Addl. Commissioner of Income Tax vs Ghasiram Phoolchand

S.P. Bharucha, J.—This is a reference u/s 256(1) of the Income Tax Act, 1961, made at the instance of the Revenue. The questions that we are called upon to answer read thus :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in setting off the fictitious loss of Rs. 1,47,767 disallowed by the Income Tax Officer against the unexplained cash credits of Rs. 1,57,708 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the sum of Rs. 73,7708 assessable as income for the assessment year in question u/s 68 of the Income Tax Act, 1961 ?"

This reference relates to the assessment year 1963-64. The assessee is a Hindu undivided family and derives income from various sources. It owns house properties. It carries on business in "Bardana". It also runs passenger buses in the name of "M/s. Mathuradas Motor Services". For the assessment year in question, it disclosed a loss of Rs. 1,47,767 in relation to the motor service. It declared an income of Rs. 12,718 in relation to its other business. Its net loss was, therefore, declared to be Rs. 1,35,049.

In the course of the assessment proceedings, the Income Tax Officer noted cash credits in the sum of Rs. 1,57,708 in the account of Ghasiram, Karta of the assessee, in the account books of the motor service. On being asked to explain the genuineness of the cash credits, the assessee contended that they had come out of its agricultural income and past savings. The Income Tax Officer rejected the explanation and treated the sum of Rs. 1,57,708 as income from undisclosed sources. The Income Tax Officer also rejected the account books of the assessee and estimated its income at Rs. 84,907 which included the sum of Rs. 59,000 as income from the motor service. The Income Tax Officer found that the income estimated by him covered the cash credits to the extent of Rs. 84,000. He treated the balance amount of Rs. 73,000 of the cash credits as income from undisclosed sources. The total computation of the assessee''s income was, therefore, Rs. 1,58,615 comprising Rs. 48,907 as income from property and business and Rs. 73,708 as income from undisclosed sources.

The assessee appealed to the Appellate Assistant Commissioner of Income Tax who dismissed the appeal.

The assessee then approached the Income Tax Appellate Tribunal (hereinafter referred to as "the Tribunal"). The representative of the assessee before the Tribunal did not (1) dispute the estimate of its total income as made by the Income Tax Officer, or (2) challenge the Income Tax Officer''s finding that the cash credits were not genuine. He contended only that the taxing authorities should have set off against the cash credits in the sum of Rs. 1,57,708 not only the estimated income but also the loss of Rs. 1,47,767 which they had disallowed in the account of the motor service. The Tribunal accepted this contention on behalf of the assessee for the reasons quoted below :

".......These statements show that according to the books, there was an alleged loss of Rs. 1,47,767 in this business. It is not disputed that the accounts of the assessee are unreliable and the loss is not genuine. So the question that naturally confronted the assessee was how to balance the books of account. The books were evidently balanced by setting off against the fictitious loss certain fictitious cash credits which were brought in the current account of the Karta, Shri Ghasiram Phoolchand. Once again, it is not disputed by the learned counsel that the cash credits are not genuine. The effect, therefore, is that on the assets side, there is a fictitious loss of Rs. 1,47,767 and on the liabilities side there are fictitious cash credits of Rs. 1,55,052 (total cash credits mentioned in the assessment order amount to Rs. 1,57,708 but credits appearing in the balance-sheet are to the tune of only Rs. 1,55,052, the difference being small and not very material is ignored. This makes it abundantly clear that the cash credits were introduced only to cover the fictitious loss and to balance the account books. If, therefore, the loss is not genuine and is fit to be ignored, the cash credits are also fit to be ignored. The two items are closely interconnected and interlinked and cannot be separated. It is, therefore, not logical on the part of the Income Tax Officer to give credit for only the profit assessed, ignoring altogether the loss disallowed.

