. Commissioner of Income-Tax (2).  We  do        not  think that these decisions touch the question at  issue        before  us.  The present is not a case where  the  Appellate        Assistant Commissioner has traveled outside the ambit of his        jurisdiction under s.    31 of the Act.        For the reasons given above, we would answer question No.  1        in  the  affirmative.     As to question No. 2, only  a  few        words  are  necessary.   Rule 33 of  the  Indian  Income-tax        Rules, 1922, is in these terms:        "  33.   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 purpose 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

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      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."        A  similar expression occurs in the rule :-"in any  case  in        which  the Income-tax Officer is Of opinion etc.".  For  the        same reasons which we have given with regard to question No.        1, the answer to question No. 2 is also in the affirmative.        The  appeal  must, therefore, be allowed; the  judgment  and        order of the High Court of Bombay dated        (1)  [1952] 22 I.T.R. 502. (2) [1956] 29 I.T.R. 759.        711        March  4, 1953, is set aside and the two questions  referred        to  the  said  High  Court are answered  in  favour  of  the        Revenue.   In view of the difficulty of  interpretation  and        the  divergence of opinion as respects the questions of  law        involved,  we  think that the parties must  bear  their  own        costs throughout.        BHAGWATI  J.--This  appeal  with  special  leave  from   the        judgment and order of the High Court of Judicature at Bombay        raises an interesting question as to whether the power under        the proviso to s. 13 of the Indian Income-tax Act (Act XI of        1922)  hereinafter referred to as " the Act "  of  rejecting        the method of accounting regularly employed by the  assessee        can  be  exercised by the Appellate  Assistant  Commissioner        while  hearing an appeal of the assessee under s. 31 of  the        Act, if the Income-tax Officer had not done so in the  first        instance.        The  respondent is a limited company registered  in  England        having  its registered office at St. Martin Street,  London.        In India it has its branches at Calcutta, Bombay and Madras.        The  respondent  publishes  as  well  as  sells  books   and        magazines  in various parts of the world.  The  Head  Office        and  branches  outside  India invoice  publications  to  the        Indian branches not at cost but at a valuation which is  25%        of the marked price for sterling publications and 30% of the        marked  price for currency publications For the purposes  of        computing the profits of its Indian branches, the respondent        takes the said valuation as the cost of the publications.        For the assessment year 1944-45 the respondent was  assessed        under  the  Act  as a non-resident  company.   Its  year  of        account  ended on April 30, 1943.  In submitting its  return        of  income for the said assessment year 1944-45 and  in  the        assessment  proceedings  before the Income-tax  Officer  for        that  year, the respondent took the aforesaid invoice  value        as  representing the cost of the books produced by it.   The        business  Income returned by the respondent was Rs.  79,131.        By his assessment order dated March 24, 1945, the Income tax        Officer  accepted the method of accounting employed  by  the        respondent and its books of account        712        for  the Indian business.  He,, however, added back  certain        items  of expenses shown in the  respondent’s  balance-sheet        and  profit and loss account and computed the income at  Rs.        82,623 and disallowed the respondent’s claim for a bad  debt        of Rs. 3,592.        The respondent appealed against the said disallowance to the        Appellate  Assistant Commissioner.  The Appellate  Assistant        Commissioner  allowed the respondent’s claim for  bad  debt.        He  was, however, of the view that the assessee’s method  of        accounting,  viz.,  taking the aforesaid  invoice  value  as        representing the respondent’s actual cost of production  was        such  that  the respondent’s profits could not  be  properly

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      deduced therefrom and issued notice to the respondent  under        the  first proviso to s. 31(3) of the Act, calling upon  the        respondent  to show cause why its assessment should  not  be        enhanced.   After  hearing  the  respondent  the   Appellate        Assistant  Commissioner  made an order  dated  November  10,        1948,  calculating  the  Indian  business  profits  of   the        respondent  on an amount which bore the same  proportion  to        the  net world profits of the respondent’s business  as  the        Indian turnover bore to the world turnover and enhanced  the        Indian business income of the respondent by Rs. 1, 1 1,616.        The  respondent  preferred  an  appeal  to  the   Income-tax        Appellate  Tribunal  against  this order  of  the  Appellate        Assistant  Commissioner  and contended inter alia  that  the        Appellate  Assistant  Commissioner had  no  jurisdiction  to        discard  the  respondent’s  method  of  accounting  and  re-        computing  the respondent’s Indian business profits  in  the        manner he had purported to do and that in any event for  the        reasons mentioned by the respondent the margin of net  world        profits could not be applied to the Indian business.  By its        order  dated April 29, 1950, the Tribunal remanded the  case        to  the  Appellate Assistant Commissioner with  a  direction        that be should allow the respondent to prove the actual cost        of the goods invoiced to and sold in India.        The  Appellate Assistant Commissioner submitted  his  remand        report  in due course.  In the meanwhile, however, the  High        Court had delivered its judgment in        113        K.F.  Vakeel  v.  The Commissioner  of  Income-tax(1)to  the        effect  that no authority other than the Income-tax  Officer        had jurisdiction to act tinder the proviso to s.  13 of  the        Act.        Relying  upon  that  judgment,  the  respondent  raised  two        contentions  before the Tribunal and they were (a)  that  it        was not competent to the Appellate Assistant Commissioner on        appeal to reject the respondent’s method of accounting which        had been accepted by the Income-tax Officer and (b) that  it        was not competent to the Appellate Assistant Commissioner on        appeal  to  compute  the  Indian  business  profits  of  the        respondent  under r. 33 of the Indian Income Tax Rules,  the        Income-tax Officer not having done so.  The Tribuna accepted        these  contentions of the respondent and by its order  dated        October 16, 1951, allowed the appeal.        At the instance of the appellant, the Tribunal stated a case        and  referred  the following questions of law  to  the  High        Court for its opinion under s. 66(1) of the Act:        "  (1)  Whether  it  is  open  to  an  Appellate   Assistant        Commissioner  on  appeal to reject the assessee’s  books  of        account, which have been accepted by the Income-        tax 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 purposes 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)  of  the        Indian  Income-tax  Act,  where  as  a  result  of  definite        information he is of opinion that the income of the assessee        has been under-assessed ?        The  said reference was heard by the High Court on March  4,        1953, and the High Court following its own decision in K. F.        Vakeel’s case (supra), answered the referred questions  Nos.        1 & 2 in the negative and stated that the referred  question        No. 3 did not arise.

