A) ABSTRACT / HEADNOTE

This landmark 1958 judgment delivered by the Supreme Court of India in The Commissioner of Income-Tax v. M/s. McMillan & Co., [(1958) 33 ITR 182 (SC)] addresses the legal ambit of appellate jurisdiction under the Indian Income-Tax Act, 1922. The case revolved around whether the Appellate Assistant Commissioner (AAC), in an appeal filed by an assessee, could independently discard a method of accounting accepted by the Income-Tax Officer (ITO) and proceed to recompute income under Rule 33 of the Indian Income-Tax Rules, 1922. The majority decision, authored by Justice S.K. Das and Justice J.L. Kapur, held that the AAC had such jurisdiction, emphasizing the AAC’s revisional and enhancement powers under Section 31(3) of the Act. However, Justice Bhagwati dissented, opining that the power to reject the accounting method under Section 13 of the Act was exclusive to the ITO. The judgment resolved a split of opinion among High Courts and became a precedent in administrative and appellate powers of taxation authorities.

Keywords: Income-Tax Officer, Appellate Assistant Commissioner, Section 13, Section 31, Rule 33, method of accounting, enhancement of assessment, appellate powers.

B) CASE DETAILS

i) Judgement Cause Title
The Commissioner of Income-Tax v. M/s. McMillan & Co.

ii) Case Number
Civil Appeal No. 29 of 1955

iii) Judgement Date
16 October 1957

iv) Court
Supreme Court of India

v) Quorum
Justice S.K. Das, Justice J.L. Kapur, Justice N.H. Bhagwati

vi) Author
Justice S.K. Das (Majority); Justice N.H. Bhagwati (Dissent)

vii) Citation
(1958) 33 ITR 182 (SC); AIR 1958 SC 56

viii) Legal Provisions Involved
Section 13 and Section 31(3) of the Indian Income-Tax Act, 1922,
Rule 33 of the Indian Income-Tax Rules, 1922

ix) Judgments Overruled by the Case
Overruled K.F. Vakeel v. Commissioner of Income-Tax, I.T. Ref. No. 21 of 1950 (Bombay High Court)

x) Case is Related to which Law Subjects
Taxation Law, Administrative Law, Appellate Procedure

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

This case emerged against a backdrop of conflicting High Court decisions regarding the powers of appellate tax authorities. While the Bombay High Court in K.F. Vakeel held that the AAC could not reject an assessee’s accounting method accepted by the ITO, the Punjab High Court in Oriental Building and Furnishing Co. v. CIT endorsed the contrary. The Supreme Court’s adjudication was sought to settle the divergence, particularly the extent of powers conferred upon the AAC under Section 31 of the Income-Tax Act. The ruling was instrumental in interpreting the interplay between the ITO’s initial assessment authority under Section 13 and the appellate powers under Section 31, especially in terms of income estimation methodology under Rule 33.

D) FACTS OF THE CASE

The respondent, M/s. McMillan & Co., a non-resident company, operated in India through branches and was engaged in publishing and distributing books and magazines globally. For the relevant assessment year, the assessee submitted its return by attributing a fixed percentage of the marked sale price as the cost of production. The Income-Tax Officer accepted this method and assessed the income at ₹82,623. However, upon appeal by the assessee on unrelated grounds, the Appellate Assistant Commissioner issued notice under Section 31(3) and suo motu rejected the accounting method, holding that the true income could not be deduced from it. Invoking Rule 33, the AAC reassessed the income at ₹1,11,616. The Income-Tax Appellate Tribunal held that the AAC lacked jurisdiction to revise the accounting method accepted by the ITO. The Tribunal referred the matter to the High Court, which ruled in favor of the assessee. The Revenue appealed to the Supreme Court.

E) LEGAL ISSUES RAISED

i) Whether the Appellate Assistant Commissioner could reject the method of accounting followed by the assessee and accepted by the Income-Tax Officer under Section 13 of the Indian Income-Tax Act, 1922?

ii) Whether the AAC could apply Rule 33 of the Income-Tax Rules, 1922, in computing the assessee’s income when the ITO had not done so?

iii) Whether such actions constituted a lawful enhancement of assessment under Section 31(3) of the Act?

