The Judgment of the Court was delivered by

Thanikkachalam, J.:— In pursuance of the direction given by this court in T.C No. 96 of 1980, the Tribunal referred the following question for the opinion of this court under section 256(2) of the Income-tax Act, 1961:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the Appellate Assistant Commissioner had travelled beyond his jurisdiction and exceeded his powers in going into the question of price factor and making an addition of Rs. 14,55,500 in respect of purchase made from Tamil Nadu Printers and Traders (P.) Ltd., Madras?”

2. The assessee is a registered firm with three partners, namely, Shri T.T Narasimhan, Shri T.T Rangaswami and Shri T.T Vasu. The Income-tax Officer made two additions. The first addition was Rs. 25,72,142 representing alleged income of the assessee diverted to Tamil Nadu Printers and Traders (P.) Ltd., a sister concern of the assessee. According to the Income-tax Officer, part of the business of distribution of gripewater was transferred by the assessee with effect from January, 1973, only to be retransferred back to the assessee in 1976. This was considered to be an arrangement solely with a view to avoid tax liability. Tamil Nadu Printers and Traders (P.) Ltd. had carried forward a loss and the object of arrangement, it was considered was to enable Tamil Nadu Printers and Traders (P.) Ltd. to avail of the benefit of set-off of the profits of the concern against such loss. That arrangement for distribution was considered to be collusive because of the common interest. The fact that the agreement was terminated a little later in 1975 was used by the Income-tax Officer for the inference that it was really not necessary. The arrangement was treated as collusive and sham one.

3. Aggrieved, the assessee filed an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner narrated in detail the arguments of the Income-tax Officer as well as those of the assessee. He reviewed the evidence and also the case law relating to the diversion of profits and found that there is evidence to show that Tamil Nadu Printers and Traders (P.) Ltd. did purchase and sell gripewater from Orient Pharm Private Ltd. and this was not a case where the entire operations were done by T.T Krishnamachari and Company and the profits were enjoyed by Tamil Nadu Printers and Traders (P.) Ltd. and there was not much to be said in favour of the theory of diversion of profits. He also found that Tamil Nadu Printers and Traders (P.) Ltd. had sold gripewater at the rate of Rs. 228.09 per gross to Herbertsons Ltd. and at Rs. 254.09 to T.T Krishnamachari and Co. He found that there was no need for the assessee to pay the heavier price of Rs. 254.09 per gross to its sister concern, when it could have got the gripewater at a lesser price of Rs. 183 from the manufacturers themselves. The Appellate Assistant Commissioner found that the assessee has paid to Tamil Nadu Printers and Traders (P.) Ltd. an extra price of Rs. 71 per gross and that there was no commercial expediency in this and no benefit or advantage accrued to the assessee in this process and hence to the extent of Rs. 71 per gross, the expenditure was disallowed, which works out to Rs. 14,55,500. He also rejected the alternative argument of the assessee that the disallowance should be at least restricted to the difference of rate charged by Tamil Nadu Printers and Traders (P.) Ltd. to Herbertsons Ltd. The addition therefore came to Rs. 14,55,500 as against Rs. 20,82,178 made by the Income-tax Officer.

4. Aggrieved by the order passed by the Appellate Assistant Commissioner, both the assessee as well as the Department went on appeal before the Appellate Tribunal. In respect of the Departmental appeal, as far as the main addition is concerned, the Tribunal found that there was a contradiction of the assessee's business and benefit to Tamil Nadu Printers and Traders (P.) Ltd., Messrs. T.T Narasimhan, T.T Rangaswami and T.T Vasu were partners in the assessee-firm, while they were directors in the company. All the same, it was found that there was no positive evidence to show diversion of income merely because some other entity got the benefit of an arrangement. There was absolutely no material with the Department to suggest that the assessee-firm derived any benefit directly or indirectly or that it was the assessee, which carried on the actual business and the profits accrued to it. The Tribunal held that as long as it has not been shown that the assessee-firm has received any benefit, the Departmental appeal, it was held, cannot be sustained and there was no justification for holding that the income earned in the gripewater transactions by Tamil Nadu Printers and Traders (P.) Ltd. should be assessed in the hands of the assessee-firm.