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      (1)  I. T. Reference No. 21 of 1950, Bombay High Court.        714        The appellant applied to the High Court for a certificate of        fitness to appeal to this Court under section 66A(2) of  the        Act  but without success.  The appellant  thereupon  applied        for  and  obtained from this Court special leave  to  appeal        under Art. 136 of the Constitution.        The  provisions of the Act and the rules  framed  thereunder        that fall to be considered in this appeal are the following:        " Section 13 ‘Method of Accounting’:        Income, profits and  gains shall be computed for the purpose        of  sections  10  and 12 in accordance with  the  method  of        accounting regularly employed by the assessee:        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.        Section 31: Hearing of Appeal:        (3)  In   disposing of an appeal,  the  Appellate  Assistant        Commissioner may, in the case of an order of assessment :        (a)  confirm, reduce, enhance or annul the assessment, or        (b)  set  aside  the assessment and  direct  the  Income-tax        Officer  to make fresh assessment after making such  further        enquiry  as  the  Income-tax  Officer  thinks  fit  or   the        Appellate Assistant Commissioner may direct, and the Income-        tax  Officer  shall  thereupon proceed to  make  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; ................                               715        Rule 33 of the Indian Income-Tax Rules, 1922:        "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 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        business, or in such other manner as the Income-tax  Officer        may deem suitable.  "        It  is  contended by the learned Solicitor-General  for  the        appellant  that even though no right of appeal is  conferred        upon  the  Revenue against an assessment order made  by  the        Income-tax  Officer,  once the assessee  carries  an  appeal        before the Appellate Assist. ant Commissioner the assessment        order is wholly robbed of its finality and the whole of  the        assessment  is  at  large  before  the  Appellate  Assistant        Commissioner  with  the result that it is then open  to  the

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      Revenue to urge all the contentions which it could have done        before   the  Income-tax  Officer  and  ask  the   Appellate        Assistant  Commissioner to reopen the whole enquiry and,  in        effect,   reassess  the  assessee  and  even   enhance   the        assessment, provided of course, that the Appellate Assistant        Commissioner  shall  not enhance the assessment  unless  and        until he has afforded the assessee a reasonable  opportunity        of  showing cause against such enhancement.  It  is  further        contended that the powers which the Appellate         91        716        Assistant Commissioner thus exercises are not  circumscribed        by any limitations and are unfettered and in the exercise of        such  powers  it  is competent to  the  Appellate  Assistant        Commissioner  also  to  reject  the  method  of   accounting        regularly  employed by the assessee even though the  Income-        tax  Officer  had  not done so provided  he,  the  Appellate        Assistant Commissioner, is of the opinion that the method of        accounting  employed  is such that the income,  profits  and        gains cannot properly be deduced therefrom and in that event        the  Appellate  Assistant Commissioner is also  entitled  to        adopt the mode of computation of the income prescribed by r.        33 of the Indian Income-tax Rules.        It  is, on the other hand, contended by the learned  counsel        for the respondent that the determination whether the method        of  accounting  regularly employed by the assessee  is  such        that  the  income,  profits and  gains  cannot  properly  be        deduced  therefrom is within the exclusive province  of  the        named  authority,  viz.,  the Income-tax  Officer  and  such        determination  by  the  named  authority  is  the  condition        precedent  to  a certain  consequence  following  thereupon,        viz.,  the rejection of the method of  accounting  regularly        employed by the assessee.  Such determination then cannot be        substituted  by  that  of another  authority,  though  while        entertaining an appeal at the instance of the assessee  such        authority  might  consider whether the named  authority  has        correctly determined the question.  Once the named authority        has  determined  that  the case does  not  fall  within  the        proviso,  no other authority has jurisdiction  to  determine        that  question and the main provision of s. 13 operates  and        the  income, profits and gains of the assessee can  only  be        computed for the purpose of ss. 10 and 12 in accordance with        the method of accounting regularly employed by the assessee.        Not  only is the Income-tax Officer bound in such a case  to        compute   the  income,  profits  and  gains  in   accordance        therewith  by  reason of the mandate contained in  the  main        provision of s. 13 but the Appellate Assistant  Commissioner        also  is  similarly bound and the terms of  s.  31(3)  which        gives the        717        Appellate  Assistant Commissioner power even to enhance  the        assessment  cannot be construed as abrogating or setting  at        naught the imperative terms of s. 13 and the proviso thereto        which  vest  such power only in the named authority  and  no        other.        There  is paucity of authority on the construction of s.  13        of  the  Act.  The High Court in deciding the  reference  in        question  relied  upon  an unreported judgment  of  its  own        delivered on October 11, 1950, in K.    F.  Vakeel  v.   The        Commissioner of Income Tax and E.  P. Tax (1).  In that case        the Tribunal for the first time came to the conclusion  that        it  was  not possible to discover the profits  made  by  the        assessee it’ the accounts were maintained on cash basis  and        therefore   the   proper  method  of  accounting   was   the        mercantile, i.e., the accrual basis and not the cash  basis,

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      even  though the Income-tax Officer had accepted the  method        of  accounting  regularly employed by the assessee  and  the        Appellate Assistant Commissioner had concurred in the  same.        The  question that arose before the High Court  was  whether        the  Tribunal  had jurisdiction to do so.   The  High  Court        construed  the  provisions of s. 13 of the Act  and  was  of        opinion that :        ".......  it  is  for the Income-tax  Officer  to  form  the        opinion  that income, profits and gains cannot  properly  be        deduced from the method adopted by the assessee and if  such        an  opinion  is formed by the Income-tax  Officer  then  the        computation of income, profits and gains has to be made upon        such basis and in such manner as the Income-tax Officer  may        determine.  But it is for the Income-tax Officer, who is the        assessing  officer,  to be dissatisfied with the  method  of        accounting  regularly adopted by the assessee.  If he  found        no  difficulty  in assessing the income, profits  and  gains        from  the  method  of accounting regularly  adopted  by  the        assessee then it is not for any other authority to come to a        different  conclusion.   It  may be that if  an  opinion  is        formed by the Income-tax Officer that opinion may be subject        to an appeal to the Appellate Assistant Commissioner or  the        Tribunal;  but  in the first instance an opinion has  to  be        formed  by  the   Income  tax Officer  as  required  by  the        proviso."        718        On  the  facts of the case before it, no  opinion  had  been        formed  by  the  Income-tax  Officer  that  the  method   of        accounting  regularly  employed  by  the  assessee  was  not        satisfactory.  It was the Tribunal that suo motu came to the        conclusion  that  cash basis was not the proper  basis  from        which  income, profits and gains could be properly  deduced.        The High Court was of opinion that the Tribunal was  clearly        wrong  in forming that opinion, forgetting that it  was  not        for  it  to form an opinion on that question  at  all.   The        Tribunal  had  vested in it the appellate powers  and  those        powers could only be exercised on the opinion formed by  the        Income-tax Officer.  There was nothing before it which could        justify  it in coming to the conclusion that the  Income-tax        Officer was not in a position to deduce the income,  profits        and  gains from the method of accounting regularly  employed        by  the assessee or that the Income-tax Officer  had  formed        any  opinion  whatever  on that question.   The  High  Court        accordingly  set aside the decision of the Tribunal on  this        point.        As  against this decision of the High Court of  Bombay,  the        appellant relied upon a decision of the Punjab High Court at        Simla   in   Oriental  Building  and   Furnishing   Co.   v.        Commissioner  of  Income-tax, Delhi (1).  In that  case  the        Income-tax Officer while acting under s. 13 read with s.  23        (3)  of  the  Act had made certain  disallowance  which  was        reduced  on appeal by the Appellate Assistant  Commissioner.        The Department went up in appeal against the order passed by        the  Appellate  Assistant Commissioner and the  Income_  tax        Appellate  Tribunal upon examining the assessee’s method  of        accounting  and  the records placed  before  the  Income-tax        Authorities  came  to  the  conclusion  that  the  basis  of        computation adopted by the Income-tax Authorities was faulty        and the account books did not reflect the correct account of        the  assessee.   It accordingly computed the income  of  the        assessee  under  the  proviso to s. 13 of the  Act  and  the        question which arose for the consideration of the Court  was        whether  the Tribunal had jurisdiction to do so.   The  High        Court was of opinion that (1) the Tribunal’s        (1)[1952] 21 I.T.R. 105.

