Commissioner Of Income-Tax, Bombay City I v. Scindia Steam Navigation Co. Ltd.

Mody, J.:— This is a reference under section 66(1) of the Indian Incomer tax Act, 1922.

2. The assessee is a shipping company. The relevant assessment year is 1952-53, the accounting year being the year ended on 30th June, 1951. On 5th April, 1951, i.e, during the accounting year, the assessee purchased a ship named “S.S Englestan” at a cost of Rs. 12,00,000 from the liquidator of the Bengal Burmah Steam Navigation Co. Ltd. On 27th March, 1957, the Income-tax Officer made his order of assessment in respect of the above assessment year. By that order he allowed to the assessee depreciation on the said ship on the basis of the said amount of Rs. 12,00,000 as being the cost of the newly acquired ship. The assessee had no dispute with regard to this item of depreciation allowed to the assessee, but the assessee was dissatisfied with certain other points covered by that assessment order. The assessee, therefore, filed an appeal to the Appellate Assistant Commissioner on those other points. Pending that appeal, the same Income-tax Officer made his order of assessment dated 17th March, 1958, in respect of the next assessment year 1953-54. In that assessment he granted depreciation, not on the footing of the actual cost of Rs. 12,00,000 but on the footing of the first proviso to section 10(5)(a) by determining the original cost to the purchaser, i.e, the assessee, which he calculated at Rs. 6,80,000. The assessee appealed to the Appellate Assistant Commissioner in respect of this assessment order relating to the assessment year 1953-54. In respect of the assessment year 1954-55 also the Income-tax Officer in his assessment order allowed to the assessee depreciation on the said ship on the same footing as in respect of the assessment year 1953-54.

3. The Appellate Assistant Commissioner sent to the assessee a notice of enhancement under section 31(3) in respect of the assessment year 1952-53.

4. All the three appeals came up for hearing before the Appellate Assistant Commissioner on 23rd November, 1959. He noticed the inconsistency in the assessments arising by reason of depreciation having been allowed to the assessee in respect of the said ship in the assessment year 1952-53 on the basis of its actual cost but in the two subsequent assessment years on the basis of the amount computed in accordance with the first proviso to section 10(5)(a). In making his order in the appeal in respect of the assessment year 1952-53, he observed and ordered as follows:

“In the context of the subsequent assessments made by the Income-tax Officer in the assessee's case, I find that the Income-tax Officer has overlooked this question of adjustment regarding the purchase price of the assessee's ship in the assessment for 1952-53 and has allowed depreciation under section 10(2)(vi) in respect of this ship on the purchase price of the ship…. While I express no opinion as to whether the provisions of section 10(5)(a), first proviso, would be applicable or not, the carry forward loss as determined by the Income-tax Officer for the assessment year 1952-53 is logically irregular and improper. I would therefore set aside the assessment and direct the Income-tax Officer to make a fresh assessment in accordance with law and after giving further opportunity to the assessee.”

5. Before the Tribunal the assessee contended that, on a true interpretation of the provisions of section 31(3)(a) and (b), whether the Appellate Assistant Commissioner himself had no power to enhance the assessment or having such power he did not in fact enhance the assessment, he could not resort to the other power of setting aside the assessment to achieve the same object. The assessee contended that the Appellate Assistant Commissioner could not himself enhance the assessment because, firstly, under the first proviso to section 10(5)(a) it is the Income-tax Officer who has to exercise his discretion, and, secondly, previous approval of the Inspecting Assistant Commissioner is required to challenge the figure of the original cost claimed by the assessee for the purpose of claiming depreciation. The assessee contended that such a challenge could be made only by the Income-tax Officer and with the prior approval of the Inspecting Assistant Commissioner and that the Appellate Assistant Commissioner could not in appeal do that himself. The Tribunal upheld the contentions of the assessee. The Tribunal held that the Appellate Assistant Commissioner can set aside an assessment and give directions for a fresh assessment being made only if the original assessment under appeal before him suffered from an infirmity, but that in the present case the failure of the Income-tax Officer to exercise his power under the first proviso to section 10(5)(a) could not be said to be an infirmity which affected the assessment made by the Income-tax Officer. The Tribunal set aside the order of the Appellate Assistant Commissioner and the appeal before the Appellate Assistant Commissioner was restored to his file with a direction that he should deal with the contentions as raised by the assessee in the appeal before him for the year 1952-53.