By this reference, the Revenue impugns this reasoning of the Tribunal. Mr. Jetly, learned counsel for the Revenue, drew our attention to the judgment of the Supreme Court in KALE KHAN MOHAMMAD HANIF Vs. COMMISSIONER OF Income Tax, MADHYA PRADESH AND BHOPAL., , where it was help that the taxing authorities were not precluded from treating amounts of credit entries as income from undisclosed sources simply because the entries appeared in the books of a business whose income they had computed on a percentage basis.

Mr. Jetly also drew our attention to the judgment of the Patna High Court in Commissioner of Income Tax Vs. Jhaverbhai Biharilal and Co., . In this matter, the taxing authorities added sums to the income disclosed on account of discrepancies in purchases and profits on sales. The Tribunal help that the cash credits should be set off against the additions made to the assessee''s income. The reference to the Patna High Court was made at the instance of the Revenue. The court noted that the basis of the Tribunal''s order was that since there were unexplained cash credits, the additions to the trading account must be related to those cash credits. The court had difficulty in accepting "this bald proposition". It said (at page 638) "there can be no presumption that whenever additions to profit or trading account are effected, they must be set off against cash credits unexplained by the assessee. It was never the case of the assessee that the cash credits were intangible additions of the previous assessment year. It was not the assessee''s assertion that the intangible additions were available with the assessee and that these were introduced in the books of account as cash credits. It was open to the assessee to advance pleas in the alternative in regard to the cash credits, but no such plea was taken. It is, therefore, difficult to hold that the cash credits were intangible additions of the previous year." There could be no general or absolute rule to the effect that whenever additions to profits were made, they must be regarded as funds represented in the books of account as cash credits. The assessee may try to cheat the Revenue not only by showing fake cash credits but also by suppressed profit. The question was whether the Tribunal had found any connection between the additions and the cash credits. The Tribunal had not so held and, therefore, it had no justification for the course it had adopted.

Mr. Thakar, learned counsel for the assessee, submitted that the intangible additions constituted a fund which was available to the assessee for introduction in the account books. He drew our attention to the assessment order passed by the Income Tax Officer. He also drew our attention to the order passed by the Tribunal. In his submission, the intangible addition that had been made by the Income Tax Officer and confirmed by the Appellate Assistant Commissioner, was in the sum of Rs. 2,06,767, comprising the estimated income in the motor service business of Rs. 59,000 and the loss in that business of Rs. 1,47,767. What was added as intangible income was not only that income but also the loss that was disbelieved and converted into a zero figure. The taxing authorities ought to have given credit for the sum of Rs. 2,06,767.

Our attention was drawn by Mr. Thakar to the judgment of the Supreme Court in Anantharam Veerasinghaiah and Co. Vs. Commissioner of Income Tax , Andhra Pradesh, . The Supreme Court observed that it could hardly be denied that when an intangible addition was made to the book profits during an assessment proceeding, it was on the basis that the amount represented by that addition constituted the undisclosed income of the assessee. That income, although commonly described as "intangible", was as much a part of his real income as that disclosed by his account books. There was no escape from the proposition that the secret profits or undisclosed income of an assessee earned in an earlier assessment year may constitute a fund, even though concealed, from which the assessee may draw subsequently for meeting expenditure or introducing amounts in his account books. But it was quite another thing to say that any part of that fund must necessarily be regarded as the source of unexplained expenditure incurred or of cash credits recorded during a subsequent assessment year. The mere availability of such a fund cannot, in all cases, imply that the assessee has not earned further secret profits during the relevant assessment year. It was a matter of consideration by the taxing authorities in each case whether the cash credits could reasonably be attributed to a pre-existing fund of concealed profits or were reasonably explained by reference to concealed income earned in that very year. In each case, the true nature of the cash credit must be ascertained from an overall consideration of the particular facts and circumstances of the case.

