JAGANMOHAN REDDY C.J. - The Income-tax Appellate Tribunal referred to this court at the instance of the assessee the following question :
'Whether, in a best judgment assessment under section 23(4) of the Act (Income-tax Act, 1922), it was open to the Appellate Assistant Commissioner to reduce the estimate of income as fixed by the Income-tax Officer by relying on additional evidence of or material not available to the Income-tax Officer at the time of making the best judgment assessment ?'
This question arose on the following facts : The assessee, a registered firm carrying on business as financiers, failed to make a return for the year 1961-62 for which the relevant accounting period was Diwali year commencing from November 1, 1959, and ending on October 20, 1960. A notice under section 22(4) calling for the production of accounts was issued on November 29, 1961, and the date of hearing was fixed as December 13, 1961. On that day the assessee did not appear. A second notice under section 22(4) was issued on January 22, 1962, and on the date of hearing, on February 5, 1962, application for adjournment was filed, but no one appeared. Adjournment was refused and the Income-tax Officer made an ex parte assessment under section 23(4) on February 8, 1962, on a total income of Rs. 80,000 in view of the assessees default in complying with the notice issued under section 22(4).
On the very next day after the assessment, viz., February 9, 1962, the assessee filed a return of income showing his total income as Rs. 32,328. It is stated that no statements such as profit and loss, balance-sheet, etc., were filed along with the return. Subsequently, the assessee filed an application under section 27 for the reopening of the assessment. But this was rejected by the Income-tax Officer.
Against the order of rejection, the assessed filed an appeal before the Appellate Assistant Commissioner. He has also filed an appeal against the assessment order made under section 23(4). Both these appeals were heard by the Appellate Assistant Commissioner and while rejecting the appeal against the order of rejection of the application under section 27, the Appellate Assistant Commissioner took into consideration the statement of profit and loss and the trial balance filed by the assessee in appeal in support of the income shown in his return and after perusing the previous record held that Rs. 80,000 assessed by the Income-tax Officer was excessive and, therefore, reduced it to Rs. 40,000.
As against the dismissal of the appeal relating to the rejection of the application under section 27, the assessee filed a further appeal to the Tribunal, which was dismissed. The income-tax department, however, filed an appeal against the order of the Appellate Assistant Commissioner reducing the assessment from Rs. 80,000 to Rs. 40,000. This appeal was allowed by the Tribunal, on the ground that the Appellate Assistant Commissioner had no power in an appeal against an order of assessment made under section 23(4) to consider any material, other than that which was before the Income-tax Officer, and, since the Appellate Assistant Commissioner had considered the material which was not before the Income-tax Officer in making the assessment, the appellate order was not sustainable. The Tribunal said :
'In an appeal against an assessment made under section 23(4), the Appellate Assistant Commissioner has only to adjudicate on the question as to whether the Income-tax Officer had exercised his best judgment on the materials that were available to him at the time of making the assessment. It is likely that, for this limited purpose, the Appellate Assistant Commissioner would have the usual powers to call for additional evidence or material. If it were not so, it would in effect, nullify the best judgment assessment of the Income-tax Officer. It would also leave the way open to a dishonest assessee to court an ex parte assessment in the hope that it would be favourable to him and, if so, to remain quite. On the other hand, if it turned out to be unfavourable, he could always take an appeal and, at the appellate stage, produce his books and other evidence and prove that the estimate made was excessive. Clearly, this cannot be the intention of the legislature.'
