PETITIONER: COMMISSIONER OF INCOME-TAX, WEST BENGAL-1,CALCUTTA Vs. RESPONDENT: SIMON CARVES LIMITED DATE OF JUDGMENT17/08/1976 BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ SARKARIA, RANJIT SINGH SINGH, JASWANT CITATION: 1976 AIR 2368 1977 SCR (1) 207 1976 SCC (4) 435 ACT: Income-tax (11 of 1922) ss. 34 and 42, Income-tax Act (43 of 1961) s.147 and Income-tax Rules, 1922, r. 33 corre- sponding to r. 10 of 1962 Rules--One of the methods men- tioned in r. 33 applied for assessment--Higher tax liability if another method in rule adopted--If a case of income escaping assessment. HEADNOTE: Section 42, Income-tax Act, 1922, provides for assessing the income, profits gains deemed to accrue or arise in the taxable territories to a person not resident in the taxable territories. RuLe 33 of the 1922-Rules is made for comput- ing the profits and gains of business deemed to accrue or arise in India in cases where the income tax officer finds that the provisions of s. 42 do not provide sufficient criteria. The rule mentions three methods and it would be open to the income-tax officer to select and apply one of the three methods mentioned in the rule. The assessee-respondent in the present case, is a non- resident company carrying on business as construction engi- neers both in India. and in other parts of the world. The Income-tax Officer found that s. 42 of the 1922-Act did not provide sufficient criteria for computing the profits and gains of the assessee deemed to accrue or arise in India and, therefore, assessed the income applying one of the three methods mentioned in r. 33. As it resulted in lower tax liability, his successor initiated proceedings under s. 147(b), Income-tax Act, 1961, adopted another method contem- plated by r. 33. and assessed the income at a higher figure. The Appellate Assistant Commissioner, the Tribunal and High Court held that in making the reassessment the Income-tax Officer could not depart from the method of computation followed in the original assessment, and adopt an alterna- tive method of computation though permitted by the rule. In appeal to this Court, it was contended that the lower tax liability in the original assessment showed that it was a case of escaped assessment and as such s. 147 of the 1961-Act was attracted. Dismissing the appeal, HELD: It is open to the Income-tax Officer at the time of making the original assessment to adopt one of the three methods mentioned in r. 33 for computing the taxable income of the assessee. From the mere fact that the method select- ed by him resulted in lower tax liability compared to the liability which would have resulted from the adoption of another method under the rule, it would not follow that the discretion was not exercised by the Income-tax Officer in a proper and judicious manner, and that it would be a case of income escaping assessment. [212 E-F] (1) The discretion to choose one of the methods in r. 33 ought to be exercised by the Income-tax Officer in a proper and judicious manner. In the present ease, there is nothing to show that the discretion was not so exercised by the Income-tax Officer, nor was it suggested that he was actuat- ed by any oblique motive. The Income-tax Officer ordering reassessment does not sit as a Court of appeal over the officer making the original assessment, nor is it open to him to substitute his own opinion regarding the method of computation of the income especially when the method of computation adopted at the time of original assessment was permissible in law. The taxing authorities exercise quasi-judicial powers, and in doing so, they must act in a fair and not a partisan manner. Although it is part of their duty to ensure that no tax, which is legitimately due from an assessee, should remain unrecovered, they 208 must also at the same time not act in a manner which indi- cates that the scales are weighted against the assessee. It is not correct to say that unless. the authorities exercise the power in a manner most beneficial to the revenue and consequently most adverse to the assessee, they should be deemed not to have exercised their discretion in a proper and judicious manner. [213C, 212G] (2) The original order of the first Income-tax Officer was a legally correct order and was not vitiated by any error. The absence of an error would justify the inference that it is not a case of income escaping assessment. There is necessarily an element of error which becomes in cases of income escaping assessment mentioned in s. 147(b) of Act of 1961 manifest in the light of subsequent information re- ceived by the Income-tax Officer. In the present case, no income has escaped assessment due tO oversight, inadvertence or a mistake committed by the first Income Tax Officer. Therefore, the case would not fall within the ambit of s. 147(b) of the 1961-Act or s. 34(1)(b) of the 1922-Act. [213A-B] JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1313 of 1973.
(From the Judgment and Order dated 7-9-1972 of
the Calcutta High Court in Income Tax Reference
No. 208 of 1966).