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                                719        power  of  dealing  with an order  passed  by  an  Appellate        Assistant Commissioner was plenary and had been expressed in        s. 33 (4) of the Act as widely as could be conceived and (2)        in  an  appeal  under s. 33 the Tribunal  was  competent  to        decide  facts  as  well as law and  possessed  authority  to        substitute  its own order of assessment for the order  under        appeal.        These are the only two decisions bearing on the construction        of  the  proviso to s. 13 of the Act and  dealing  with  the        question  whether the Appellate Assist. ant Commissioner  or        the Income-tax Appellate Tribunal as the case may be,  could        for  the  first  time exercise the power  of  rejecting  the        method  of  accounting regularly employed  by  the  assessee        while  entertaining appeals, if the Income-tax  Officer  had        not  done so in the first instance.  Whereas the High  Court        of  Bombay took the view that they were not competent to  do        so, the High Court of Punjab took the view that there  being        no limitation on the power to be exercised by the  Tribunal,        it could while exercising the appellate powers decide  facts        as  well as law and substitute its own order  of  assessment        for the order under appeal.  I Not much help can be  derived        from  the  reasoning adopted by the High  Court  of  Punjab,        though the High Court of Bombay appears to have applied  its        mind  to  the terms of the proviso to s. 13 of the  Act  and        stated  that it was for the Income-tax Officer, who was  the        assessing  Officer,  to be dissatisfied with the  method  of        accounting regularly employed by the assessee.  If he  found        no  difficulty  in assessing the income, profits  and  gains        from  the  method of accounting regularly  employed  by  the        assessee, then it is not for any other authority to come  to        a  different conclusion.  The Income-tax Officer  is  really        the  authority  entrusted  under the Act with  the  duty  of        computing  the  income, profits and gains  of  the  assessee        under the relevant provisions of the Act.  It is for him  to        form  an opinion whether the method of accounting  regularly        employed  by the assessee is such that the  income,  profits        and  gains  cannot properly be deduced therefrom and  it  is        only if he forms such an opinion that the proviso comes into        operation and the computation        720        of  the income, profits and gains of the assessee is  to  be        made  upon such basis and in such manner as  the  Income-tax        Officer may determine.        The appellant also referred to a decision of the High  Court        of  Allahabad  in Pearey Lal Shukla of Cawnpore, In  re  (1)        where  it was held that the basis and manner  of  assessment        applied by the Income-tax Officer under the proviso to s. 13        of  the  Act  was liable to interference on  appeal  by  the        Assistant Commissioner and the Commissioner.  This  decision        however  throws  no light on the question which  arises  for        determination  in this appeal for the simple reason that  it        proceeds on the basis that the Income-tax Officer has formed        an opinion that the method of accounting regularly  employed        by  the assessee is such that the income, profits and  gains        cannot properly be deduced therefrom and the proviso  having        come into operation the computation of the income has to  be        made  upon such basis and in such manner as  the  Income-tax        Officer may determine.  The basis and manner thus adopted by        the  Income-tax  Officer can be examined on  appeal  by  the        Appellate  Assistant Commissioner or the Commissioner  while        exercising  the  appellate powers vested in them  under  the        Act.  This case is no authority for the proposition that the        power  of  rejection of the method of  accounting  regularly        employed  by  the  assessee can also  be  exercised  by  the

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      Appellate   Assistant  Commissioner  or   the   Commissioner        concerned  while  entertaining  an appeal  by  the  assessee        against the order of the Income-tax Officer.        There  is,  however,  a decision of  the  Privy  Council  in        Commissioner  of  Income-tax,  Bombay  v.  Sarangpur  Cotton        Manufacturing  Co., Ltd, (2) which throws some light on  the        construction of s. 13 and the nature and scope of the  power        to be exercised by the Income. tax Officer under the proviso        thereto.  The assessees in that case had employed a  regular        method  of  accounting  but had also  for  some  years  past        adopted  regularly a method of valuation of stock by  taking        some price under both cost and market price with the  object        of creating a " secret " reserve, which involved the        (1) [1942] 10 T.T.R. 239.        (2) [1938] 6 I.T.R. 6,        721        retention  of profits as not to be included in  the  profits        shown  to the shareholders.  The assessees  submitted  their        profit and loss account showing a profit of Rs. 2,64,086 and        a  return  of  the total income of the  company  showing  an        income  of Rs. 1,99,086 which was arrived at by taking  into        account  the  result of undervaluation of  stock  which  the        company  had adopted in the previous years.  The  Income-tax        Officer,  without considering whether the true income  could        be arrived at from the method of accounting employed by  the        assessees held that the assessees were bound by the  profits        shown  in the balance-sheet.  On appeal by the assessee  the        Appellate  Assistant Commissioner confirmed  the  assessment        and  the  assessees  then applied  to  the  Commissioner  of        Income-tax, Bombay, to review the said order under s. 33  of        the  Act, or in the alternative, to make a reference of  the        questions  of  law to the High Court under s. 66(2)  of  the        Act.  The Commissioner declined to review the order and also        to  make  the reference.  Thereupon, the High  Court  on  an        application made by the assessees under s. 66(3) of the  Act        required  the  Commissioner  to  make  a  reference  and  he        accordingly made the reference in question.  The High  Court        amended the referred question as follows:        "  Whether in the circumstances of the case  the  Income-tax        Officer  was  entitled to compute the  income,  profits  and        gains of the assessees upon the basis of the printed copy of        the  profit  and loss account sent with the  letter  of  the        assessees  of  July 18, 1931, without regard to  any  under-        valuation of the stock which may have been or may be  proved        to have been made."        The  High  Court  was of opinion that  the  covering  letter        formed  part  of the method of accounting  employed  by  the        assessees  within the meaning of s. 13 of the Act  and  that        the  Income-tax  Officer was not entitled to  split  up  the        method  of  accounting  and to regard the  profit  and  loss        account apart from the covering letter; that the  Income-tax        Officer  had only accepted a portion of the method,  without        taking  the method as a whole, which he was not entitled  to        do.   It, therefore held that the matter was still at  large        for the        722        proper  decision of the Income-tax Officer  and  accordingly        answered   the  amended  question  in  the  negative.    The        Commissioner  of  Income-tax then carried an appeal  to  the        Privy Council and their Lordships found themselves unable to        agree  with the view of the High Court as to the meaning  of        s.  13  of  the Act and they were of the  opinion  that  the        section related to a method of accounting regularly employed        by the assessee for his own purpose and did not relate to  a        method  of making up the statutory return for assessment  to