5. As regards the assessee's appeal, the Tribunal found that the question of part of the disallowance of payment of price for gripewater was not a question in issue before the Appellate Assistant Commissioner. It was not a matter considered and processed in the assessment order. According to the Tribunal, it was not open to the Appellate Assistant Commissioner to consider the question of disallowance of any part of the purchase price in view of the bar laid down by the Supreme Court in the case of Addl. CIT v. Gurjargravures P. Ltd. [1978] 111 ITR 1. Hence, the assessee's appeal was allowed on a technical ground.

6. However, the Tribunal also proceeded to consider the question on the merits. The Tribunal stated that regarding the applicability of section 40A(2)(a) of the Income-tax Act, it was submitted that this is not the provision on the basis of which the Appellate Assistant Commissioner has proceeded and while it was conceded that the category of persons in this case are those mentioned in section 40A, still the disallowance was not warranted in this case as there was no excess payment. But, the Tribunal held that though the application of section 40A(2)(a) was not specifically invoked by the Appellate Assistant Commissioner, it was open to the Departmental representative to support the order of the Appellate Assistant Commissioner on the application of section 40A(2). The Tribunal further held that the assessee's counsel was not able to satisfy the Tribunal as to how the Appellate Assistant Commissioner could not be said to have taken an objective view as to the excessive nature of the rate of Rs. 254.09 and that the Appellate Assistant Commissioner's finding that excess price paid is not borne out of his taking a subjective point of view. The Tribunal was of the view that the Appellate Assistant Commissioner should not have taken the price at Rs. 183.57 as the fair market price as that was the price at which the goods were supplied by Orient Pharma Private Ltd. to Tamil Nadu Printers and Traders (P.) Ltd. also and Tamil Nadu Printers and Traders (P.) Ltd. must have its own margin of profits, besides covering its normal expenditure. The Tribunal held that the price paid by Herbert-sons Ltd., a different entity and not connected with the assessee-firm or Tamil Nadu Printers and Traders (P.) Ltd., could be considered as the normal market price prevailing at that time and if its finding on the legal issue is not found to be acceptable on the merits, the assessee should succeed to the extent of the difference between the price charged to Herbertsons Ltd. and the assessee. The Tribunal ultimately held that in view of its finding on jurisdiction, no part disallowance towards price made by the Appellate Assistant Commissioner can be sustained.

7. Before us learned standing counsel for the Department submitted as under:

8. The jurisdiction of the Appellate Assistant Commissioner is coterminous with that of the Income-tax Officer. Once an appeal was filed, the entire assessment was thrown open before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner has got the power to correct and revise the assessment, even to the extent of causing prejudice to the assessee. The Appellate Assistant Commissioner is not confined to the subject-matter in appeal. The Appellate Assistant Commissioner can consider the whole assessment. Restrictions in disallowance cannot be said to be based on a new source of income. What was considered by the Income-tax Officer was the income from purchase and sale of gripewater. With reference to that source of income, the Appellate Assistant Commissioner has got power to modify or correct the assessment. The assessment based on price factors cannot be said to be relating to a different source. Addition was made by the Appellate Assistant Commissioner on the basis of restricting the disallowance made by the Income-tax Officer. In fact, there is no enhancement in this case. The disallowance made by the Income-tax Officer in accordance with the provisions contained in section 40A(1) of the Act, can be corrected by the Appellate Assistant Commissioner in view of the decision in the case of CIT v. McMillan and Co. [1958] 33 ITR 182 (SC).

9. The fact that the Department can exercise its power under section 147 or under section 263 of the Act would not preclude the Department, viz., the Appellate Assistant Commissioner to exercise his jurisdiction in the matter of making assessment inasmuch as his jurisdiction is coterminous with that of the Income-tax Officer. Purchase price plays a major part in making the assessment with regard to the profit made in the business of manufacture, purchase and sale of gripewater. Hence, applying the provisions of section 40A(2) in disallowing certain price as excessive cannot be said to be an assessment made on a different source, which was not considered by the Income-tax Officer. It was, therefore, submitted that the Tribunal was not correct in holding that disallowance made on the basis of the price factors is processing the assessment with regard to a different source. In order to support his contentions, learned standing counsel for the Department relied upon various decisions.

