Commissioner of Income Tax vs Banarsilal Dhawan

Ismail, J.—The Income Tax Appellate Tribunal u/s 256(1) of the Income Tax Act, 1961, has referred the following questions of law for the

opinion of this court:

(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law and justified in deleting the addition of Rs.

31,000 made by the Income Tax Officer under the head ''other sources'' for 1963-64 assessment ?

(2) Whether the conclusion of the Tribunal in deleting the addition of Rs. 31,000 is based on a reasonable view of the facts and circumstances of

the case ?

The assessee is a dealer in crepe soles, raw rubber, etc. For the assessment year 1963-64, the relevant accounting year being the preceding

financial year, he returned an income of Rs. 10,260 under ""business"". At the time of hearing before the Income Tax Officer, it was submitted for

the assessee that the proviso to Section 145(1) of the Income Tax Act was applicable and that the assessee had no objection to the estimate of

gross profit as in the preceding year. This resulted in an addition to Rs. 15,500 to the disclosed trading results. There were also some hundi

transactions during the previous year and the assessee filed a peak credit statement showing a peak credit of Rs. 31,000. By his letter dated

September 2, 1966, the assessee''s representative admitted that a sum of Rs. 31,000 said to be hundi loans was not capable of verification and,

therefore, may be treated as having been admitted u/s ""F"" of the return of income. It was also claimed on behalf of the assessee that a sum of Rs.

8,500 out of the total amount of Rs. 31,000 pertained to the previous year and that it should be deducted. It was further claimed that the said sum

of Rs. 31,000 should be set off against the intangible additions of the earlier years. The Income Tax Officer declined to comply with this request of

the assessee. He held that the assessee had not linked the intangible additions of the past years with the appearance of the credits and unless the

assessee proved that the hundi credits were introduced out of profits made in the trading account outside the books, it was not possible to

telescope the two additions, with the result, he assessed a sum of Rs. 31,000 as income from other sources.

Against the order of the Income Tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner of Income Tax and

before that officer the assessee contended that the ruling of this court in S. Kuppuswami Mudaliar Vs. Commissioner of Income Tax, Madras,

enabled the assessee to claim a set-off of the gross profit additions of the past years against the unexplained credits in the year in question. The

Appellate Assistant Commissioner declined to accept this argument and, in his view, the decision of this court in S. Kuppuswami Mudaliar Vs.

Commissioner of Income Tax, Madras, must be taken to have been overruled by the subsequent decision of the Supreme Court in Commissioner

of Income Tax, Uttar Pradesh Vs. Devi Prasad Vishwanath Prasad, , with the result, he sustained the order of the Income Tax Officer. The

assessee, thereafter, preferred a second appeal to the Income Tax Appellate Tribunal. The Tribunal held that the decision of this court in S.

Kuppuswami Mudaliar Vs. Commissioner of Income Tax, Madras, applied to the facts of this case and that the decision cannot be said to have

been overruled by the subsequent decision of the Supreme Court in Commissioner of Income Tax, Uttar Pradesh Vs. Devi Prasad Vishwanath

Prasad, , with the result, the Tribunal accepted the contention of the assessee and allowed the assessee what it called the benefit of set-off of gross

profit additions of the past years against the unexplained cash credits in question and directed the deletion of Rs. 31,000 as income from ""other

sources"". It is the correctness of this conclusion of the Tribunal that is challenged before us in the form of the questions extracted already.

We may mention one thing immediately. Admittedly, for the assessment years 1960-61, 1961-62 and 1962-63, the Income Tax Officer made

additions by way of estimation of the profits of the assessee in the sums of Rs. 11,040, Rs. 18,279 and Rs. 24,040, respectively, which totalled

Rs. 53,359. It was the case of the assessee, relying on the decision of this court in S. Kuppuswami Mudaliar Vs. Commissioner of Income Tax,

Madras, that the unexplained credit of Rs. 31,000 should be set off against this Rs. 53,359 and it was this case which was accepted by the

Tribunal.

We may immediately explain the facts of this case and whether it has got a bearing on the decision of this court in S. Kuppuswami Mudaliar Vs.

