Can the first appellate authority tax a source of income the officer never looked at?
No. In an appeal filed by the assessee, the first appellate authority has no power to enhance by discovering new sources of income not mentioned in the return or considered by the officer.
Decided by the Supreme Court (Supreme Court of India — S.K. Das, M. Hidayatullah and J.C. Shah JJ (judgment by Hidayatullah J)) on 1962-02-14, reported as (1962) 44 ITR 891 (SC); AIR 1962 SC 1086; (1962) Supp (3) SCR 171; Civil Appeal No. 420 of 1961. It bears on section 251 of the Income Tax Act 1961, in Appeals matters.
The power of enhancement is what makes a first appeal feel risky. This is the outer limit of it, and the Supreme Court authority behind the Tribunal decision already in this library on the same point.
Binding on every court and authority in India.
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The assessee received Rs 40,000 on 20 July 1946. The Income-tax Officer noticed the receipt while assessing 1946-47 but, as it fell in the accounting year for 1947-48, did not tax it, recording a note that the question would be considered again at the 1947-48 assessment. The assessee did not show the amount in his return for 1947-48 and the Officer overlooked his own note, so the item was omitted from that assessment. The assessee appealed against the 1947-48 assessment, and while the appeal was pending the Income-tax Officer wrote to the Appellate Assistant Commissioner asking him to assess the Rs 40,000. The Appellate Assistant Commissioner issued notice and included it. The Tribunal agreed with him, but on a reference the Bombay High Court held he had not been competent to enhance the assessment, and the Commissioner appealed to the Supreme Court.
The Commissioner's appeal was dismissed and the Bombay High Court decision affirmed. In an appeal by the assessee the Appellate Assistant Commissioner may enhance the assessment within the sources processed by the Income-tax Officer, but may not travel outside the record - the return and the assessment order - to find and tax a new source of income not disclosed in either. Escaped income from a new source is to be brought to tax through the separate machinery for that purpose.
The Court held that the Revenue's wider construction - that 'the assessment' means the amount that ought to have been computed on the true total income - was itself a possible reading. It declined to adopt it, and the reason was not that the wider reading was wrong in principle but that the narrower one had held the field for nearly thirty-seven years, since the Patna High Court's decision in Jagarnath Therani in 1925, and had been followed in Madras, Patna and Bombay. Because the Act separately provides machinery by which escaped income from new sources can be brought to tax, there was reason to think the legislature had accepted that settled view as the true exposition of the section; had it intended otherwise, it would have amended the provision to say so, and although the Act was amended several times over those thirty-seven years the enhancement provision was never amended to nullify those rulings. On that footing the Court would not now read the section differently from the meaning accepted in India, particularly as that meaning was also reasonably possible. The Court also recorded that its earlier decision in McMillan & Co. had left this precise question open, and that what it had approved there was only the proposition that the Appellate Assistant Commissioner is a revising authority whose powers extend to the subject-matter of the assessment and include a power to enhance.
In view of this, we do not think that we should interpret, s. 31 differently from what has been accepted in India as its true import, particularly as that view is also reasonably possible.
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Handle my notice → Ask a CA on WhatsAppNo. In an appeal filed by the assessee, the first appellate authority has no power to enhance by discovering new sources of income not mentioned in the return or considered by the officer. This was decided by the Supreme Court (Supreme Court of India — S.K. Das, M. Hidayatullah and J.C. Shah JJ (judgment by Hidayatullah J)) and bears on section 251 of the Income Tax Act 1961. It is reported as (1962) 44 ITR 891 (SC); AIR 1962 SC 1086; (1962) Supp (3) SCR 171; Civil Appeal No. 420 of 1961. The power of enhancement is what makes a first appeal feel risky. This is the outer limit of it, and the Supreme Court authority behind the Tribunal decision already in this library on the same point. If it applies to you, the first step is this: On an enhancement notice, first ask whether the officer considered that source at all.