10. On the other hand, learned counsel appearing for the assessee submitted as under:

11. While completing the assessment in the case of the assessee, the Income-tax Officer made two additions, one based upon diversion of profits and another on the basis of the commission paid by the assessee. Aggrieved by the order of the Income-tax Officer, the assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner in his order held that there is no question of diversion of profits or income arising in this case. The assessee filed a paper book disclosing the materials on the basis of which the return was filed. On perusing the paper book and a discussion with the chartered accountant, the Appellate Assistant Commissioner collected various facts and found that there was purchase difference and on the basis of the purchase difference, a new addition was made, which was not considered by the Income-tax Officer in his assessment. Therefore, the addition was made on a new source which was not considered by the Income-tax Officer. The Income-tax Officer accepted the income returned and made additions on account of diversion of profits. The price factor does not form part of the return. The profit made by the other firm, which is a private limited company was added in the hands of the assessee. The Appellate Assistant Commissioner found that both the firm and the company are genuine and the transactions done by them are also found to be genuine. The Income-tax Officer did not consider the provisions of section 40A(2). According to the Appellate Assistant Commissioner, the addition made on the basis of diversion of profits is not correct. The price factor emerges first before the Appellate Assistant Commissioner, after the paper book was filed by the assessee. Therefore, assessment made on the basis of the price factor is assessment made on a new source, which was not considered by the Income-tax Officer. Reliance was placed upon the decision in the case of CIT v. Shapoorji Pallomji Mistry [1962] 44 ITR 891 (SC), wherein it was held that the Appellate Assistant Commissioner has no power to enhance the assessment by discovering new sources of income not mentioned in the return or considered by the Income-tax Officer in his order. By this process, the Appellate Assistant Commissioner made the assessee lose his right of appeal granted by the statute. When the Appellate Assistant Commissioner found that there is a new source for making addition, he could have either directed to reopen the assessment under section 147 of the Act or the Commissioner could have exercised his jurisdiction under section 263 of the Act for revising the assessment. The income returned by the assessee was acceptable. The assessee was doing various businesses and one of his businesses is manufacturing, buying and selling gripewater. The income was returned pertaining to various businesses done by the assessee. Therefore, on the basis of the price factor with regard to the sale and purchase of gripewater, addition is not sustainable. According to learned counsel, there is no nexus between what was found in the paper book and what was stated in the return. In order to support his contentions, learned counsel for the assessee relied upon the decisions reported in CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC); Addl. CIT v. Gurjargravures P. Ltd. [1978] 111 ITR 1 (SC) and Commissioner Of Income-Tax v. National Company Ltd. [1993] 199 ITR 445 (Cal).

12. We have heard both learned standing counsel appearing for the Department as well as learned counsel appearing for the assessee.

13. The point for consideration is whether addition made on the basis of price factors would amount to addition made on a new source, which was not considered by the Income-tax Officer.

14. As against the order passed by the Appellate Assistant Commissioner, both the Department and the assessee went in appeal. In the Departmental appeal, the Tribunal expressed its view that the Income-tax Officer has correctly drawn the inference that a portion of the business in the dealings of gripewater has been diverted. But, the Tribunal was not willing to extend this inference to the conclusion that the income or benefit reached the firm directly or indirectly. According to the Tribunal, such inference is far-fetched. The Tribunal further held that the introduction of Tamil Nadu Printers and Traders (P.) Ltd. into the picture may be considered superfluous. But, the indenting part of the business and taking the financial responsibilities of payment for supplies indented by them cannot be disputed because the materials placed before the authorities below and the Tribunal show that this has not been done by T.T.K and Company and has been done only by Tamil Nadu Printers and Traders (P.) Ltd. Therefore, the Tribunal was of the view that there is no justification for holding that the income relating to transactions in gripewater earned by Tamil Nadu Printers should be assessed in the hands of the assessee-firm.

15. In the assessee's appeal, the assessee questioned the disallowance of purchases made by the assessee-firm from Tamil Nadu Printers. According to the Tribunal, the Appellate Assistant Commissioner was not competent to go into the question. Disallowance of purchases was not the subject-matter of consideration by the Income-tax Officer and the subject-matter of consideration purely related to the question of inclusion of income earned by Tamil Nadu Printers in the hands of the assessee. According to the Tribunal, the Income-tax Officer never applied his mind to the question of higher price having been paid to Tamil Nadu Printers in respect of supplies of gripewater by the latter company. Therefore, it was outside the scope of the Appellate Assistant Commissioner to go into that question. The Tribunal pointed out that the Appellate Assistant Commissioner should have confined only to the ground raised before him in respect of the matter over which the assessee was aggrieved. The aggrieved matter over which the assessee went on appeal related to the inclusion of the said income. According to the Tribunal, the Appellate Assistant Commissioner should have jurisdiction on the item that should be the one considered and processed by the Income-tax Officer and not on every matter, which never was the subject-matter of consideration by the Income-tax Officer.