6. Under these circumstances, at the instance of the department, the following question of law has been referred:

“Whether the Appellate Assistant Commissioner's order setting aside the assessment and directing the Income-tax Officer to make a fresh assessment so as to recompute the depreciation allowance for the ship ‘S.S Englestan’ was in accordance with the provisions of section 31(3)(a) and (b) of the Income-tax Act?”

7. Under the provisions of section 10, the assessee was entitled to a deduction for depreciation on the said ship. The provisions of subsection (5) of section 10, so far as they are material, are:

“In sub-section (2), ‘paid’ means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section;…………

(a) in the case of assets acquired in the previous year, the actual cost to the assessee:

Provided that where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business and the Income-tax Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Income-tax Officer may, with the previous approval of the Inspecting Assistant Commissioner, determine having regard to all the circumstances of the case.”

8. Sub-section (3) of section 31 provides:

“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 inqui???y 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, ………”

9. The question for consideration in this reference is:

“Whether the Appellate Assistant Commissioner had the power under section 31(3) to make an order which he in fact made?”

10. Mr. R.J Joshi, the learned counsel for the department, contended that clauses (a) and (b) of section 31(3) are alternative and that the Appellate Assistant Commissioner can exercise the power available to him under either of these two clauses. His contention was that the provisions in clause (a) cannot be interpreted to, in any way, limit the power under clause (b). In this connection he pointed out that the disjunctive “or” has been used between the two clauses (a) and (b). His second contention was that the powers of the Appellate Assistant Commissioner have been held to be plenary and to be co-extensive with the powers of the Income-tax Officer and that he therefore had the power to do everything which the Income-tax Officer could have done. His third contention was that the powers of the Appellate Assistant Commissioner under section 31(3) are not only appellate but also revisional. He contended that, therefore, the Appellate Assistant Commissioner had the power to make the order which he made in this case in respect of the assessment year 1952-53. All these three contentions relate to the powers of the Appellate Assistant Commissioner under section 31(3).

11. Mr. Dastur, the learned counsel for the assessee, urged his contentions, which, according to us, can be divided into five parts or points. His first point was that three appeals in respect of the assessee's assessment years 1952-53, 1953-54 and 1954-55 came up for hearing before the same Appellate Assistant Commissioner and on one and the same day which was a purely accidental factor. He pointed out that in respect of the assessment year 1952-53 the Income-tax Officer had accepted the assessee's claim for depreciation allowance on the basis of actual cost and his assessment order does not show that he even considered resorting to the first proviso to section 10(5)(a). He contended that it is only because of the knowledge acquired by him in the other two appeals that the thought occurred to the Appellate Assistant Commissioner to consider proceeding in the appeal relating to the year 1952-53 under the first proviso to section 10(5)(a). He contended that he got this idea from something outside the record of the appeal relating to the assessment year 1952-53 and, by taking into consideration a matter from outside that record, he made his order. He contended that the Appellate Assistant Commissioner is not entitled to go beyond the record of the appeal he was hearing because even the Income-tax Officer himself could not have done it and that because of these reasons the order of the Appellate Assistant Commissioner is vitiated.

12. We will straightaway deal with this first point urged by Mr. Dastur. There is no reason to suppose that the fact that in the two later assessment years the depreciation had been allowed by the Income-tax Officer in respect of the said ship, not on the basis of its actual cost but on the basis of the provisions of the first proviso to section 10(5)(a), came to his knowledge only from the record of the other two appeals, or that but for that accidental factor it would never have come to his knowledge. There is no reason to suppose that the department would not be represented in that appeal or that the representative of the department would not have brought that fact to his notice. Once that fact was brought to his notice, what action should be taken in the appeal before him and what order should be passed would become only a question of the power of the Appellate Assistant Commissioner. If the Appellate Assistant Commissioner did have the power to make the order which he made, the mere fact of the knowledge having been obtained either from the record of the other two appeals or from the information given by the department's representative cannot by itself vitiate his order.