V.P. Raman, Addl. Solicitor Genl. and M.N.
Shroff for the Appellant.
K. Ray and D.N. Gupta, for the Respondent. The
Judgment of the Court was delivered by
KHANNA, J. This appeal on certificate, by the
Commissioner of Income-tax, is against the judgment
of the Calcutta High Court whereby the High Court
answered in a reference under the Income-tax Act
the following question in favour of the assessee-
respondent and against the revenue:
“Whether, on the facts and in the circumstances of
the case, the Tribunal was right in holding that
in making the reassessment under section 147(b)
of the Income-tax Act, 1961, the Income-tax
Officer could not depart from the method of
computation permitted in Rule 33 of the Income-tax
Rules and followed in the original assessment, and
adopt an alternative method of computation also
permitted under the said Rules (corresponding to
Rule 10 of the Income-tax Rules, 1962) ?”
The matter relates to the assessment year
1959-60, the corresponding financial year for which
ended on March 31, 1959. The assessee is a non-
resident company carrying on business as construc-
tion engineers. The Income-tax Officer made the
original assessment on May 31, 1960 on a total
income of Rs. 21,49,169. On November 5, 1962 the
Income-tax Officer initiated proceedings under
section 147(b) of the Income-tax Act, 1961 (herein-
after referred to as the Act) and completed the
assessment on February 29, 1964 on a total income
of Rs. 69,85,097.
At the time of the original assessment the
assessee filed the return of income along with the
auditor’s certificate of the trading results of
the various contracts. One of those contracts was
in respect of work at Durgapur with the Hindustan
Steel Ltd. In respect of that work
209
the assessee filed a provisional estimate of income
which was arrived at “by calculating the income
that could be attributable in relation to the tax
deducted under section 18(B) by the Hindustan Steel
Ltd.” The Income-tax Officer computed the income
from that contract at Rs. 5,33,164. The income
from the other contracts was computed at Rs,
16,16,005 “as per audited statements.”
In the reassessment proceedings the Income-tax
Officer purported to find as under:
(i) That the assessee’s outlay in India to the
total outlay in various contracts represented a
fair index of operations carried out in India and
as such 60 per cent of the profits attributable to
sterling payments and claimed to be exempt related
to operations in India and fell to be included in
the assessee’s total income;
(ii) that the figure of depreciation required
to be changed; and
(iii) that some portion of the income had to be
assessed under section 4(1)(A) on receipt basis.
The total income of the assessee, as already mentioned, was
determined as a result of reassessment to be Rs. 69,85,097.
In arriving at the figure of the total income the Income-tax
Officer estimated the income in respect of Durgapur contract
to be Rs. 5,33,164 as had been done in the original assess-
ment. Regarding the other contracts, the Income-tax Officer
determined the income of the assessee in reassessment pro-
ceedings to be Rs. 64,51,933. The difference in the income
computed at the time of the original assessment and at the
time of reassessment was due to the fact that the Income-tax
Officer at the time of original assessment adopted one
method of computation under rule 33 of the Income-tax Rules,
1922 while the Income-tax Officer making reassessment adopt-
ed another method under that rule.
On appeal it was submitted before the Appellate Assist-
ant Commissioner on behalf of the assessee that the action
of the Income-tax Officer in reopening the assessment under
section 147(b) was without jurisdiction and that the
Income-tax Officer had no jurisdiction to change the
method of computation as originally adopted in the revised
proceedings. The Appellate Assistant Commissioner held that
the proceedings under section 147(b) were bad and that the
Income-tax Officer could not adopt an alternative method of
computation in the reassessment proceedings. He, therefore,
allowed the appeal. The Appellate Assistant Commissioner at
the same time observed that the Income-tax Officer would be
justified in computing the income to be Rs. 22,23,231 and
that the assessee had no objection to such a revision.