16. According to the Department, the Appellate Assistant Commissioner has got wide power and further this is not a case where he was going into a new source of income. The source of income is already found in the order of the Income-tax Officer, i.e, the business income of T.T.K and Company, which included income in dealings in gripewater.

17. On the merits, the case of the assessee was that the Appellate Assistant Commissioner should have considered from an objective angle and should have found that there was nothing to show that the price paid for purchases could be said to be not falling within the scope of the business needs of the company and was excessive. According to the assessee, even if certain expenses were found to be excessive, there should not be any disallowance, because excessiveness should be adjudged from the businessman's point of view and not based on an arbitrary view and, therefore, this matter should be considered from an objective angle. On the other hand, according to the Department, the provisions of section 40A(2)(a) of the Income-tax Act, 1961, would apply to the facts of this case. According to the Department, when the goods were available in the market at the rate of Rs. 183.57 per gross, the assessee need not purchase the goods for Rs. 254.09 per gross. Therefore, the Department pointed out that the Appellate Assistant Commissioner has adopted only an objective standard and has come to the conclusion that there has been an abnormal price paid for the gripewater.

18. According to the Tribunal, in so far as the jurisdiction of the Appellate Assistant Commissioner is concerned, it is no doubt true that the powers of the Appellate Assistant Commissioner are wide, but they are not so wide as to travel outside to matters not considered and processed by the Income-tax Officer. The price factor in making addition was not considered by the Income-tax Officer. The Income-tax Officer was mainly concentrating on the diversion of the business and in that process, his efforts were to gather as much material as to include the income in the hands of the assessee. Therefore, according to the Tribunal, the Appellate Assistant Commissioner had travelled beyond his jurisdiction and his consideration of the matter, which was not considered and processed by the Income-tax Officer cannot fall for a decision and, therefore, the Tribunal held that the Appellate Assistant Commissioner fell into an error in going into that point and making the addition.

19. It was pointed out before the Tribunal that section 40A(2) was challenged only on the limited ground that this was not the provision on the basis of which the Appellate Assistant Commissioner has proceeded. However, the Tribunal was of the view that though the application of section 40A(2)(a) of the Act was not specifically invoked by the Appellate Assistant Commissioner, still when that section is in the statute, the Department can certainly canvass for pressing that section into service in support of the Appellate Assistant Commissioner's order. The Tribunal further pointed out that the Appellate Assistant Commissioner has taken an objective view in coming to the conclusion that the price paid by the assessee-firm to Tamil Nadu Printers at Rs. 254.09 per gross was excessive, when he has specifically brought out that there was no material to show that the assessee was not able to obtain at the price at which either Herbertsons Ltd. had purchased or Tamil Nadu Printers could purchase from Orient Pharma Private Ltd. However, the Tribunal was of the view that the Appellate Assistant Commissioner should not have taken the price at Rs. 183.57 as the fair market price at which Orient Pharma supplied to Tamil Nadu Printers. The price charged by Orient Pharma at Rs. 183.57 is to Tamil Nadu Printers and it is obvious that Tamil Nadu Printers cannot supply at that rate, because it must have its own margin of profits, besides covering its normal expenditure like interest and other expenses. The Tribunal was also of the view that the price paid by Herbertsons, which is a different entity not connected with the firm of Tamil Nadu Printers, could be considered as the normal market-price prevailing at that time. Hence, the Tribunal ultimately held that the Appellate Assistant Commissioner was not correct in making addition on the basis of the new source. On the merits, the Tribunal pointed out that the assessee should succeed to the extent of the difference between the price charged to Herbertsons and the assessee.

20. Therefore, according to the Tribunal, the price factor was not considered by the Income-tax Officer, while making the addition. But, that was taken into consideration by the Appellate Assistant Commissioner in making the addition.