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      income-tax.   Secondly,  the  section clearly  made  such  a        method  of  accounting  a compulsory  basis  of  computation        unless in the opinion of the Income-tax Officer the  income,        profits and gains cannot properly be deduced therefrom.  The        duty  of the Income-tax Officer was to determine whether  it        was possible to deduce the true profits from the account and        the  judgment  of the Income-tax Officer under  the  proviso        must  be properly exercised.  Their Lordships laid  it  down        that it is the duty of the Income-tax Officer where there is        a  method of accounting regularly employed by  the  assessee        not  to prima facie, accept the profits and gains  shown  by        the assessee but to consider whether the income, profits and        gains  can  properly  be deduced therefrom  and  to  proceed        according to his judgment on the question.  On the facts  of        the  case  before them their Lordships were of  the  opinion        that  the Income-tax Officer acted on the same view as  that        expressed  by the Appellate Assistant Commissioner, and  did        not  perform the duty above stated.  In so far as the  facts        showed  that the method of accounting regularly employed  by        the  assessees  did  not show the true  income,  profits  or        gains, the question was further amended by them as follows:        "Whether in view of the provisions of See. 13 of the  Income        Tax  Act or otherwise, the Income-tax Officer was  right  in        computing  for  the  purpose of See. 10  of  that  Act,  the        income,  profits and gains in accordance with the method  of        accounting  regularly  employed by the  assessee  when  that        method  in fact does not show the true income,  profits  and        gains" and was answered in the negative.        723        Their  Lordships further observed that it would then be  for        the Income-tax Officer to proceed to the proper discharge of        his  duty  under s. 13 in the light of the  opinion  therein        expressed  and  reach  a  proper  decision  with   reference        thereto.        This  case discards the view that it is prima facie duty  of        the Income-tax Officer concerned to accept the profits shown        by  the  assessee’s  accounts where there  is  a  method  of        accounting  regularly employed by the assessee and  it  lays        down  that  it is his duty where there is such a  method  of        accounting to consider whether the income, profits and gains        can  be properly deduced therefrom.  It is incumbent on  the        Income-tax  Officer  to  come to  a  determination  on  that        question  and  if he forms the opinion that  the  method  of        accounting is such that the income, profits and gains of the        assessee cannot properly be deduced therefrom he is bound to        reject such method of accounting and make a computation upon        such  basis  and in such manner as he  may  determine.   The        Income-tax  Officer has to apply his mind to this aspect  of        the  question  and  come to his own  determination  in  that        behalf  and  if  he does not do so and  merely  accepts  the        profits shown by the accounts even though in fact the method        of  accounting regularly employed by the assessee does  riot        show the true income, profits and gains, he is in error  and        his  action  in thus accepting the method of  accounting  is        liable  to  be  set  aside at the  instance  of  the  higher        Tribunal.  This leaves open however the question whether  if        the  higher  Tribunal comes to that conclusion, it  will  be        open  to the higher Tribunal to substitute its  opinion  for        that  of  the Income-tax Officer concerned  and  proceed  to        assess  the assessees applying the proviso to s. 13  of  the        Act.   Their  Lordships  of the Privy Council  in  the  case        before  them  did not do anything of the kind  and  observed        that it would be then for the Income-tax Officer himself  to        proceed  to the proper discharge of his duty under s. 13  of        the  Act  in  the light of the opinion  expressed  in  their

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      judgment.   They  did not send back the case either  to  the        Commissioner  of  Income-tax,  Bombay or  to  the  Assistant        Commissioner of        92        724        Income-tax but after having answered the amended question in        the negative simply stated that the Income-tax Officer would        doubtless  proceed to reach a proper decision in  behalf  of        the applicability of the proviso to s. 13 of the Act  having        regard   to  his  experience  in  the  preceding  years   of        assessment.  They neither left that duty to be performed  by        the Commissioner of Income-tax nor by the Assistant  Commis-        sioner  of Income-tax but referred the performance  of  that        duty to the proper authority who was the Income-tax  Officer        who alone was invested with the duty of performing it  under        the terms of the proviso to s. 13 of the Act.        Certain decisions bearing on the interpretation of s. 33B of        the  Act were referred to in this context and  reliance  was        placed  on certain observations contained therein in  regard        to the powers vested in the Appellate Assistant Commissioner        while  hearing  appeals filed before him  by  the  assessee.        (Vide   Commissioner  of  Income-tax  v.   Tejaji   Farasram        Kharawala  (1);   Commissioner  of  Income-tax  v.  Amritlal        Bhogilal   &  Co.,  (2)  and  Smt.   Durgabatti   and   Smt.        Narmadabala  Gupta v. Commissioner of Income-tax, Bihar  and        Orissa (3).        It may be remembered that the Revenue has not been given any        right of appeal before the Appellate Assistant  Commissioner        against  the  assessment  order  passed  by  the  Income-tax        Officer.   It  is  only the assessee who has  such  a  right        conferred  upon  him  under  s. 30 of  the  Act.   When  the        Appellate  Assistant Commissioner however hears such  appeal        though  at  the  instance of the  assessee,  the  Income-tax        Officer is given the right to be heard, either in person  or        by  a  representative,  who appears’  before  the  Appellate        Assistant  Commissioner  to  justify  the  assessment  order        passed by him.  The Legislature in its wisdom has not  given        a  substantive  right  to the Revenue  to  carry  an  appeal        against  the order of the Income-tax Officer.  The  decision        of the Income-tax Officer is qua the Revenue invested with a        finality  and  the Income-tax Officer is not regarded  as  a        party aggrieved against        (1) [1953] 23 I.T.R. 412.       (2) [1953] 23 I.T.R. 420.        (3)  [1956] 30 I.T.R. 101.        725        his  own  decision.  He in fact represents the  Revenue  and        there  is  no question therefore of his ever being  able  to        question his own decision which is considered to all intents        and purposes a proper decision given by him having regard to        all the circumstances of the case.  The assessee is the only        person who is given the right of appeal against the decision        of the Income-tax Officer.  If the assessee does not  choose        to  exercise  this  right of appeal,  the  decision  of  the        Income-tax Officer acquires a finality both qua the  Revenue        and  himself  but if the assessee chooses  to  exercise  the        same,  the  appeal  is  heard  by  the  Appellate  Assistant        Commissioner.  The Income-tax Officer is as aforesaid,  then        given  the  right  to  be heard either in  person  or  by  a        representative.   There  also  the contest  is  between  the        Revenue on the one hand and the assessee on the other.   The        powers   which  are  vested  in  the   Appellate   Assistant        Commissioner while hearing such appeals are statutory powers        conferred  upon him by S. 31 of the Act and in the  exercise        of these powers the Appellate Assistant Commissioner may  in        the  case  of an order of assessment  (a)  confirm,  reduce,