It appears to us that his conclusion of the Tribunal is based on an erroneous view of the powers of the Appellate Assistant Commissioner under section 31(2) of the Act. The remedy given under section 27 is something apart from the remedy conferred under section 31(2); in the former case, it is the ex parte assessment that is sought to be set aside and, in the latter, the merits of the assessment are questioned. Section 23(4) empowers the Income-tax Officer to make a best judgment assessment if the assessee fails to make a return required by any notice given under section 22(2) and has not made a return or a revised return under sub-section (3) of section 22 or fails to comply with all the terms of a notice issued under sub-section (2) of section 22. This assessment, like any other assessments made under section 23(3), is appealable under section 30. Section 27 deals with cancellation of assessments and it says that if within one month from the service of a notice of demand of assessment made on him under section 23(4), the assessee satisfies the Income-tax Officer that he was prevented by sufficient cause from making the return required by section 22 or that he did not receive the notice issued under section 22(4) or section 23(2) or that he had not a reasonable opportunity to comply or was prevented by sufficient cause from complying with the terms of the last mentioned notices, the Income-tax Officer shall cancel the assessment and proceed to make a fresh assessment in accordance with the provisions of section 23. If the Income-tax Officer cancels the assessment under section 27, then the appeal against the assessment itself would become. But, if he rejects the application under section 27, the assessee can file an appeal, not only against that order but also against the order of assessment. This is clear from section 30 which provides for appeals against orders under section 23, or section 27, or the amount of loss computed under section 24, or the amount of tax determined under section 23 or section 27 or denying his liability to be assessed under the Act. There are other orders specified therein against which appeals have been provided, but it is unnecessary for the purpose of this reference to consider them.
An appeal against the order rejecting an application under section 27 and an appeal against the assessment under section 23(4) are two separate remedies provided under the Act and different considerations will weigh with the Appellate Assistant Commissioner in disposing of those appeals. In an appeal against the rejection of an application under section 27, all that the Appellate Assistant Commissioner has to see is whether the assessee had shown sufficient cause which would have satisfied the Income-tax Officer for not making a return or complying with the notices specified therein. If the assessee has not satisfied the Income-tax Officer in respect of these matters, and the Appellate Assistant Commissioner agrees with the order of the Income-tax Officer, the appeal will be rejected. But that is far from saying that the Appellate Assistant Commissioner cannot thereafter consider the merits of the assessment on appeal, which is a distinct and concurrent remedy provided to the assessee under the Act. In that appeal, it is open to the Appellate Assistant Commissioner to say that the Income-tax Officer acted without material, or acted arbitrarily or capriciously. In such a case the Appellate Assistant Commissioner can, under sub-section (2) of section 31, before disposing of any appeal, make such further inquiry as he thinks fit, or cause further inquiry to be made by the Income-tax Officer. This provisions vests ample power in the Appellate Assistant Commissioner to remand the case to the Income-tax Officer for fresh disposal if he comes to the conclusion that the basis of the assessment is not valid or the assessment itself is not sustainable. In our view, if the Appellate Assistant Commissioner can remand the case or call for a finding, he can also call for evidence and receive it or hold an inquiry which would place materials before him to make a valid best judgment assessment, subject, however, only to this limitation, that neither the remand order nor the acceptance or receipt of additional evidence should be designed to achieve the object for which an appeal against an order under section 27 was provided two remedies in respect of the same subject-matter.
It may here be stated that prior to the amendment of the Income-tax Act in 1939, a best judgment assessment under section 23(4) could only be challenged or questioned by an application under section 27, and thereafter by an appeal under section 30. But the Amendment Act has made a provisions, in section 30, permitting an appeal by an assessee against an order of the Income-tax Officer making an assessment under section 23(4), thereby enlarging the right of the assessee to question the assessment itself, i.e., question the quantum or even the validity of the assessment by reason of the notices issued under section 22 being invalid. If an assessee does not choose to appeal against an order under section 27, he simply loses the right to have assessment reopened on the ground mentioned in section 27 and availing himself of the opportunity to comply with the notices under section 22. Though the assessee might have lost that right by not appealing against an adverse order under section 27 or by not succeeding in an appeal before him, viz., whether the Income-tax Officer has properly exercised his judgment under section 23(4) and whether he assessed the quantum fairly on the materiel before him. In over view, it is not improper, even in cases of best judgment assessment under section 23(4), to look into the books which the assessee failed to produce when asked to of so under section 22(4), in order to ensure that the judgment of the assessing officer is not capricious or arbitrary and, if it is defective, to rectify it on a valid and proper basis.