In appeal before the Tribunal the department urged
that the Appellate Assistant Commissioner was not justified
in holding that the Income-tax Officer (i) had no jurisdic-
tion to start proceedings under section 147(b) of the Act;
and (ii) that the Appellate Assistant
210
Commissioner had erred in allowing deductions in the income
of the assessee. The Tribunal held on the first ground that
proceedings under section 147(b) had been validly initiat-
ed. Regarding the second ground, the Tribunal observed in
agreement with the Appellate Assistant Commissioner that the
mode of computation adopted in the original assessment was
one permitted under rule 33 of the Income-tax Rules 1922 and
that the mode adopted in reassessment was another alterna-
tive method. The tribunal held that both the methods being
permissible, it could not be said that any mistake was
committed in computing the income at the time of the origi-
nal assessment on a particular basis adopted with reference
to rule 33. In the opinion of the Tribunal, the Income-tax
Officer could not in reassessment proceedings depart from
the method of computation adopted in the original assess-
ment. The Tribunal directed that the reassessment be made
“adopting the same method of computation as in the original
assessment subject to any adjustments which may be justified
such as excess depreciation being charged in the account and
so on.”
At the instance of the revenue, the question reproduced
above was referred to the High Court. The High Court, while
answering the question against the revenue, referred to the
connotation of the words “escaped income” and observed
” …. it means an income which the asses-
see has succeeded in getting away with or has
eluded observation or search or notice of the tax
authorities. In other words, it cannot mean an
item of income which has not been taxed by purusing
a method approved by law. In the instant case,
the excess income was not taxable under the third
method but it has become taxable by following
another method sanctioned by the same rule, namely,
rule 33. This is not, therefore, a case of escaped
income which has not been brought into the orbit of
taxation in the reassessment proceedings.”
In appeal before us learned Additional Solicitor
General has assailed the judgment of the High Court and has
contended that the High Court was in error in holding that
the instant case was not one of income escaping assessment.
As against that, Mr. Ray on behalf of the assessee-
respondent has canvassed for the correctness of the view
taken by the High Court.
Before dealing with the contentions advanced, it may be
apposite to refer to the relevant provisions. According to
section 4(1 )(c) of the Indian Income-tax Act, 1922, subject
to the provisions of that Act, the total income of any
previous year of any person includes all income, profits and
gains from whatever source derived which if such person is
not resident in the taxable territories during such year,
accrue or arise or are deemed to accrue or arise to him in
the taxable territories during such year. Sub-section (1)
of section 42 of the Act of 1922, inter alia, provides that
all income, profits or gains accruing or arising, whether
directly or indirectly, through or from any business connec-
tion in the taxable territories, shall be deemed to be
income
211
accruing or arising within the taxable territories, and
where the person entitled to the income, profits or gains is
not resident in the taxable territories, shall be chargeable
to income-tax either in his name or in the name of his
agent. According to sub-section (3) of section 42, in the
case of a business of which all the operations are not
carried out in the taxable territories, the profits and
gains of the business deemed under this section to accrue or
arise in the taxable territories shall be only such profits
and gains as are reasonably attributable to that part of the
operations carried out in the taxable territories.
The assessee-respondent in the present case carried on
business as construction engineers both in India and other
parts of the world. The Income-tax Officer, it seems, found
that the provisions of section 42 of the Act of 1922 did not
provide sufficient criteria for computing the profits and
gains of business deemed to accrue or arise in India. Resort
was accordingly had to rule 33 of the 1922 Rules. The above
rule has been made to meet such an eventuality, and reads as
under:
“In any case in which the Income-tax Officer is
of opinion that the actual amount of the income,
profits or gains accruing or arising to any person
residing out of the taxable territories whether
directly or indirectly through or from any business
connection in the taxable territories or through or
from any property in the taxable territories, or
through or from any asset or source of income in
the taxable territories, or through or from any
money lent at interest and brought into the taxable
territories in cash or in kind cannot be ascer-
tained, the amount of such income, profits or gains
for the purposes of assessment to income-tax may be
calculated on such percentage of the turnover so
accruing or arising as the Income-tax Officer may
consider to be reasonable, or on an amount which
bears the same proportion to the total profits of
the business of such person (such profits being
computed in accordance with the provisions of the
Indian Income-tax Act) as the receipts so accruing
or arising bear to the total receipts of the busi-
ness or in such other manner as the Income-tax
Officer may deem suitable.”
