1. This is a reference under Section 66(2) of the Indian Income-tax Act, 1922. It is a consolidated reference relating to assessment years 1940-41 to 1946-47. The question No. 1 relates to the assessment year 1940-41 alone. The question No. 2 relates to all the assessment years while question No. 3 relates to assessment years 1940-41 to 1944-45. The questions are :

" 1. Whether, in the circumstances of the case, the Tribunal was competent to direct the Income-tax Officer to calculate the amount of interest again and to pass a fresh assessment order so as to disallow out of interest a sum in excess of Rs. 30,000, when the assessee appealed against the disallowance of Rs. 30,000 ?

2. Whether, in the circumstances of the case, the Tribunal was right in including in the taxable income of the assessee the sum of Rs. f 5,000, due as rent from M/s. J. N. Cocolas & Co. Ltd. when the assessee's case was that in respect of that source of income it followed the cash system of accounting and not the mercantile system which it followed in respect of its business income ?

3. Whether, in the circumstances of the case, the Tribunal was right in including in the assessable income of the assessee a sum of Rs. 2,181, as the assessee's share of income in another firm of the name and style of Gopal & Co. ? "

2. The facts giving rise to question No. 1 are these. While examining the account books of the assessee relating to assessment year 1940-41, the Income-tax Officer found that out of its borrowed capital, the assessee-firm had advanced a sum of about Rs. 9 lakhs to its partners but did not charge any interest on such advances. Out of the total interest claimed by the assessee as a deduction, the Income-tax Officer disallowed a sum of Rs. 30,000, representing the interest on the advances made to the partners on the ground that the capital advanced to the partners had not been utilised for business purpose. The assessee's appeal on this point was rejected by the Appellate Assistant Commissioner of Income-tax. The assessee then appealed to the Income-tax Appellate Tribunal. The Tribunal found that out of the total borrowings amounting to Rs. 83,39,903 a sum of Rs. 11,25,572 was advanced to the partners and, as such, the assessee was entitled to a deduction of 72.5/83.3 of the total interest paid and the balance was to be disallowed. The Tribunal accordingly directed the Income-tax Officer to work out the amount of disallowable interest according to this formula and to amend the assessment order accordingly. The disallowance in this manner works out to Rs. 36,000 as against Rs. 30,000 disallowed by the Income-tax Officer. The question No. 1 is as to whether the Tribunal was competent to issue such a direction to the Income-tax Officer.

3. Under Section 33(4) of the Indian Income-tax Act, 1922, the powers of the Income-tax Appellate Tribunal in disposing of an appeal are stated in very wide terms. It can " pass such orders thereon as it thinks fit". However, the word " thereon " restricts the jurisdiction of the Tribunal to the subject-matter of appeal and the subject-matter of appeal is stated in the original grounds of appeal and such additional grounds as may be raised by leave of the Tribunal. It is not open to the Tribunal to adjudicate or give a finding on a question which is not in dispute and which does not form the subject-matter of appeal. Unlike an Appellate Assistant Commissioner, who has been specifically authorised under Section 31 to enhance an assessment, the Tribunal, in the absence of a cross-appeal or a cross-objection by the department, cannot enhance an assessment on an appeal by an assessee. Similarly, it is not open to the Tribunal to give a finding adverse to the assessee, which does not arise from any question raised in the appeal nor is it open to it to raise any ground which would work adversely to the appellant and pass an order which makes his position worse than it was under the order appealed against.

4. The Madras High Court in V. Ramaswamy Iyengar v. Commissioner of Income-tax, [1960] 40 I.T.R. 377 (Mad.) has held that in such cases the Tribunal cannot exercise the power of remand with a view to enhancing the assessment. In Puranmal Radhakishan and Co. v. Commissioner of Income-tax, [1957] 31 I.T.R. 294 (Bom.) the Bombay High Court has taken a similar view. In that case the assessee had claimed a loss on the sale of certain shares on the basis of the difference between cost price and sale price of the shares. The Income-tax Officer and the Appellate Assistant Commissioner held that the assessee was entitled to claim loss on the basis of the difference between the market price on the date of purchase and the sale price. The market price was determined at Rs. 715 per share. The Income-tax Appellate Tribunal on appeal by the assessee gave a finding that the market price was at Rs. 524-6-0. The Bombay High Court held that the Tribunal has no jurisdiction to give such a finding. In Pathikonda Balasubba Setty v. Commissioner of Income-tax, [1967] 65 I.T.R. 252 (Mys.) the Mysore High Court has held that the powers of the Tribunal are limited to the subject-matter of appeal and that the Tribunal had no jurisdiction to make an enhancement beyond the figure fixed by the Income-tax Officer.