If Mr. Kondaiahs contention that the Appellate Assistant Commissioner cannot call for any fresh evidence or himself receive fresh evidence or material, but must necessarily act only on the material available to the Income-tax Officer is accepted, then the powers conferred under section 31(2) will be illusory and otiose. The logical result of that contention will be that while the Appellate Assistant Commissioner could set aside the assessment on the ground that the Income-tax Officer did not act on any material or acted on insufficient material, and can direct him to act on proper material or call for or recipe proper material and make an assessment, he himself is precluded from doing so. Such a conclusion, as we have said, is not possible on a reading of sub-section (2) of section 31.
We are fortified in this view by judgments of several High Courts. In Brij Mohan Rameshwar Dass v. Commissioner of Income-tax, a case from the Punjab, the assessee preferred an appeal against the assessment under section 23(4) for failure to submit the return and to produce the account books. He had also filed an application under section 27, which was rejected, and against that order filed an appeal before the Appellate Assistant Commissioner which was also dismissed by him. In the appeal against the order under section 23(4) the Appellate Assistant Commissioner, however, called for a further report from the Income-tax Officer, and, after receiving the same, dismissed the appeal and maintained the assessment. On appeal, against that order, the Tribunal on the fresh material which the Appellate Assistant Commissioner had called for and received, reduced the assessment from Rs. 65,000 to Rs. 50,000. In a reference, the High Court considered the following question : 'Whether in an order of remand made by an Appellate Assistant Commissioner under section 31(2) of the Act, it is open to the Appellate Assistant Commissioner to direct or permit the Income-tax Officer to take into consideration account books of the assessee which had not been produced before the Income-tax Officer at the time the first assessment was made ?' This question was answered in the affirmative. It was observed by Weston C.J. that there was nothing in section 31 which limited the scope of the further inquiry ordered under clause (2) which, by its very nature, implied that fresh evidence should be led and the account books of the assessee undoubtedly are fresh evidence. An attempt seems to have been made to introduce the analogy of the provisions of Order 41, rule 27, Civil Procedure Code, but those provisions were held not to be applicable. It is obvious that the High Court was dealing with a case where the Appellate Assistant Commissioner remanded the case directing the Income-tax Officer to take into consideration the account books filed in the appeal and it was held that he had jurisdiction to do so, even though it was the Tribunal that acted upon the additional evidence. The High Court, it may be pointed out, was careful to observe that they expressed no opinion as to the weight, if any, which should be given to the books of account which were not produced in compliance with the notice under section 22(4).
In Girdhar Javer & Co. v. Commissioner of Income-tax the Tribunal had held that the Appellate Assistant Commissioner was not competent to examine the assessees books of account and, therefore, they refused to look at them. On a reference under section 66(1), the High Court held that the order of remand of the Appellate Assistant Commissioner itself was not in accordance with law and, therefore, there was no obligation upon the Appellate Tribunal to consider the report made on that order. It was further held that the Appellate Assistant Commissioner did not issue directions under section 31(2) and, as such, that direction was not appealable. The High Court approved the general principle laid down in Brij Mohan Rameshwar Dass v. Commissioner of Income-tax that the Appellate Assistant Commissioner has jurisdiction to remand a matter under section 31(2) and direct an examination of books of account even in the case of a best judgment assessment as long as that order enabled a proper best judgment assessment being made. Chagla C.J. observed :