21. Reliance was placed upon a decision reported in CIT v. McMillan and Co. [1958] 33 ITR 182 (SC), wherein the Supreme Court held that (headnote):

“Whether the income, profits and gains can properly be deduced from the assessee's method of accounting is undoubtedly a matter which the Appellate Assistant Commissioner can go into when he has seizin of the appeal from the order of assessment of the Income-tax Officer. If the Income-tax Officer has failed to apply his mind to the proviso to section 13 or has come to a wrong determination for or against the assessee in the computation of the income, the Appellate Assistant Commissioner can correct that error when he has seizin of the assessment on an appeal filed by the assessee. Whether in a particular case a remand will be the proper order depends on the circumstances of each case: the Appellate Assistant Commissioner has the power to correct the error in the way most suitable in the circumstances of the case.”

22. The jurisdiction of the Appellate Assistant Commissioner in disposing of the appeal filed before him came up for consideration before the Supreme Court in the case of CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC), where the Supreme Court held as under (headnote):

“The Appellate Assistant Commissioner has no jurisdiction under section 31(3) of the Indian Income-tax Act, 1922, to assess a source of income which is not disclosed either in the returns filed by the assessee or in the assessment order. It is not therefore open to the Appellate Assistant Commissioner to travel outside the record, i.e, the return made by the assessee or the assessment order of the Income-tax Officer, with a view to finding out new sources of income and the power of enhancement under section 31(3) is restricted to the sources of income which have been the subject-matter of consideration by the Income-tax Officer from the point of view of taxability. In this context ‘consideration’ does not mean ‘incidental’ or ‘collateral’ examination of any matter by the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection.”

23. In the case of CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 (SC), while considering the provisions of section 33(4) of the Indian Income-tax Act, 1922, the Supreme Court held that (headnote):

“The Appellate Assistant Commissioner has plenary powers in disposing of an appeal. The scope of his powers is conterminous with that of the Income-tax Officer. He can do what the Income-tax Officer can do and can also direct him to do what he has failed to do.”

24. In the case of CIT v. Scindia Steam Navigation Co. Ltd., [1971] 80 ITR 589 (Bom), the Bombay High Court while considering the powers of the Appellate Assistant Commissioner held that (headnote):

“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.”

25. In the case of Parameswara Oil Mill v. CIT [1972] 85 ITR 151 (AP), the Andhra Pradesh High Court while considering section 31 of the Indian Income-tax Act, 1922, held that (headnote):

“…the powers of the Appellate Assistant Commissioner under section 31 are not confined to the subject-matter of the appeal but extend to the subject-matter of the assessment and that the Appellate Assistant Commissioner is entitled to sustain the addition made by the Income-tax Officer on a ground different from the one which has been made by him.”

26. In Indermal Natwarlal v. CIT [1987] 166 ITR 494, the Madhya Pradesh High Court while considering the provisions of section 251 of the Income-tax Act, 1961, held that (headnote):

…the Appellate Assistant Commissioner by his order of remand had not introduced any new source of income, not processed by the Income-tax Officer. The question as to whether any expenditure could not be deductible in view of the provisions of section 40A(3), was a matter which directly arose in the course of assessment and as the Income-tax Officer had failed to examine that aspect of the matter, the Appellate Assistant Commissioner had directed him to do so. Therefore, the Tribunal was justified in holding that the Appellate Assistant Commissioner had not exceeded his jurisdiction in passing the remand order.”

27. In the case of Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688 (SC), the Supreme Court while considering section 251(1)(a) of the Income-tax Act, 1961, came to the following conclusions (headnote):

“(i) The power to tax on discovery of a new source of income is quite different from granting deduction on the admitted facts fully supported by the decision of the Supreme Court

(ii) An appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter and

(iii) The observations in the case of Gurjargravures P. Ltd. [1978] 111 ITR 1 (SC), do not rule out a case for raising an additional ground before the Appellate Assistant Commissioner if the ground so raised could not have been raised at the stage when the return was filed or when the assessment order was made or if the ground became available on account of change of circumstances or law.”

28. The Gujarat High Court while considering the powers of the Appellate Assistant Commissioner in Vijaykunverba v. CIT [1994] 208 ITR 312 held that (headnote):

“The powers of the Appellate Assistant Commissioner are not confined to the subject-matter of the appeal but extend to the subject-matter of the assessment. The entire assessment is thrown open before the Appellate Assistant Commissioner and so long as he does not travel outside the matters considered and determined by the Income-tax Officer, he can correct any decision of the Income-tax Officer in the course of the assessment even if the assessee is satisfied with it and has not challenged it in the appeal.”