13. The second point urged by Mr. Dastur was that the scheme of section 31(3) shows that all the powers conferred under it which the Appellate Assistant Commissioner can exercise are for the benefit of the assessee with a solitary exception, the same being the power to enhance the assessment under clause (a) of section 31(3). He contended that this is supported by the provision under that section requiring notice to be issued to the assessee before the Appellate Assistant Commissioner exercises his power to enhance the assessment but there is no provision for the issuing of such a notice to the assessee when the Appellate Assistant Commissioner intends to exercise any other power available to him under section 31(3), including the power to set aside the assessment. He further pointed out that the Appellate Assistant Commissioner did in fact actually issue a notice to enhance, but did not in fact exercise the power to enhance. He contended that that was because the Appellate Assistant Commissioner must have realised that he could not exercise his power to enhance because of the provisions of the first proviso to section 10(5)(a) under which it was only the Income-tax Officer who could exercise the power conferred thereunder and that too only with the previous approval of the Inspecting Assistant Commissioner. He contended that in making the order setting aside the assessment and directing a fresh inquiry the only object of the Appellate Assistant Commissioner was that the Income-tax Officer should proceed under that first proviso and allow depreciation on the footing of the provisions of that proviso. He contended that the power to set aside the assessment available under clause (b) can be exercised, not to bring about any detriment to the assessee but only for the benefit of the assessee, as, for example, when the assessee complains that the assessment has been made by the Income-tax Officer without giving him an opportunity to cross-examine or any such like matters. He stated that decided cases under section 31(3) show that the Appellate Assistant Commissioner has the power to revise, but he contended that that was only because he has been given a power to enhance the assessment and not because of any other reason. He contended that, as in our case the Appellate Assistant Commissioner has exercised the power to set aside the assessment in this manner, it will result to the detriment of the assessee by reason of a lesser allowance of depreciation being allowed to the assessee and, therefore, the exercise of the power is wrongful and invalid. Like Mr. Joshi's contentions, these contentions also concern the powers of the Appellate Assistant Commissioner.

14. In view of these rival contentions as to the power of the Appellate Assistant Commissioner, it is now necessary to ascertain what are the powers of the Appellate Assistant Commissioner under section 31(3) by referring to decided cases.

15. In Narrondas Manordass, Bombay…Applicant; v. Commissioner Of Income-Tax, Central Bombay,…. [1957] 31 I.T.R 909 Bom.. a Division Bench of this High Court held that the powers conferred upon the Appellate Assistant Commissioner by the Income-tax Act are much wider than the powers of an ordinary court of appeal. Under the Income-tax Act 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, but ranges over the whole assessment and it is open to him to correct the Income-tax Officer not only with regard to a matter raised by the assessee in the appeal but also with regard to any other matter which has been considered by the Income-tax Officer and determined in the course of the assessment. The judgment holds 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 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, that is, 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 decision in that case shows that it would of course not be open to the Appellate Assistant Commissioner to introduce in the assessment new sources of income, and the assessment must be confined to the subject-matter of the original assessment.

16. The decision of the Supreme Court in Commissioner Of Income Tax v. Mcmillan & Co [1958] 33 I.T.R 182 shows that the Appellate Assistant Commissioner has the power even to review a matter which is only a matter “in the opinion of the Income-tax Officer” under the proviso to section 13 and in reviewing the order he can exercise the same powers which the Income-tax Officer could exercise. The Supreme Court pointed out that there is nothing in the language of section 31 which imposes any restriction on the powers of the Appellate Assistant Commissioner so as to prevent him from exercising the power under the proviso to section 13. One point decided by the Supreme Court in this judgment is of importance in our case. It was contended before the Supreme Court that, where the Income-tax Officer determined that the method under the proviso to section 13 was unacceptable in the sense that income, profits and gains could not be properly deduced therefrom, there was a decision; but where, however, he did not so decide, there was no decision and it was merely a case of non-exercise of power and that in the latter case there was no decision by the Income-tax Officer at all and the Appellate Assistant Commissioner could not, therefore, interfere. The Supreme Court, however, held that, looked at from a proper standpoint, a non-existence 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. The Supreme Court has stated that, under the proviso to section 13, the Income-tax Officer must form his own opinion as to whether the income, profits and gains could be properly deduced from the method of accounting regularly employed, if any, but if he failed to apply his mind to the proviso or came to a wrong determination for or against the assessee in the computation of the income-tax, the Appellate Assistant Commissioner could correct the error in computation, provided he had seizin of the assessment on an appeal filed by the assessee. This judgment clearly shows that the Appellate Assistant Commissioner has the power to interfere in appeal even when the Income-tax Officer, having the power, has failed to exercise it. That the Income-tax Officer has not proceeded on the basis of the proviso to section 10(5)(a) is a fact. There is nothing on the record to show why he did not so proceed. It may be due to the possibility either that he did in his mind consider it but for some reason rejected it or that it did not at all occur to him. In either of these two possibilities the Appellate Assistant Commissioner had the power to set aside the order of the Income-tax Officer and direct him to proceed according to law.