Commissioner of Income Tax, Madras, . As we pointed out already, admittedly in the books of the assessee there were the peak credits of Rs.

31,000 and they were said to be the result of hundi transactions with various persons. It was admitted by the assessee himself that he could not

satisfactorily explain the persons with reference to whom the credits were entered and it is only on that ground he requested the Income Tax

Officer to treat the said amount as having been included in Section ""F"" of the return. Section ""F"" of the return, as it then was, relevant for the

assessment year in question, provided for these particulars :

Sources of income Particulars of items Amount

Rs.

Section F 1.

In this section should be shown any amount which 2.

is not included in sections A, B and C and which 3.

the assessee claims to be not taxable for any 4.

reason such as that the receipt is of a casual 5.

nature not arising from any business or 6.

profession or occupation, or that it is exempt 7.

under any provision of the Income Tax Act, 1961. 8.

Total of Section F.

The request to the officer to treat the sum as having been included in Section ""F"" of the return will itself show that the assessee admitted the

amount as income of the year in question, though it might have been open to the assessee to show that the same was not liable to tax under the

provisions of the Act. At the same time, the assessee claimed that he was not able to explain the source of the credit. However, the assessee also

contended that the unexplained credit should be set off against the ""intangible additions"" made in the previous years of assessment amounting to Rs.

53,359 as referred to above. It is only in this context reliance was placed on the decision of this court in S. Kuppuswami Mudaliar Vs.

Commissioner of Income Tax, Madras, .

We are of the opinion that the decision of this court in S. Kuppuswami Mudaliar Vs. Commissioner of Income Tax, Madras, has no bearing

whatever on the present case and the facts of the present case are totally different. In S. Kuppuswami Mudaliar Vs. Commissioner of Income Tax,

Madras, , what happened was this. The assessee was a tanner carrying on business at Ambur. For the assessment year 1947-48, the income from

the business was estimated by addition of Rs. 28,500. For the assessment year 1948-49, the income was again estimated by addition of Rs.

23,730. For these two years together there was an addition of Rs. 52,230. The assessments for the years 1949-50 and 1950-51 were made by

the officer on March 29, 1950, and March 21, 1951, respectively. In the assessment of the latter year, he included the sum of Rs. 27,625 as

income from other sources not explained by the assessee and which income was kept outside his books of account. Subsequently, the Income Tax

Officer received information that the assessee had lent a sum of Rs. 40,000 on a mortgage in the name of his brother, Murugesa Mudaliar, on

August 29, 1948, which was within the ""previous year"" for the assessment year 1949-50. The officer also came to know that the assessee''s wife

and married daughter had advanced sums of Rs. 15,000 and Rs. 10,000, respectively, as and for their share capital in the firm of S. Kuppuswami

Mudaliar and Co. on February 10, 1950, which came within the ""previous year"" for the assessment year 1950-51. With this information in his

possession, the Income Tax Officer initiated proceedings u/s 34 of the Act and issued appropriate notices to the assessee for reopening the

assessment of the years 1949-50 and 1950-51. The contention of the assessee was that the mortgage loan and other investments made in the

name of his wife and daughter came out of Rs. 52,230 which had been found to have been earned by the assessee by the Income Tax Officer

himself in the assessment proceedings relating to the years 1947-48 and 1948-49. However, the Income Tax Officer rejected this contention,

because he was of the opinion that the assessee could not have got these amounts from the additions made, which additions, according to him,

were ""intangible additions"". The assessee filed appeals before the Appellate Assistant Commissioner and the said officer found that the department

was not justified in making the addition of Rs. 40,000 in the reassessment for the year 1949-50, as there was no reason to disbelieve the

assessee''s version that this sum came out of Rs. 52,230, the addition made by the department in the previous years. He also found that the excess

amount of Rs. 12,230 which remained unabsorbed out of the total of Rs. 52,230 after deducting the mortgage loan advanced would still be

available with the assessee for investment. The department preferred appeals to the Income Tax Appellate Tribunal. The Tribunal held that the

assessee had failed to disclose the sources for the mortgage loan and other advances and that the order of the appellate authority deleting the