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      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 enquiry as the  Income-        tax   Officer   thinks  fit  or  the   Appellate   Assistant        Commissioner  may direct, and the Income-tax  Officer  shall        thereupon  proceed  to  make  such  fresh  assessment.   and        determine  where necessary the amount of tax payable on  the        basis of such fresh assessment.  If the Appellate  Assistant        Commissioner  chooses to exercise the powers conferred  upon        him  under the first alternative and enhance the  assessment        he is enjoined by the proviso to s. 31(3) of the Act to give        to  the Appellant a reasonable opportunity of showing  cause        against  such enhancement.  There are no doubt limit.  lions        grafted   on   this  power  of   the   Appellate   Assistant        Commissioner but these limitations have to be found from the        very   nature   of  the   proceedings   themselves.    These        limitations  will  be  indicated at  the  appropriate  place        hereafter.        726        The  High Court of Bombay no doubt expressed the opinion  in        the  Commissioner of Income-tax v. Amritlal Bhogilal  &  Co.        (1):        "  As  pointed  out in the last  reference,  the  object  of        enacting  section  33B  was  to  confer  a  power  upon  the        Commissioner in the interest of revenue to revise orders  of        the Income-tax Officer which could not be revised under  any        circumstances  if  the assessee did not  appeal  from  those        orders.   However  erroneous  the order  of  the  Income-tax        Officer  may  be, however prejudicial to  the  Revenue,  the        assessee  by refusing to exercise his right of appeal  could        make  that  order  conclusive.  In order  to  fill  up  this        obvious  lacuna  the Legislature enacted Section  33B.   But        once  the  assessee  has appealed, there  is  no  difficulty        whatsoever  in  the way of the department in  agitating  any        question  before the Appellate Assistant Commissioner  which        in  its  opinion  should  be agitated  and  decided  in  the        interest  of public revenue.  Now, it is clear that when  an        appeal   is   pending   before   the   Appellate   Assistant        Commissioner,  the  Income-tax Officer has the right  to  be        heard either in person or by a representative, and the  very        point  which the Commissioner has taken and on which he  has        given  his decision under section 33B could have been  urged        under   the  directions  of  the  Commissioner  before   the        Appellate Assistant Commissioner.  It is only when no remedy        is  open  to  the Commissioner to revise the  order  of  the        Income-tax Officer that this jurisdiction under section  33B        arises.  But when a legal remedy is given to him to get  the        orders   of  the  Income-tax  Officer  revised,  he   cannot        requisition  to his aid the power conferred upon  him  under        section 33B.  Once the appeal with regard to the year  1949-        50 was pending before the Appellate Assistant  Commissioner,        the  Commissioner was given the full right to get the  order        of  the Income-tax Officer revised in any manner he  thought        necessary in the interest of public revenue."        These  are  however observations only with  regard  to   the        construction of s.33B of the Act and do not throw any  light        on the nature and scope oft he powers        727        vested  in the Appellate Assistant Commissioner under s.  31        of the Act, much less do they throw any light on the  nature        and  scope  of  the power vested in  express  terms  in  the        Income-tax Officer under the proviso to s. 13 of the Act  of        rejecting the method of accounting regularly employed by the        assessee if in his opinion the method of accounting is  such        that  the  income,  profits and  gains  cannot  properly  be

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      deduced   therefrom.   This  decision  does  not  help   the        appellant  in its contention that if the Income-tax  Officer        has  not  in fact done so it will be open to  the  Appellate        Assistant Commissioner while hearing an appeal filed  before        him  by  the assessee to exercise such power  in  the  first        instance.        The position contended for by the appellant as emerging from        the decision of the High Court of Bombay just referred to is        contrary  to  the one which was enunciated  by  the  learned        judges  of the High Court of Bombay in K. F.  Vakeel’s  Case        (supra).   I  am  clearly of the opinion  that  the  learned        judges  of  the High Court of Bombay did not intend  to  lay        down any such position.        In fact, in the later unreported decision of theirs in  M/s.        Narrondas  Manordass, Bombay v. The Commissioner of  Income-        tax,  Bombay  (1) the learned judges of the  High  Court  of        Bombay  laid  down  that however wide in  terms  the  powers        conferred upon the Appellate Assistant Commissioner under s.        31  of the Act may have been worded, they are  not  absolute        but are circumscribed by the very nature of the  proceedings        themselves.  The learned judges in that context observed:        "Now,  in  order to understand what the  competence  of  the        Appellate Assistant Commissioner is and what are the  powers        conferred  upon the Appellate Assistant Commissioner, it  is        necessary to bear in mind certain salient facts.  It is only        the assessee who has a right conferred upon him to prefer an        appeal  against  the  order of  assessment,  passed  by  the        Income-tax  Officer.   If the assessee does  not  choose  to        appeal, the order of assessment becomes final subject to any        power         (1) [1957] 31 I.T.R. 909        728        of revision that the Commissioner might have under s.33-B of        the Income-tax Act.  Therefore,it would be wholly  erroneous        to  try  and compare the powers of the  Appellate  Assistant        Commissioner with the powers possessed by a Court of Appeal,        under  the  Civil Procedure Code.  The  Appellate  Assistant        Commissioner is not an ordinary court of appeal in the sense        in  which  that  expression  is  understood  in  the   Civil        Procedure  Code.   It is impossible to talk of a   court  of        appeal  when  only  one party to the  original  decision  is        entitled  to appeal and not the other party, and in view  of        this  peculiar position occupied by the Appellate  Assistant        Commissioner,  the Legislature, as we shall presently  point        out,  has  conferred  very wide powers  upon  the  Appellate        Assistant Commissioner once an appeal is preferred to him by        the  assessee.   If the assessee chooses to  remain  content        with  the order of the Income-tax Officer there  is  nothing        that  the Appellate Assistant Commissioner can  do,  however        erroneous  the assessment may be; but if the  assessment  is        opened  up by the action of the assessee himself,  then  the        powers  conferred upon the Appellate Assistant  Commissioner        are  much  wider  than the powers of an  ordinary  Court  of        appeal.  The statute provides that once an assessment  comes        before  the Appellate Assistant Commissioner his  competence        is  not  restricted  to  examining  those  aspects  of   the        assessment  which  are complained of by  the  assessee;  his        competence  ranges over the whole assessment and it is  open        to  him  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        assessment.        "It  is clear t at the Appellate Assistant Commissioner  has        been  constituted a revising authority against the  decision