Shorn of the parts with which we are not concerned,
the rule provides that in any case in which the
Income-tax Officer is of the opinion that the
actual amount of income, profits or gains accruing
or arising to any person residing out of the taxa-
ble territories, whether directly or indirectly,
through or from any business connection in the
taxable territories cannot be ascertained, the
amount of such income, profits or gains for the
purpose of assessment to income-tax may be calcu-
lated
(i) on such percentage of the turnover so
accruing or arising as the Income-tax Officer may
consider to be reasonable, or
(ii) on an amount which bears the same propor-
tion to the total profits of the business of such
person (such
212
profits being computed in accordance with the
provisions of the Indian Income-tax Act) as the
receipts so accruing or arising bear to the total
receipts of the business, or
(iii) in such other manner as the Income-tax
Officer may deem suitable.
The above rule makes it clear that if other condi-
tions mentioned in the rule are satisfied, it would
be open to the Income-tax Officer in computing the
income, profits or gains to apply one of the three
methods mentioned in the rule. It is the common
case of the parties, and that is also the underly-
ing assumption of the question referred to the High
Court, that the Income-tax Officer in making the
original assessment adopted one method while the
Income-tax Officer making reassessment adopted
another method contemplated by rule 33. The ques-
tion with which we are concerned is whether it
would be a case of income escaping assessment if
the Income-tax Officer adopts a method of computa-
tion which is permissible under the law but which
method results in lower tax liability compared to
the other method which too is permissible in law.
According to the learned Additional Solicitor
General, the adoption of a method even though
permitted by rule 33 which results in lower tax
liability of the assessee compared to the other
method mentioned in the rule would warrant the
conclusion that income has escaped assessment and
as such section 147 of the Act of 1961 would get
attracted. After giving the matter our earnest
consideration, we find it difficult to accept the
above contention. It was open, as already men-
tioned, to the Income-tax Officer at the time of
making the original assessment to adopt one of the
three methods mentioned in rule 33 for computing
the taxable income of the assessee. Discretion was
vested by rule 33 in the Income-tax Officer for the
purpose of making his choice of the methods, and
the same was to be exercised in a proper and judi-
cious manner. There is nothing before us to show
that the discretion was not exercised by the said
officer in a proper or judicious manner. It is
also not suggested that the Income-tax Officer was
actuated by some oblique motive. From the mere fact
that the method selected by him was such as result-
ed in lower tax liability of the assessee compared
to the liability which would have resulted from the
adoption of other method, it would not follow that
the discretion was not exercised in a proper and
judicious manner. The taxing authorities exercise
quasi judicial powers and in doing so they must act
in a fair and not a partisan manner. Although it
is part. of their duty to ensure that no tax which
is legitimately due from an assessee should remain
unrecovered, they must also at the same time not
act in a manner as might indicate that scales are
weighted against the assessee. We are wholly unable
to subscribe to the view that unless those authori-
ties exercise the power in a manner most beneficial
to the revenue and consequently most adverse to the
assessee they should be deemed not to have exer-
cised it in a proper and judicious manner.
The order made by the Income-tax Officer at the time of
the original assessment was a legally correct order and was
not vitiated
213
by any error. The absence of an error in that order would
justify the inference that the present is not a case of
income escaping assessment. There is necessarily an element
of error in cases of income escaping assessment mentioned in
section 147(b) of the Act of 1961. Such error resulting in
income escaping assessment becomes manifest in the light of
information coming subsequently into the possession of the
Income-tax Officer. Where, as in the present case, the
order making the original assessment was a legally correct
order and was not vitiated by any error, the case would not
be one which would fall within the ambit of section 147(b)
of the Act of 1961 or section 34(1)(b) of the Act of 1922.
We may add that the Income-tax Officer ordering reassess-
ment’ does not sit as a court of appeal over the Income-tax
Officer making the original assessment. Nor is it open to
the Income-tax Officer ordering reassessment to substitute
his own opinion regarding the method of computing the income
for that of the Income-tax Officer who made the original
assessment, especially when the method of computation adopt-
ed at the time of original assessment was permissible in
law. The fact that the adoption of a different method of
computation would have resulted ‘in higher yield of tax
would not in such a case justify the reopening of the as-
sessment.
It has been argued on behalf of the appellant that
reassessment under section 147(b) would be justified where
in the original assessment income liable to tax has escaped
assessment due to oversight, inadvertence or a mistake
committed by the Income-tax Officer. The present however,
we find, is a case which does not fall in any of those
categories.
We would, therefore, uphold the judgment of the High
Court and dismiss the appeal with costs.
V.P.S. Appeal dis-
missed.
214