'It is true the further inquiry contemplated by section 31(2) must be an inquiry for the purposes of disposing of the appeal, and the question in appeal before the Appellate Assistant Commissioner must be whether the judgment of the Income-tax Officer was properly exercised under section 23(4) and whether the quantum arrived at by the Income-tax Officer was properly and fairly arrived at. But can it be said that under no circumstances is the Appellate Assistant Commissioner permitted to direct the Income-tax Officer to look at the books of account, which books have not been and cannot be produced for the purpose of the ordinary assessment We fully appreciates the point of view put forward on behalf of the department that the assessee should not be allowed to sit on the fence, take the chance of a best judgment assessment is not in their favour and the production of the books of account which they have suppressed may result in an assessment more favourable to them, them ask for the examination of their books. We also appreciate the point of view of the department that the weight to be attached to the books of account which have not been produced at the proper time must always be very slight. But what we are considering in this reference is not the right of the assessee to produce their books but it is the power and the jurisdiction of the Appellate Assistant Commissioner to direct the Income-tax Officer to look into these books of account. The right that the assessees had to produce their books of account was taken away when their appeal under section 27 was dismissed. They could not insist on the assessment being made on the basis of their books of account. But the question of the jurisdiction and the power of the Appellate Assistant Commissioner is entirely a different one. Even though in practice it may be in extremely rare cases that the Appellate Assistant Commissioner would direct the Income-tax Officer to look into the books of account of the assessee which the assessee had failed to produce, however rare the cases may be, we haves got to answer the question of law on the provisions of the statue and not from the point of view of its practical application.'
On the facts of that case, however, the Bench held that the remand order itself was bad, because while holding that the default committed by the assessee could not be set aside for any sufficient reasons, the Appellate Assistant Commissioner none the less remanded the case for an examination of the account books, as the assessee expressed regret, promising that he will comply with all future notices. It is obvious that the remand was not made to assist the disposal of the appeal and had stultified the previous order made in the appeal against an order made under section 27.
A Bench of the Madras High Court in M. M. Muthuwappa v. Commissioner of Income-tax considered both the above cases as well as that of Naba Kumar Singh Dhudhuria v. Commissioner of Income-tax and expressed a similar view to the one taken by us. It held that it is beyond dispute that the Appellate Assistant Commissioner has power to pass a remand order under section 31(2) but that the extent to which that power could be used in a case of quantum appeal arising under section 23(4) was limited to the requirement of the disposal of that appeal as also the consideration of the validity of the notice and the assessment. After citing the observation of the Chalga C.J. in Girdher Javer & Co. v. Commissioner of Income-tax Srinivasan J., speaking for the court, observed at page 1118 :
'With respect, we may say that the above passage clearly indicates the scope of the jurisdiction of the Appellate Assistant Commissioner. It certainly does not support the contention of the department that under no circumstances is the Appellate Assistant Commissioner competent to make an order of remand and to direct the scrutiny of the account books though such account books might not have been produced earlier. The learned judges point out that even in cases of best of judgment assessment, it is not improper to look into the books of account of the assessee in order that capricious and unjustified assessment should not be made. To that extent the decision is in favour of the assessee.'
After examining the particular facts of the case in the decision of the Bombay High Court, Srinivasan J. further observed at page 1119 :
'It was under those peculiar circumstances that the learned judges of the Bombay High Court had to consider the particular orders made by the Appellate Assistant Commissioner in the two appeals before him. But the general principle they lay down is nevertheless that the Appellate Assistant Commissioner has jurisdiction to make an order of remand under section 31(2) and that he can in such an event direct the examination of the books of account even in the case of a best of judgment assessment, but only for the purpose of enabling a proper best of judgment assessment being made. That the Appellate Assistant Commissioner has jurisdiction to make a remand limited in that manner is well established by this decision.'