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      of  the Income-tax Officer; a revising authority not in  the        narrow  sense of revising what is the subject matter of  the        appeal,  not  in the sense of revising those  matters  about        which the assessee makes        729        once  the  appeal is before him he can revise not  only  the        ultimate  computation arrived at by the  Income-tax  Officer        but  he can revise every process which led 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.  "        The learned judges then cited with approval the observations        of the Patna High Court in Jagarnath Therani v.   Commissioner        of Income-tax (1):        "  Now this section (section 31(3)) relating to  appeals  is        enacted  for  the benefit of the subject and  also,  to  the        limited extent therein stated, for the benefit of the Crown.        But  the subject-matter of the appeal is the assessment  and        the  scope of the appeal must, in my opinion, be limited  by        the subject-matter.  The appellate authority has no power to        travel beyond the subject-matter of the assessment, and, for        all the reasons advanced by the appellant, is in my opinion,        not  entitled  to  assess  new sources  of  income.   "  the        observations  of  the High Court of  Madras  in  Gajalakshmi        Ginning  Factory v. Commissioner of Incometax (2)  (approved        by the Patna High Court in Bishwanath Prasad Bhagwat  Prasad        v. Commissioner of Income-tax (3) at p. 758):        " Of course, it would not be open to the Appellate Assistant        Commissioner  to introduce into the assessment new  sources,        as his power of enhancement should be restricted only to the        income  which  was the subject matter of  consideration  for        purposes of assessment by the Income-tax Officer.  "        and  their  own observations in an  unreported  judgment  of        theirs in Sharrif Jima & Co. Ltd., Mombassa v.  Commissioner        of Income-tax, Bombay City (4):        "  When the Appellate Assistant Commissioner  exercises  his        power of enhancement, be is dealing with        (1)  [1925] 2 I.T.C. 4, 8.        (3)  [1956] 29 1 T. R. 748.        (2) [1952] 22 I.T.R. 502, 510.        730        the subject-matter of appeal before him, and enhancement  is        confined  to  the sources or items in respect of  which  the        assessment has been made by the Income-tax Officer.        After  considering the various authorities cited  above  the        learned judges finally came to the conclusion:        "  We do not think it can be seriously disputed  that  those        powers, are very wide and unfettered, but the only  question        before  us  is whether there is any  limitation  upon  those        powers,  and if there is any limitation upon  those  powers,        what  is the nature and character of the limitation.  It  is        not   as  if  the  Appellate  Assistant   Commissioner   has        completely unqualified powers; his powers are limited to the        subjectmatter  of  the assessment and we have  attempted  to        define what the subject-matter of the assessment is.  "        It follows from the above that even though the powers of the        Appellate   Assistant   Commissioner  in   the   matter   of        enhancement  of the assessment provided in s. 31(3)  of  the        Act  are not circumscribed by any limitation  thereupon  and        are  as  wide  as wide can  be,  there  are  well-recognized        limitations  on  the  same, one of which  has  been  rightly        accepted  by the learned judges of the High Court of  Bombay

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      in  their  unreported decision above referred  to.   It  now        remains to consider whether there is any other limitation on        such  powers of the Appellate Assistant Commissioner  to  be        found in the provisions of s. 13 of the Act and the  proviso        thereto.        It  is clear that not much light is thrown on this  question        by  the authorities directly bearing on the construction  of        s.  13 of the Act above referred to except the  observations        of  the learned judges of the High Court of Bombay in K.  F.        Vakeel’s Case, (supra).  This judgment of the learned judges        of  the  High Court of Bombay has not  been  dissented  from        either  in Bombay or else where and stands unchallenged  and        would  prima  facie go to establish the  position  canvassed        before us by the assessee that it is the Income-tax  Officer        and  the Income-tax Officer alone who is invested  with  the        power to determine whether the method of accounting employed        by the assessee is such that        731        the  income,  profits  and  gains  of  the  assessee  cannot        properly be deduced therefrom.        Not much help can be derived also from the comparison of the        various  provisions of the Act where the Income-tax  Officer        is  vested with the power of arriving at the  determinations        on his own, viz., Section 4A(a)(iv),s.  10(5), s. 12B(2), s.        22(2), s. 22(4), s. 23(2), s. 23A,s.    34  and s. 42(2)  or        where  there  are  several  authorities  named  besides  the        Income-tax  Officer  for arriving at determinations  of  the        relative questions, viz., s. 28(1) and (2), s. 37, s. 38, s.        48,  and s. 49E of the Act with the provisions contained  in        s. 13 and the proviso thereto.  It is not necessary to probe        into  the  reasons  for  the  enactment  of  these   several        provisions by the Legislature in the manner therein  stated.        It  is sufficient for the present purpose to scrutinise  the        provisions  of  s. 13 itself and reach a conclusion  on  the        express terms thereof.        Turning  then to the provisions of s. 13 itself,  one  finds        that the main provision thereof enacts the rule that income,        profits  and gains shall be computed for the purpose of  ss.        10  and  12  in accordance with  the  method  of  accounting        regularly  employed  by the assessee.  If the  matter  stood        there  the  imperative  character of  this  provision  would        entail upon the Income-tax Officer and upon all the  income-        tax  authorities in the hierarchy to accept that  method  of        accounting for the computation of income, profits and  gains        of the assessee for the purpose of ss. 10 and 12 of the Act.        This  method of accounting though regularly employed by  the        assessee is however not invested with a sacrosanct character        and  is  subject to the proviso enacted in s. 13 and  it  is        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.  Two conditions are thus attached  to        the  rejection of the method of accounting regular  employed        by the assessee and        732        they  are  expressed in different phraseology :  (i)  if  no        method of accounting has been. regularly employed; and  (ii)        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.  It is to be noted that these        two conditions are couched in quite different terms.  In the        case  of the first condition, the mere fact of no method  of        accounting having been regularly employed is enough to bring