17. The third point urged by Mr. Dastur was that the Appellate Assistant Commissioner has by this order sought to indirectly bring about a result which he could not himself directly by his own order bring about. He contended that under the provisions of the first proviso to section 10(5)(a) the authority who can proceed thereunder is the Income-tax Officer and the authority whose previous approval is required is the Inspecting Assistant Commissioner. He contended that the Appellate Assistant Commissioner himself could not, therefore, proceed under that proviso and make an order of allowing depreciation on the basis of its provisions, which would reduce the amount of depreciation allowable and thereby enhance the assessment. The order of the Appellate Assistant Commissioner setting aside the assessment will, however, ultimately bring about the identical result, but only indirectly and that, therefore, the order is invalid.

18. Now, in our case the Income-tax Officer had the power to proceed under the first proviso to section 10(5)(a). He, however, did not exercise it. It is a case of non-exercise of power. The judgment of the Supreme Court in Commissioner Of Income Tax v. Mcmillan & Co shows that the Appellate Assistant Commissioner has the power to interfere to correct non-. exercise of a power by the Income-tax Officer, although the latter has such power. If the Appellate Assistant Commissioner is of the opinion that the record and the facts and circumstances of a case are such as would require him to exercise the power, he may himself exercise the power, as was in fact done by the Appellate Assistant Commissioner in the above case before the Supreme Court; but if he feels that something more is required to be done before he can exercise the power which the Income-tax Officer bad, but did not exercise, the Appellate Assistant Commissioner may set aside the order of the Income-tax Officer and direct him to proceed further in the matter according to law. As this is the extent of the power of the Appellate Assistant Commissioner as revealed by the above judgment of the Supreme Court, we reject the third point made by Mr. Dastur. Its acceptance would curtail the ambit of the power of the Appellate Assistant Commissioner as shown in the above judgment of the Supreme Court. As a matter of fact, the third point of Mr. Dastur cannot even arise as the Appellate Assistant Commissioner does, on the basis of the above judgment of the Supreme Court, have the power to make the order which he made and the basis of Mr. Dastur's argument that the Appellate Assistant Commissioner cannot do indirectly what he could not do directly is knocked out as the Appellate Assistant Commissioner did have such power.

19. Mr. Joshi had contended that the contention of Mr. Dastur that the Appellate Assistant Commissioner indirectly brought about a result which he could not directly bring about is not correct. He contended that the power of the Appellate Assistant Commissioner is the same as that of the Inspecting Assistant Commissioner and that when the Appellate Assistant Commissioner was seized of the appeal, and therefore of the entire assessment, subject only to the limitations laid down by the judgments, the Appellate Assistant Commissioner himself could have given the approval contemplated by the first proviso to section 10(5)(a) to be given by the Inspecting Assistant Commissioner. In our opinion, it is not necessary to consider this contention because the order of the Appellate Assistant Commissioner will not have the effect of enabling the Income-tax Officer to bring in a new subject-matter, as the subject-matter, viz., the claim for depreciation, will remain the same. The only effect of the order will be that it will be possible for the Income-tax Officer to consider and after due consideration apply only an alternative method for calculating the same claim for deduction for depreciation allowance. In our opinion, therefore, it was competent for the Appellate Assistant Commissioner to pass the order setting aside the assessment with a direction to make a fresh assessment according to law.

20. Mr. Dastur's fourth point was that it has been held that the Income-tax Tribunal's powers are the same as those of the Appellate Assistant Commissioner except possibly the power to enhance the assessment. He contended that the Tribunal has no power to enhance, but has all the other powers which the Appellate Assistant Commissioner has under section 31(3) and that it shows that the Tribunal may perhaps not have the power to enhance assessment simply because that is the only power the exercise of which can result in detriment to the assessee. He contended that it must, therefore, be inferred that the other powers, including the power to set aside the assessment, are not intended to be exercised to the detriment of the assessee. It should be noticed that the judgments in respect of the Tribunal's powers under section 33(4) show that the powers of the Tribunal are to decide the points or grounds raised in the appeal before it, whereas the said two judgments relating to the powers of the Appellate Assistant Commissioner show that the powers of the Appellate Assistant Commissioner extend to the entire assessment, the only limitation being that the Appellate Assistant Commissioner cannot travel beyond what the Income-tax Officer considered and processed in his order of assessment. The Appellate Assistant Commissioner has, therefore, no power to include in the assessment any source of income unless it has been considered by the Income-tax Officer. In our opinion, it is not necessary to ascertain the powers of the Appellate Assistant Commissioner in this circuitous manner because of the said two judgments which deal directly with the powers of the Appellate Assistant Commissioner and clearly lay down the ambit of his powers.