In the Madras case, no return was made by the assessee and the Income-tax Officer, after waiting for a week, finding that default had been committed in complying with the notices under section 22(2) and section 22(4), wrote on February 7, 1951, as follows : 'I have also received information that the assessee is cooking up accounts and manufacturing vouchers for expenses. I, therefore, proceed to complete the assessment under section 23(4).' Having regard to the treatment of the assessee as a resident and ordinarily resident in the immediately preceding years, the Income-tax Officer took the assessees status to be the same. The assessee went in appeal to the Appellate Assistant Commissioner and contended : (i) that the Income-tax Officer erred in assessing his income under section 23(4) at Rs. 88,000; and (ii) that for the relevant accounting period he was a resident but not ordinarily resident and that the assessment made as on a resident and ordinarily resident was wrong. In the view that a further inquiry by the Appellate Assistant Commissioner by virtue of his powers under section 31(2) by his memorandum dated June 20, 1954, remanded the case to the Income-tax Officer to determine the correct degree of residence and to recompute the income after examination of the evidence and accounts to be produced by the assessee and after further enquiries, after rejecting the preliminary objection of the Income-tax Officer that fresh evidence was not to be allowed to be put in at that stage. The order of remand by the Appellate Assistant Commissioner was as follows :
'I find from a perusal of the assessment order and the records that there was no proper basis for the high assessments adopted and that the Income-tax Officer was merely guided by the income estimated in the previous year. As regards the degree of residence, it varies according to the circumstances applicable to each year and just because a person was treated as resident and ordinarily resident in earlier years, it did not prevent him from claiming that the status for the accounting period was different.'
The Income-tax Officer in his remand report, after scrutinizing the evidence produced before him, held that the assessee was resident but not ordinarily resident premising the report with the remark that the inquiry contemplated under section 31(2) should not offend the provisions of section 23(4). He also stated that the assessment made already must stand as a best judgment assessment and not as an assessment computed from accounts and evidence. When the appeal was heard by the Appellate Assistant Commissioner, the assessee questioned the objections of the Income-tax Officer to the letting in of fresh evidence and the point over jurisdiction raised by him. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. On appeal to the Income-tax Appellate Tribunal, the Tribunal held that the Appellate Assistant Commissioner had no power to pass a remand order, and that he had every right to refuse permission to the assessee to raise the question of denial of liability to be assessed under the Act before him in the first instance even when it was not raised before the Income-tax Officer originally. As already noticed, the High Court gave the answer to the question whether the Appellate Assistant Commissioner has jurisdiction to make a remand order, in the affirmative, and in respect of the other question, viz., whether the subsequent Appellate Assistant Commissioner had power to ignore the remand report on the ground that the remand was not properly made, as it was beyond the jurisdiction of the Appellate Assistant Commissioner who made it, the High Court observed at page 1122 :
'Whether the order of the Appellate Assistant Commissioners was or was nor proper or was in excess of jurisdiction, it certainly did not lie in the mouth of the subordinate authority, the Income-tax Officer, to question that order.'
It was also pointed out that it was not open to the succeeding Appellate Assistant Commissioner to deal with the matter in a manner which was really a function of a superior appellate authority. The answer of the High Court to that question was where an Appellate Assistant Commissioner has made an order of remand giving certain directions to the Income-tax Officer, it is not open to the succeeding Appellate Assistant Commissioner who finally hears the appeal, to question the jurisdiction of his predecessor. With respect, we agree with these observations.
In the instant case, the Appellate Assistant Commissioner, in reducing the amount from Rs. 80,000 to Rs. 40,000, did not rely upon the accounts which the assessed failed to produce in compliance with the notices under section 22(4). That apart, he seems to have pursued the pervious records and came to the conclusion that the assessment of Rs. 80,000 was excessive. It cannot be said that the Appellate Assistant Commissioner had, in admitting the additional evidence, circumvented the result of the proceedings under section 27. We are, however, not expressing any view on the question whether the assessment of Rs. 80,000 had any basis.
Our answer to the question, therefore, is that the Appellate Assistant Commissioner can call for and receive additional evidence or material not available to the Income-tax Officer at the time of making the best judgment assessment and he has also jurisdiction to remand the matter under section 31(2), but only subject to the limitations indicated above. Our answer is accordingly in the affirmative and in favour of the assessee, with costs. Advocates fee, Rs. 250.
Question answered in the affirmative.