The assessee received Rs 40,000 on 20 July 1946. The Income-tax Officer noticed the receipt while assessing 1946-47 but, as it fell in the accounting year for 1947-48, did not tax it, recording a note that the question would be considered again at the 1947-48 assessment. The assessee did not show the amount in his return for 1947-48 and the Officer overlooked his own note, so the item was omitted from that assessment. The assessee appealed against the 1947-48 assessment, and while the appeal was pending the Income-tax Officer wrote to the Appellate Assistant Commissioner asking him to assess the Rs 40,000. The Appellate Assistant Commissioner issued notice and included it. The Tribunal agreed with him, but on a reference the Bombay High Court held he had not been competent to enhance the assessment, and the Commissioner appealed to the Supreme Court. The matter was decided on 1962-02-14 by the Supreme Court (Supreme Court of India — S.K. Das, M. Hidayatullah and J.C. Shah JJ (judgment by Hidayatullah J)). On those facts the Supreme Court held as follows. The Commissioner's appeal was dismissed and the Bombay High Court decision affirmed. In an appeal by the assessee the Appellate Assistant Commissioner may enhance the assessment within the sources processed by the Income-tax Officer, but may not travel outside the record - the return and the assessment order - to find and tax a new source of income not disclosed in either. Escaped income from a new source is to be brought to tax through the separate machinery for that purpose.
The Court held that the Revenue's wider construction - that 'the assessment' means the amount that ought to have been computed on the true total income - was itself a possible reading. It declined to adopt it, and the reason was not that the wider reading was wrong in principle but that the narrower one had held the field for nearly thirty-seven years, since the Patna High Court's decision in Jagarnath Therani in 1925, and had been followed in Madras, Patna and Bombay. Because the Act separately provides machinery by which escaped income from new sources can be brought to tax, there was reason to think the legislature had accepted that settled view as the true exposition of the section; had it intended otherwise, it would have amended the provision to say so, and although the Act was amended several times over those thirty-seven years the enhancement provision was never amended to nullify those rulings. On that footing the Court would not now read the section differently from the meaning accepted in India, particularly as that meaning was also reasonably possible. The Court also recorded that its earlier decision in McMillan & Co. had left this precise question open, and that what it had approved there was only the proposition that the Appellate Assistant Commissioner is a revising authority whose powers extend to the subject-matter of the assessment and include a power to enhance. In the words reproduced by the source cited on this page: "In view of this, we do not think that we should interpret, s. 31 differently from what has been accepted in India as its true import, particularly as that view is also reasonably possible."
It was decided by the Supreme Court on 1962-02-14 and is reported as (1962) 44 ITR 891 (SC); AIR 1962 SC 1086; (1962) Supp (3) SCR 171; Civil Appeal No. 420 of 1961. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 251, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Commissioner's appeal was dismissed and the Bombay High Court decision affirmed. In an appeal by the assessee the Appellate Assistant Commissioner may enhance the assessment within the sources processed by the Income-tax Officer, but may not travel outside the record - the return and the assessment order - to find and tax a new source of income not disclosed in either. Escaped income from a new source is to be brought to tax through the separate machinery for that purpose. It arises in Appeals matters, on section 251 of the Income Tax Act 1961, and was decided by Supreme Court of India — S.K. Das, M. Hidayatullah and J.C. Shah JJ (judgment by Hidayatullah J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Consideration means deliberate examination for taxability — incidental mention is not enough. Take the jurisdiction point before arguing quantum.
Still good law. A Full Bench of the Delhi High Court in Sardari Lal & Co, 251 ITR 864, after considering the competing lines of authority, held that Shapoorji Pallonji and Rai Bahadur Hardutroy Motilal Chamaria still hold ground. Applied by ITAT Pune in Ram Infrastructure (2016). Note the countervailing line represented by CIT v Nirbheram Daluram, which the Delhi Full Bench reconciled. That finding was checked against a published source, which is linked on this page, on 2026-08-25. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Decided under s.31(3) of the Indian Income-tax Act 1922, the predecessor of s.251. Civil Appeal No. 420 of 1961, decided 14 February 1962 by S.K. Das, Hidayatullah and J.C. Shah JJ, on an appeal from Shapoorji Pallonji Mistry v. CIT [1958] 34 ITR 342 (Bom.), which was affirmed. The assessment year was 1947-48 and the sum in dispute Rs 40,000. Note that the Court did not hold the wider construction to be wrong: it held that a construction settled for thirty-seven years and apparently accepted by the legislature should not now be displaced by another that was merely also possible. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Commissioner's appeal was dismissed and the Bombay High Court decision affirmed. In an appeal by the assessee the Appellate Assistant Commissioner may enhance the assessment within the sources processed by the Income-tax Officer, but may not travel outside the record - the return and the assessment order - to find and tax a new source of income not disclosed in either. Escaped income from a new source is to be brought to tax through the separate machinery for that purpose.
TaxSphere, “CIT v Shapoorji Pallonji Mistry”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-shapoorji-pallonji-mistry/ (validity last checked 2026-08-25)
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