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      the  proviso  into operation but in the case of  the  second        condition the Income-tax Officer has to form an opinion that        the  method of accounting is such that the  income,  profits        and  gains cannot properly be deduced therefrom  before  the        proviso can ever come into operation.  The determination  of        the  Income-tax  Officer  concerned to that  effect  is  the        condition  of  the  rejection  by  him  of  the  method   of        accounting regularly employed by the assessee and unless and        until he comes to that conclusion he cannot reject the  same        and  compute the income, profits and gains of  the  assessee        upon such basis and in such manner as he may determine.  The        difference  in  the  language of  these  two  conditions  is        advisedly  adopted  by the Legislature.  The  fact  that  no        method  of  accounting has been regularly  employed  by  the        assessee  would be obvious to any Income-tax Officer  merely        on  a  perusal of the statement of account furnished  b  the        assessee and would not require any mental process which  can        be  properly  described  as  a  determination.   The  mental        process  involved,  however,  in  the  case  of  the  second        condition  is  of a much more elaborate  character  and  the        Income-tax  Officer  has to apply his mind to  the  question        whether  even  though  the method  of  accounting  has  been        regularly employed by the assessee, such income, profits and        gains  cannot  properly  be  deduced  therefrom.   Here  the        Income-tax Officer concerned has to form a definite  opinion        on  the question and if he comes to the conclusion that  the        income,  profits and ’gains of the assessee cannot  properly        be deduced from the method of accounting regularly  employed        by  him  the proviso at once comes into  operation.   He  is        entitled to reject        733        assessee  and compute the income, profits and gains  of  the        assessee  upon  such  basis and in such  manner  as  he  may        determine.   This  is not the mental process of  the  nature        required  for the fulfilment of the first condition.  It  is        the  application  of mind to the  question  whether  income,        profits  and gains of the assessee can be  properly  deduced        from  the  method of accounting regularly  employed  by  the        assessee  and  the  Income-tax Officer has to  come  to  the        conclusion that it cannot be so done.  This determination is        under the terms of the proviso itself a determination of the        Income-tax Officer himself and of no other authority in  the        hierarchy of the Income-tax Officers.  It may be noted  that        the term" Income-tax Officer" has been defined in s. 2(7) of        the  Act  as  distinct from the  term  "Appellate  Assistant        Commissioner" defined in s. 2(3) of the Act.  The Income-tax        Officer,  the  Appellate  Assistant  Commissioner  and   the        Inspecting Assistant Commissioner are separate entities each        with  a  jurisdiction of its own and the one cannot  by  any        chance be interpreted to mean the other.  If, therefore, the        proviso to s. 13 of the Act talks of the Income-tax Officer,        it is the Income-tax Officer alone as defined in s. 2(7)  of        the  Act  and not the Appellate  Assistant  Commissioner  as        defined  in s. 2(3) of the Act or any other officer  in  the        hierarchy  of Income-tax Officers.  Such  an  interpretation        would involve the deletion not only of the term  "Income-tax        Officer"  from  the proviso to s. 13 but also  the  absolute        negation  of the expression "in the opinion’ of the  Income-        tax Officer" mentioned therein.  I for one cannot ascribe to        the Legislature any negligence or oversight nor can I impute        to  it any intention to use these words as though they  were        superfluous or redundant.  The words used by the Legislature        must  be  given their full effect and significance  and  the        only way in which these words can be construed is to ascribe        to  the Legislature the intention to make the  determination

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      by  the lncome-tax Officer a condition of the proviso  being        brought  into operation, with the necessary consequences  of        the rejection of the method of accounting regularly        734        basis  and in such manner as the Income-tax Officer  himself        may determine.        To  that extent the decision of the High Court of Bombay  in        K.  F. Vakeel v. Commissioner of Incometax & E. P.  Tax  (1)        would appear to be correct.        It  is however urged that this interpretation would  involve        the  necessary  consequence that the  determination  of  the        Income-tax  Officer within the proviso to s. 13 of  the  Act        would be final so far as the Revenue was concerned as it had        no right to appeal against the determination of the  Income-        tax Officer, whereas the assessee would have the right under        s.  30  of the Act to carry an appeal before  the  Appellate        Assistant  Comniissioner and such a result  could  certainly        not have been contemplated by the Legislature while enacting        this  measure.  It is also contended that once the  assessee        carries   an   appeal   before   the   Appellate   Assistant        Commissioner  he  himself  destroys  the  finality  of   the        determination  made by the Income-tax Officer and the  whole        matter  is at large so much so that even though the  Revenue        could  not  have preferred an appeal on its  own,  once  the        appeal   is   entertained   by   the   Appellate   Assistant        Commissioner  it would be able to urge any and every  ground        including  the  one which would bring the  case  within  the        proviso  to  s.  13 of the Act even  though  the  Income-tax        Officer had not entertained the same in the first instance.        The  first  contention is wholly untenable  for  the  simple        reason that when proceedings are entertained by the  Income-        tax Officer, he represents the Revenue and the contest  then        is  between the Revenue (as represented by him) on  the  one        hand  and the assessee on the other.  If the Revenue  itself        decides  the question in a particular manner in the  process        of  assessment, it cannot legitimately be heard to say  that        it  has  not  been given any right  of  appeal  against  the        decision  of the Income-tax Officer who represents it  fully        all  the  way.  The party aggrieved by the decision  of  the        Income-tax Officer can only be one and that is the assessee,        the  Revenue having decided the question in its  on  favour.        The assessee only can in the circum-        735        stances, therefore be given the right of appeal against  the        decision of the Income-tax Officer.  Even when the  assessee        files an appeal before the Appellate Assistant Commissioner,        the Revenue is represented by the Income-tax Officer himself        who  appears  before the  Appellate  Assistant  Commissioner        either in person or by a representative.  So, there also the        Revenue  is  fully represented and has its full say  at  the        hearing of the appeal before the Appellate Assistant Commis-        sioner  and the only say which it can ever have would be  to        support  the  decision  which has been given  in  the  first        instance by the Income-tax Officer who is its representative        in  the assessment proceedings.  No grievance can  therefore        be  made  that the Revenue has been conferred  no  right  of        appeal  and that if the assessee does not choose  to  appeal        against  the decision of the Income-tax Officer, it  has  no        redress  whatever.   It has, in fact, no  grievance  at  all        which  can  ever  be redressed by  the  Appellate  Assistant        Commissioner  and  if the Revenue cannot by  any  chance  be        treated as an aggrieved party the whole of this argument  is        robbed  of  significance.  It is futile on the part  of  the        appellant  therefore to urge that there is finality  in  one        case and no finality in the other.