29. So also, the Calcutta High Court in Commissioner Of Income-Tax v. Ranicherra Tea Co. Ltd. [1994] 207 ITR 979, held that (headnote):

“In disposing of an appeal from an assessment under section 144 of the Income-tax Act, 1961, the first appellate authority need not confine itself only to the materials on record at the time of assessment. It may make such enquiries as it thinks fit. The first appellate authority has all the powers which the original authority may have. In the absence of any statutory provision to the contrary, the appellate authority is vested with all the plenary powers which the subordinate authority has in the matter,”

30. On behalf of the assessee reliance was placed upon the decision of the Supreme Court in the case of CIT v. Shapoorji Pallomji Mistry [1962] 44 ITR 891 was brought to our notice, wherein the Supreme Court held that (headnote):

“In an appeal filed by the assessee the Appellate Assistant Commissioner has no power to enhance the assessment by discovering new sources of income not mentioned in the return of the assessee or considered by the Income-tax Officer in the order appealed against.”

31. The assessee's counsel also relied upon the decision of the Supreme Court in the case of Addl. CIT v. Gurjargravures P. Ltd. [1978] 111 ITR 1, wherein the Supreme Court while considering the powers of the Appellate Assistant Commissioner held as under (at page 5):

“If, as held in this case, an item of income noticed by the Income-tax Officer but not examined by him from the point of view of its taxability or non-taxability cannot be said to have been considered by him, it is not possible to hold that the Income-tax Officer examining a portion of the profits from the point of view of its taxability only, should be deemed to have also considered the question of its non-taxability. As we have pointed out earlier, the statement of case drawn up by the Tribunal does not mention that there was any material on record to sustain the claim for exemption which was made for the first time before the Appellate Assistant Commissioner. We are not here called upon to consider a case where the assessee failed to make a claim though there was evidence on record to support it, or a case where a claim was made but no evidence or insufficient evidence was adduced in support. In the present case neither any claim was made before the Income-tax Officer, nor was there any material on record supporting such a claim.”

32. It was further held in the abovesaid decision, that “consideration” does not mean incidental or collateral examination of any matter of the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection.

33. Lastly, counsel for the assessee also placed reliance on the decision of the Calcutta High Court in the case of Commissioner Of Income-Tax v. National Company Ltd., [1993] 199 ITR 445 wherein, while considering the powers of the Appellate Assistant Commissioner, the Calcutta High Court took the following view (headnote):

“In enhancing the assessment for any year, the Appellate Assistant Commissioner cannot travel outside the record, that is to say, the return made by the assessee and the assessment order passed by the Income-tax Officer. There are other provisions which enable escaped income from a new source to be brought to tax after following the special procedure. The power of the Appellate Assistant Commissioner extends to matters considered by the Income-tax Officer, and if a new source is to be considered, then the power of remand should be exercised. By the exercise of the power to assess fresh sources of income, the assessee is deprived of the finding by two Tribunals and one right of appeal.”

34. Thus, a combined reading of the decisions cited by learned standing counsel for the Department as well as learned counsel appearing for the assessee will go to show that the Appellate Assistant Commissioner is having a plenary power in an appeal filed before him. The entire assessment is thrown open. The Appellate Assistant Commissioner cannot travel outside the record, that is to say, the return made by the assessee and the assessment order passed by the Income-tax Officer. The first appellate authority need not confine itself only to the materials on record at the time of assessment. It may make such enquiries as it thinks fit. The first appellate authority has all the powers which the original authority may have. In the absence of any statutory provision to the contrary, the appellate authority is vested with all the plenary powers which the subordinate authority has in the matter. An item of income noticed by the Income-tax Officer, but not examined by him from the point of view of its taxability or non-taxability, cannot be said to have been considered by him. Consideration does not mean incidental or collateral examination of any matter by the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection.