Mr. Thakar also drew our attention to the judgment of this court in Commissioner of Income Tax, Poona Vs. Jawanmal Gemaji Gandhi, . It is unnecessary to refer to that judgment in any detail for the court was satisfied, having regard to all the circumstances that were before the Tribunal, that the sources for the acquisition of certain gold could well do assumed to be the amount added to the assessee''s income. This being, in the court''s view, a reasonable conclusion, it declined to substitute its own view for that of the Tribunal.

In the case of S. Kuppuswami Mudaliar Vs. Commissioner of Income Tax, Madras, , it was held by the Madras High Court that "where the Income Tax authorities make an addition to the income of the assessee over and above the income as disclosed by the assessee, on an estimate basis, the amount so added must be treated as the real income of the assessee...." (vide headnote)

In the case of MADDI SUDARSANAM OIL MILLS CO. Vs. COMMISSIONER OF Income Tax, HYDERABAD AND ANDHRA., , the Andhra Pradesh High Court held that "where the Income Tax authorities reject the books of account of the assessee and compute the gross profits of his business by applying a flat rate on the total turnover, they cannot rely on the books for the purpose of adding cash credits, which were part of the scheme of balancing accounts, to the profits so ascertained." (vide headnote)

It is necessary to examine what exactly happened in the instant case. The assessee filed a return which showed a net loss of Rs. 1,47,767 in the motor service business. In the account of the Karta of the assessee in the motor service business, cash credits aggregating to Rs. 1,57,708 were noticed. The assessee''s books were not accepted by the Income Tax Officer. The cash credits were not satisfactorily explained. The question then, the Income Tax Officer noted, was to examine how far the possession of a sum of Rs. 1,57,708 could be explained. It could not, the Income Tax Officer found, be explained from past savings. He noted that "since the assessee is admitting the falsity of his account books and also indirectly admitting suppression of income from transport collections and other business by offering to be assessed on estimated income, the available funds for being introduced in the business can only be accepted to the extent of income estimated, and the balance of credits still not covered will be treated as income from undisclosed sources u/s 56 read with section 68 of the Income Tax Act......". Thus, the cash credits were covered to the extent of Rs. 84,000, being the estimated income. The balance thereof in the amount of Rs. 73,708 remained unexplained. This amount, the Income Tax Officer added, to the assessee''s "income from other sources".

Before the Tribunal, the assessee did not dispute the estimate of its income. It did not dispute that the cash credits of Rs. 1,57,708 could not be explained. All that it urged was that the addition of the amount of Rs. 73,708 made by the Income Tax Officer should be set off against the intangible additions. The intangible additions, according to it, were of the sum of Rs. 2,06,767, comprising the estimated income from the motor service business of Rs. 59,000 and the loss in that business as claimed by the assess in his books of account in the sum of Rs. 1,47,767.

It is very important to note that this is a case where, admittedly, the assessee''s books are not genuine. There is, therefore, no question of relying upon the figure of Rs. 1,47,767 shown as loss in those books. The only intangible addition that can be said to have been made by the taxing authorities is in the amount of Rs. 73,708. The taxing authorities very properly set off the sum of Rs. 84,000 which was estimated as the assessee''s income against the cash credits. The unexplained balance thereof, viz., Rs. 73,708, was added on to the assessee''s income.

There was thus absolutely no basis upon which the Tribunal could have held that "the cash credits were introduced only to cover the fictitious loss" or that "the two items are closely interconnected and interlinked and cannot be separated". That the assessee had the estimated income of Rs. 84,000 was not in dispute. That the assessee had shown unexplained cash credits in the sum of Rs. 1,57,708 was also not in dispute. The income could, therefore, account only for Rs. 84,000 out of the cash credits of Rs. 1,57,708. The balance amount of Rs. 73,708 was, therefore, unexplained and the Tribunal should have treated it, as the taxing authorities had done, as income from undisclosed sources.

In the result, we answer the questions posed to us in the negative and in favour of the Revenue.

The assessee shall pay to the Revenue the costs of the reference.