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      The  second  contention  put forward  by  the  appellant  is        equally  devoid of substance.  The powers of  the  Appellate        Assistant  Commissioner  are statutory and they  are  to  be        found  in the four corners of s. 31 of the Act.  The  nature        and scope of these powers have been already discussed  above        and  these  powers  are not absolute in  character  but  are        circumscribed in the manner indicated in the judgment of the        High  Court  of Bombay above referred  to.   The  Income-tax        Officer  who appears before the Appellate Assistant  Commis-        sioner  either  in  person  or  by  his  representative   is        concerned  to  support his own decision  and  therefore  lie        cannot  be ever heard to say that the decision which he  has        reached in the matter of the proviso to s. 13 of the Act  is        wrong  in  any  manner whatever.   The  Appellate  Assistant        Commissioner  even though he is exercising  these  appellate        powers, cannot on its own        736        accounting  regularly employed by the assessee is such  that        the  income,  profits and gains of the  assessee  cannot  be        properly  deduced  therefrom.   He can only  arrive  at  the        conclusion  on  the record before him and on  the  materials        presented before him by the assessee as well as the  Income-        tax  Officer appearing before him either in person or  by  a        representative that the conclusion which has been reached by        the Income-tax Officer within the terms of the proviso to s.        13  of  the  Act  is not proper and  if  he  comes  to  that        conclusion the only thing that be can do is to set aside the        assessment within the meaning of s. 31(3)(b) of the Act avid        direct  the  Income-tax Officer to make a  fresh  assessment        after  making  such  further enquiry  which  the  Income-tax        Officer   thinks   fit  or  he,  the   Appellate   Assistant        Commissioner, may direct.  He has no jurisdiction to  arrive        at a determination of his own as to the method of accounting        regularly  employed  by  the assessee being  such  that  the        income, profits and gains of the assessee cannot properly be        deduced  therefrom.  That is the function of the  Income-tax        Officer by the very terms of the proviso to s. 13 itself and        he cannot arrogate that function to himself by abrogating or        setting at naught the express terms of the proviso to s.  13        which lay down that the power of rejection of the method  of        accounting   regularly   employed  by   the   assessee   and        computation of the income, profits and gains of the assessee        upon such basis and in such manner as the Income-tax Officer        himself  may  determine  is only vested  in  the  Income-tax        Officer  as  defined in s. 2(7) of the Act.   The  power  of        enhancement  of the assessment conferred upon the  Appellate        Assistant Commissioner under s. 31(3)(a) cannot be construed        to mean that the Appellate Assistant Commissioner can on his        own exercise such power within the meaning of the proviso to        s.  13  even though the Income-tax Officer himself  has  not        done  so in the first instance.  The powers  conferred  upon        the Appellate Assistant Commissioner under s. 31(3)(a)  have        got to be read with this further limitation that even though        he can enhance the assessment, he cannot do so by exercising        the        737        in the Income-tax Officer concerned under the proviso to  s.        13 of the Act.  Section 31(3) of the Act has got to be  read        harmoniously  with the provisions of s. 13 and  the  proviso        thereto and if they are so read the only conclusion to which        one  can arrive is that even though the Appellate  Assistant        Commissioner  exercises the wide powers conferred  upon  him        under  s.  31(3) of the Act, he cannot abrogate  or  set  it        naught  the express power which is vested in the  Income-tax        Officer under the proviso to s. 13 of the Act.

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      The  learned Solicitor-General urged that if the proviso  to        s.  13  of  the Act was so interpreted  it  would  not  only        deprive the Appellate Assistant Commissioner of the power to        bring  the proviso to s. 13 of the Act into operation  in  a        proper  case but would also deprive the Commissioner of  the        power which he has to revise the Income-tax Officer’s  order        of  assessment  under  s.  33B  of  the  Act.   As   already        indicated,  the  Court  is  not  concerned  here  with   the        interpretation of s. 33B of the Act and it may also be noted        that  there was no such provision to be found in the Act  as        it  stood at the relevant period.  Assuming,  however,  that        the  power  of  the Commissioner to  revise  the  Income-tax        Officer’s  orders  under  s.  33B  of  the  Act  has  to  be        considered in this context, there is nothing in the terms of        that section which militates against the conclusion  arrived        at  on the construction of the proviso to s. 13 of the  Act.        If  the Commissioner considers that any order passed in  the        record  of any proceedings under the Act by  the  Income-tax        Officer  is erroneous in so far as it is prejudicial to  the        interests of the Revenue, it is open to him after giving the        assessee an opportunity of being heard as he deems necessary        to pass such orders thereon as the circumstances of the case        justify.  If he comes to the conclusion that the  Income-tax        Officer concerned is in error in the matter of accepting the        method of accounting regularly employed by the assessee  and        ought  to  have come to the conclusion that  the  method  of        accounting  employed  is such that the income,  profits  and        gains cannot properly be deduced therefrom, it would be open        to  the Commissioner to record that opinion of his and  pass        an order cancelling        738        the assessment and directing a fresh assessment which  would        be within his competence and would be the only order thereon        which  the  circumstances  of the case  would  justify.   No        injustice would be done to the Revenue.  The ends of justice        would  be equally served if the Commissioner in such a  case        makes  an  order cancelling the assessment and  directing  a        fresh assessment and remands the case back to the Income-tax        Officer  with a direction to apply his mind properly to  the        facts of the case and determine the question which is within        his exclusive province under the terms of the proviso to  s.        13  of  the Act.  I cannot see any difficulty  of  the  type        envisaged by the learned Solicitor-General and am of opinion        that   this  contention  of  the  appellant  also  must   be        negatived.        I  am, therefore, of opinion that the conclusion reached  by        the High Court of Bombay in the instant case was correct and        the  referred questions Nos.  1 and 2 were rightly  answered        by  the High Court in the, negative.  As stated by the  High        Court the question No. 3 did not arise for consideration  at        all and I would, therefore, dismiss the appeal with costs.        BY  THE  COURT.-In  accordance  with  the  judgment  of  the        majority, the appeal will be allowed.  Each party will  bear        its own costs throughout.        Appeal allowed.        739