5. Dr. Misra, the learned counsel for the department, contends that the powers of the Income-tax Appellate Tribunal are subject to no limitations and, as such, should be treated to include the power of enhancement. He has relied on three cases. The first case is that of Hukumchand Mills Ltd. v. Commissioner of Income-tax, [1967] 63 I.T.R. 232 ; [1967] 1 S.C.R. 463 (S.C.) It is difficult to appreciate how that case supports the contention of the learned counsel. There the Supreme Court, after stating that the powers of the Tribunal in dealing with appeals are expressed in Section 33(4) in the widest possible term, went on to observe at page 237:

" The word ' thereon' of course restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words ' Pass such orders as the Tribunal thinks fit' include all the powers (except possibly the power of enhancement) which has been specifically conferred on the Appellate Assistant Commissioner by Section 31 of the Act."

6. The next case relied upon by the learned counsel is that of New India Assurance Company Ltd. v. Commissioner of Income-tax, [1957] 31 I.T.R. 844 (Bom). There the Bombay High Court held that the Appellate Tribunal has power to give, leave to the appellant to raise a new ground and in that connection it was stated that the position of the Appellate Tribunal was the same as that of a court of appeal under the Code of Civil Procedure. The Bombay High Court nowhere says that the Tribunal has the power of enhancement.

7. The last case relied upon by the learned counsel is that of Income Tax Officer, Cannanore. v. M. K. Mohammed Kunhi., [1969] 71 I.T.R. 815 ; [1969J 2 S.C.R. 65 (S.C.) In that case the Supreme Court held that the Income-tax Appellate Tribunal in exercise of its statutory powers under Section 254 of the Income-tax Act, 1961 (corresponding to Section 33(4) of the Indian Income-tax Act, 1922), had the power in proper cases to pass orders staying the recovery proceedings pending an appeal before the Tribunal, and it is in that connection that the Supreme Court observed that under Section 254 of the Income-tax Act, 1961, the powers of the Tribunal were of widest amplitude. Obviously, the Supreme Court was not dealing in that case with the question which we are called upon to decide in the present case.

8. Now, in the instant case, the subject-matter of appeal was the sum of Rs. 30,000 which had been disallowed by the Income-tax Officer and the Appellate Assistant Commissioner of Income-tax. The assessee was aggrieved and filed a second appeal before the Income-tax Appellate Tribunal. There was no cross-objection or cross-appeal by the department that the disallowance should have been more than Rs. 30,000. In these circumstances the Tribunal, if it found that the disallowance should have been more than Rs. 30,000, could only confirm the findings of the income-tax authorities and dismiss the assessee's appeal on that ground but it had no jurisdiction to pass an order either directly or indirectly to place the assessee in a worse position by disallowing a sum of Rs. 36,000 in place of Rs. 30,000.

9. Now, coming to the next question, the facts are that the assessee had leased out one of its factory premises to one Messrs. J. N. Cocolas and Company Ltd. for an annual lease rent of Rs. 15,000. The assessee claimed that it was not able to realise the lease rent in the years under consideration and that it should, therefore, be assessed on that income only when it actually realised the same. In other words, the assessee's contention was that in respect of that source of income it followed the cash system of accounting and, as such, could be taxed only when such income was received. Now, the Income-tax Appellate Tribunal has taken the view that the assessee had advanced certain loans to this party and, in respect of those loans, it was following the mercantile system, inasmuch as it used to debit to the party the amount of interest every year without its being realised. The Tribunal thought that, in such circumstances, the assessee was not justified in not offering for assessment the rent which had accrued in its favour even though it had not been realised, In our opinion, the Tribunal was not right in its approach.