35. T.T Krishnamachari and Company is the assessee. The assessee filed a return for the assessment year 1974-75 disclosing an income of Rs. 4,90,081 under the head “Business income”. According to the Income-tax Officer, the profit to be made by the assessee through purchase and sale of gripewater was transferred to the company, Tamil Nadu Printers and Traders (P.) Ltd. Therefore, the profit earned by the company, Tamil Nadu Printers and Traders (P.) Ltd., was assessed in the hands of the assessee. The subject-matter in the assessment before the Income-tax Officer was the business income earned by the assessee through purchase and sale of gripewater. On appeal, the Appellate Assistant Commissioner did not want to go into the question of diversion of profit. According to the Appellate Assistant Commissioner, the assessee itself made the profit out of its own business in manufacturing, purchasing and selling of gripewater. The Income-tax Officer accepted the income returned under the head “Business income”. The Appellate Assistant Commissioner called for the records in the appellate proceedings and on going through the paper book filed by the assessee and after discussions with the chartered accountant, came to the conclusion that the assessee purchased gripewater for a higher price when the same goods were available in the market for a lower price. The difference between the abovesaid two prices was made as an addition by the Appellate Assistant Commissioner. In the process, we have to see whether the Appellate Assistant Commissioner travelled beyond or outside the record, that is to say, the return filed by the assessee and the assessment order passed by the Income-tax Officer. While accepting the returned income under the head “Business income”, the Income-tax Officer did not question on what basis the returned income was arrived at. But, it remains to be seen that the income returned relates to the profit made out of manufacture, purchase and sale of gripewater. While accepting the business income returned by the assessee, though the Income-tax Officer has not questioned on what basis the income was arrived at, definitely the business income would have been arrived at on the basis of the purchase price and sale price in order to ascertain the business profit. When the Income-tax Officer accepted the returned business income, he accepted the profit arrived at by the assessee in its business on the basis of the purchase price and the sale price furnished by the assessee. Without adverting to the sale price and the purchase price, the profit could not have been arrived at and, therefore, when the Income-tax Officer accepted the business income returned by the assessee, it cannot be said that the Income-tax Officer has not considered the business profit made out of the sale and purchase of the commodity in question. After accepting the business income returned by the assessee, the Income-tax Officer sought to tax the same by processing the assessment. On appeal, the Appellate Assistant Commissioner also on the basis of the sale price and the purchase price as furnished by the assessee tried to modify the assessment made by the Income-tax Officer by reducing the allowance made by the Income-tax Officer. On the materials available on record, the Appellate Assistant Commissioner reduced the permissible deduction, since they are unreasonable and excessive, according to him. Under such circumstances, it cannot be said that the Appellate Assistant Commissioner has travelled outside the return filed or outside the assessment order made or outside the materials available on record, or it cannot also be said that the Appellate Assistant Commissioner found out a new source, which was not considered by the Income-tax Officer for reducing the allowance. Therefore, on the materials available on record, we are coming to the conclusion that the Appellate Assistant Commissioner has not exceeded his jurisdiction, while reducing the allowance on the basis of the price factors, which was deemed to have been considered by the Income-tax Officer while accepting the income returned under the head “Business income” returned by the assessee.

36. It is seen from the facts that Tamil Nadu Printers and Traders (P.) Ltd. purchased from Orient Pharma the gripewater at the rate of Rs. 183.57 per gross. So also, the Tamil Nadu Printers and Traders (P.) Ltd. sold gripewater to Herbertsons Ltd. for Rs. 228.09 per gross. T.T.K and Co. purchased from Tamil Nadu Printers and Traders (P.) Ltd. gripewater at the rate of Rs. 254.09 per gross. According to the Appellate Assistant Commissioner, when the goods were available at the rate of Rs. 183.57 per gross, there is no necessity to purchase the goods at Rs. 254.09 per gross. Therefore, the Appellate Assistant Commissioner sustained an addition on the basis of the price difference between Rs. 254.09 and Rs. 183.57 amounting to Rs. 71 per gross. According to the Tribunal, the price paid to Herbertsons Ltd., which is a different entity not connected with the firm of Tamil Nadu Printers, could be taken as the normal market price prevailing at that time. Therefore, the Tribunal took the difference between Rs. 228.09 per gross and Rs. 254.09 per gross, which comes to Rs. 26 per gross and the addition was directed to be made on this basis. The assessee has not filed any reference questioning the order passed by the Tribunal on the merits as an alternative measure.

37. For these reasons, we hold that the Tribunal was not correct in coming to the conclusion that the Appellate Assistant Commissioner has erred in making an addition by reducing the allowance by travelling outside the assessment records and thereby exceeded his jurisdiction and materials available on record, by finding out a new source. We also hold that the Tribunal's alternative approach on the merits to make addition at the rate of Rs. 26 per gross appears to be in order. In that view of the matter, we answer the question referred to us in the negative and in favour of the Department. There will be no order as to costs.