21. Mr. Dastur's fifth point was that, even assuming that the Appellate Assistant Commissioner did have the power to indirectly enhance the assessment by making an order setting aside the assessment and directing a fresh assessment, he could not direct a fresh assessment in the way in which he has done. He contended that the subject-matter of assessment in our case was the claim for depreciation allowance for the said ship on the basis of the provision of clause (a) of section 10(5) and it was on that very basis on which the Income-tax Officer made the allowance for depreciation in his order of assessment. He contended that the Income-tax Officer did not at all apply his mind when making the order of assessment to the questions arising under the first proviso to section 10(5)(a) and that therefore the Appellate Assistant Commissioner had no power to set aside the order of assessment and direct a fresh assessment so as to enable the Income-tax Officer to proceed under the provisions of the first proviso. In other words, his contention was that the Appellate Assistant Commissioner had no power to take into account a basis for allowing depreciation which the Income-tax Officer never considered. He relied upon the judgment of the Supreme Court in Commissioner of Income-tax v. Rai Bahadur Hardutroy Motilal Chamaria, the judgment of the Gujarat High Court in Commissioner of Income-tax v. Jagdish Mills Ltd. and another judgment of the Gujarat High Court in Prabhudas Ramji v. Commissioner of Income-tax [1966] 62 I.T.R 621 Guj... The judgment of the Supreme Court is to the effect that the Appellate Assistant Commissioner's powers are restricted to the source of income as mentioned in the return and in the assessment order. He contended that the judgment of the Gujarat High Court in Commissioner of Income-tax v. Jagdish Mills Ltd. shows that his powers do not extend to any matter which has never been considered by the Income-tax Officer and that the other judgment of the Gujarat High Court in Prabhudas Ramji v. Commissioner of Income-tax also shows that his powers do not extend to a matter which was not considered and processed by the Income-tax Officer. Now, in our opinion, these judgments have no relevance to the facts of this case. In our case what is relevant is not a source of income, that being the point to which all these judgments relate, but a deduction by way of an allowance for depreciation. The above judgment of this High Court in Narrondas Manordass, Bombay…Applicant; v. Commissioner Of Income-Tax, Central Bombay,…. [1957] 31 I.T.R 909 Bom.. clearly shows that the powers of the Income-tax Officer are similar in relation to the claim for deduction. Now the assessee had in fact claimed a deduction by way of depreciation in respect of the said ship. The Income-tax Officer had, therefore, to apply his mind as to whether the assessee was entitled to a deduction by way of depreciation allowance in respect of the said ship and, if so, on what basis in law. He proceeded on the basis of the actual cost of the ship by applying clause (a) of section 10(5). He omitted to consider whether the provision contained in the first proviso was or was not applicable in the case of the assessee. The subject-matter of his consideration was the claim for deduction for depreciation allowance that was present to his mind and if he allowed depreciation allowance a mere change in the method on which the depreciation is to be calculated did not change the subject-matter. The non-consideration of the method under the provisions of the first proviso amounts merely to “non-exercise of his power by the Income-tax Officer” and, as pointed out by the Supreme Court in Commissioner of Income-tax v. McMillan & Co., no distinction in this connection can be made between the exercise and the non-exercise of his power by the Income-tax Officer. The Appellate Assistant Commissioner, therefore, had the power to make the order which he made as, after the matter of the assessment goes back to the Income-tax Officer, there will be no change in the subject-matter of the claim for deduction for depreciation. What would change, if at all, would be merely the basis to be taken into account for making that very deduction for depreciation.

22. We, therefore, answer the question in the affirmative. The question contains the words “so as to” and we have answered the question as above on the basis that the meaning of the words “so as to” is the same as “which would enable the Income-tax Officer to”. On the facts of this case the order of the Appellate Assistant Commissioner clearly indicates that, after the order is set aside and the matter goes back to the Income-tax Officer, the Income-tax Officer will consider the application of the provisions of the first proviso to section 10(5)(a) as if it is a new matter and not as if the Appellate Assistant Commissioner has already decided that every step required to be followed by the first proviso had in fact already been followed and the result had been reached.

23. The assessee to pay the costs of the department.