10. Section 13 of the Act gives an option to the assessee to follow whatever method of accounting it likes in respect of income assessable under Sections 10 and 12 of the Act. Now, admittedly, the income from lease money falls to be assessed under Section 12 as income from " other sources " while the income earned by the assessee by way of interest in its money-lending business would be income from business assessable under Section 10. It was open to the assessee to follow one system of accounting in respect of one source and another system in respect of the other source. The assessee followed the mercantile system in respect of its income from business. But that does not mean that the assessee could be compelled to adopt the same system in respect of the income falling under Section 12. The option to the assessee is absolute and it cannot be varied at the instance of the department. It is legitimate to expect that an assessee would exercise the option under Section 13 for his own benefit.

11. Now, in the instant case, if the assessee thought that it would be more advantageous to it to follow the cash system in respect of its income assessable under Section 12 and to follow the mercantile system in respect of its income assessable under Section 10, it was entitled to do so.

12. Now, we take up the question No. 3. The Singhania group to which the partners of the assessee-firm belonged and the Gupta group of Kanpur owned between themselves a company of the name of Laxmi Ratan Cotton Mills Company Ltd., Kanpur. There was another firm of the name and style of Gopal and Company. This firm had the selling agency of the Laxmi Ratan Cotton Mills. Among the partners of Gopal and Company were two persons, by the names of Dilsukh Rai and Sitaram. The Income-tax Officer held that those two persons were dummy partners and were benamidars of the assessee-firm so that the income falling to their share was included in the income of the assessee. In other words, the Income-tax Officer included in the assessee's income a sum of Rs. 2,181 for the assessment year 1940-41 and varying amounts for other assessment years. The assessee appealed on this point first to the Appellate Assistant Commissioner of Income-tax and then to the Income-tax Appellate Tribunal, but remained unsuccessful. The assessee's contention is that it was not a partner in the firm of Gopal and Company. Its name was not in the partnership deed. The finding that Dilsukh Rai and Sitaram were benamidars of the assessee was recorded in the assessment proceedings of Gopal and Company of which the assessee was given no notice. The Appellate Assistant Commissioner of Income-tax held that although the assessee's name did not appear in the partnership deed, yet in the circumstances of the case it was clear that the assessee was the real owner of the shares allotted to Dilsukh Rai and Sitaram. It further held that, although no formal notice was given to the assessee, yet the assessee was fully aware of the case. Before the Tribunal no ground was raised with regard to the want of notice. All that was contended before the Tribunal was that in the circumstances of the case it could not be held that the assessee was liable to be taxed in respect of the share income of Dilsukh Rai and Sitaram.

13. The finding recorded by the Tribunal is that Dilsukh Rai and Sitaram were benamidars of the assessee. This is a finding of fact and cannot be challenged in a reference under Section 66(1) of the Act unless the finding is assailed on the ground that it is based on no material. The sufficiency of material cannot be a question of law.

14. Now, the Tribunal has endorsed the finding on the reasoning given by the Appellate Assistant Commissioner of Income-tax, When we tarn to the order of the Appellate Assistant Commissioner of Income-tax, we find that he based his finding on the following circumstances and material:

(i) That the original capital of Rs. 1 lakh contributed by Dilsukh Rai and Sitaram was supplied by the assessee-firm and subsequently entries were passed in the books of account of the assessee's sister concern at Calcutta showing the sum of Rs. 1 lakh loan to Dilsukh Rai and Sitaram.

(ii) It is inconceivable that the lucrative business of the selling agency of Laxmi Ratan Cotton Mills could have been transferred by the assessee-firm in favour of Dilsukh Rai and Sitaram without any tangible consideration.

(iii) That Gopal and Company had filed an appeal in respect of their assessment but the constitution of the firm as taken by the Income-tax Officer was never challenged.

15. Now, it cannot be said that the circumstances relied upon by the Appellate Assistant Commissioner of Income-tax and endorsed by the Income-tax Appellate Tribunal are irrelevant. The capital cohtributed by these two partners in order to become partners of the Gopal and Company was supplied by the assessee-firm and entries were passed in the books of account of the assessee's sister concern at Calcutta showing that the sum of Rs. 1,00,000 was advanced to these two persons by way of loan by the Calcutta firm. These entries were treated by the income-tax authorities to be a camouflage to cover up the real transaction. In the circumstances, it is not possible to hold that the finding of the Tribunal on this point is vitiated by any error of law.

16. We, accordingly, answer the three questions as follows :