F) PETITIONER / APPELLANT’S ARGUMENTS

i) The counsels for the Petitioner / Appellant submitted that:

The AAC had wide powers under Section 31(3)(a) to “confirm, reduce, enhance or annul the assessment”, including revisiting and revising the basis of assessment itself. It was argued that even though Section 13 vested the initial discretion with the ITO, it did not render his decision final. If the AAC found that income could not be properly deduced from the method employed, it was within his jurisdiction to reject it and apply a more suitable computation under Rule 33, especially when the books of accounts failed to reflect the actual profit margins. The case of Narrondas Manordass v. CIT [(1957) 31 ITR 909 (Bom)] was cited, where Chagla CJ emphasized the broad revisional authority of the AAC under Section 31(3) to review “every process” leading to assessment.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that:

The language of Section 13, particularly the phrase “in the opinion of the Income-Tax Officer”, conferred exclusive jurisdiction upon the ITO to decide whether the method of accounting was appropriate. Once the ITO accepted it, the AAC could not revisit the matter in the absence of an appeal on that issue by the assessee. The reliance was placed on K.F. Vakeel v. CIT, where the Bombay High Court held that such discretion was non-transferable to appellate authorities. It was further contended that the AAC’s power to “enhance” was procedural and limited to errors in the assessment, not a fresh basis of computation.

H) RELATED LEGAL PROVISIONS

i) Section 13 of the Indian Income-Tax Act, 1922: Mandates computation based on the assessee’s regular method of accounting unless the ITO opines otherwise.
ii) Section 31(3) of the same Act: Grants AAC authority to confirm, reduce, enhance or annul assessments.
iii) Rule 33 of the Indian Income-Tax Rules, 1922: Allows approximation of profits based on turnover where income cannot be ascertained accurately.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Supreme Court, by majority, ruled that the AAC’s powers under Section 31(3) are wide and not limited by the acceptance of the method of accounting by the ITO. The Court held that the expression “in the opinion of the Income-Tax Officer” in Section 13 did not render the ITO’s decision final or non-reviewable. Accordingly, the AAC could invoke the proviso to Section 13 and Rule 33, even if the ITO did not, provided the appeal was otherwise within jurisdiction. The Court emphasized that the AAC could revise every process that led to the assessment, including the foundational method of computation.

b. OBITER DICTA 

i) Justice Bhagwati, dissenting, opined that the legislative intent was clear in limiting the discretion under Section 13 to the ITO alone. He warned that allowing appellate authorities to supplant the ITO’s opinion could lead to arbitrary enhancements without sufficient checks, thereby affecting the finality and procedural balance of assessments.

c. GUIDELINES 

• The AAC, when hearing an appeal, has jurisdiction to revise the basis of assessment, including rejecting the method of accounting accepted by the ITO.

• The phrase “in the opinion of the Income-Tax Officer” does not prohibit the AAC from forming an independent opinion if the matter is before him in appeal.

• The AAC may invoke Rule 33 to compute income if the books fail to reflect true profits.

• No statutory limitation in Section 13 prevents the AAC from exercising judgment under Section 31(3).

J) CONCLUSION & COMMENTS

This decision represents a significant enlargement of appellate authority in Indian tax jurisprudence. By affirming that the AAC may reject a method of accounting and recompute income under Rule 33 even without the ITO doing so, the Court acknowledged the functional equivalence of appellate and assessment powers once an appeal is validly filed. The majority judgment emphasized the need for accurate computation of taxable income over procedural rigidity. At the same time, Justice Bhagwati’s dissent offered a cautionary perspective on preserving statutory roles and procedural consistency. This case remains pivotal in guiding appellate reviews in Indian tax proceedings and balancing discretion among tax authorities.

K) REFERENCES

a. Important Cases Referred

i) Narrondas Manordass v. Commissioner of Income-tax, (1957) 31 ITR 909 (Bom)
ii) K.F. Vakeel v. Commissioner of Income-tax, IT Ref. No. 21 of 1950 (Bombay HC)
iii) Oriental Building and Furnishing Co. v. CIT, (Punjab HC)
iv) Commissioner of Income-tax v. Sarangpur Cotton Mfg. Co., AIR 1952 PC 32
v) Pearey Lal Shukla, In re, [1942] 10 ITR 309 (All HC)
vi) Jagarnath Therani v. Commissioner of Income-Tax, [1925] 2 ITC 4
vii) Gajalakshmi Ginning Factory v. Commissioner of Income-Tax, [1952] 22 ITR 502

b. Important Statutes Referred

i) Indian Income-Tax Act, 1922, Sections 13, 31(3)
ii) Indian Income-Tax Rules, 1922, Rule 33