addition of Rs. 52,230 in all was erroneous and unsustainable. It was the correctness of that order which was challenged before this court in a

reference u/s 66(1) of the Income Tax Act. This court held that the addition of Rs. 52,230 made in thereafter two years was not an ""intangible

addition"" ; it represented the real estimate of the profits earned by the assessee and, therefore, that amount was available with the assessee. This

court also pointed out that the only question the Tribunal had to decide was whether the assessee could have derived the amount of Rs. 52,230

from the prior years which, according to the department, the assessee did earn and the Tribunal did not say, nor would the materials on record

enable it to say, that the sum was not available to the assessee either to advance the mortgage loan in the name of Murugesa Mudaliar or for other

advances. This court observed--See S. Kuppuswami Mudaliar Vs. Commissioner of Income Tax, Madras, :

It is a hard fact that for the two years 1947-48 and 1948-49 a total addition of Rs. 52,230 was made by the department in computing the

assessable income. This was, therefore, treated as the real income of the assessee for the years in question. There was nothing notional or fictional

about it. However convenient it might be to describe the addition as ''intangible'' as has been done by the department and the Tribunal, the fact is

that it was found to have accrued to the assessee and was not merely supposed to have been earned by him. Once the addition is made the

department is fixed to the position that the assessee earned the amount in the relevant year...... If there had been any evidence to show that the

assessee devoted that amount for other purposes it may well be that the mortgage loan and other advances were made from an unexplained or

undisclosed source. But that it is not so in the present case. The Tribunal''s conception of ''intangible additions'' is somewhat queer and we confess

our inability to appreciate it. The Tribunal observes in its order:

''Intangible additions, as the name itself suggests, are purely matters of estimate which may err on the wrong side for the department. For want of

proper evidence, additions on account of deficiency of gross profit or other defects may be made but this would not mean putting in possession of

the assessee their equivalent in hard cash available for expenditure or investment. It may be said that having suffered a harsh assessment in a

particular year, the assessee''s case should be considered sympathetically in the subsequent year when an investment of the nature we are

discussing is brought to light.''

Additions are no doubt made very often on estimate basis. But it can never be said, or at any rate the department cannot contend, that the amount

of the addition is not the real income but something which the assessee may not have earned. It is wholly illogical for the department to contend that

the addition was only for purposes of taxation and that it should never be taken as true income of the assessee.

We are of the opinion that that decision is wholly inapplicable to the facts of the present case. In that case, (1) there were additions to the

income of the assessee in a sum of Rs. 52,230 in the previous assessment years 1947-48 and 1948-49; (2) during the assessment years 1949-50

and 1950-51, the assessee had invested a sum of Rs. 40,000 on a mortgage in the name of his brother, Murugesa Mudaliar, and certain other

amounts in the names of his wife and daughter; (3) when the Income Tax Officer called upon the assessee to explain the source of those advances,

the assessee straightaway stated that it came out of the sum of Rs. 52,230 which had been added to his income in the two previous years. In such

a situation, the only question that came to be considered by this court was whether the assessee had established that the advances made by him

during the years 1949-50 and 1950-51 came out of the additions made in the previous years, namely, 1947-48 and 1948-49, and this court on

the evidence held that there being no evidence to show that the assessee had spent away that amount for other purposes, there was no justification

for rejecting his case that these advances were made out of that sum of Rs. 52,230. In the present case, there was no question of any advances

made in the name of the assessee or in the name of other close relations of the assessee over whom the assessee had control. Secondly, in the

present case, it was one of the credit entries finding a place in the books of accounts of the assessee in the names of third parties. Thirdly, the

assessee admittedly was not able to explain or verify those credits with reference to the persons in whose names they stood in his accounts. Under

such circumstances, the question for consideration is whether it was open to the assessee to contend that he was entitled to claim that the

unexplained credit of Rs. 31,000 must be deemed to have come out of the additions made in the previous three years'' assessments amounting to

Rs. 53,359.

In the first place, we are of the opinion that once the assessee has originally shown the credits as having emanated from certain named

individuals and when he failed to establish the same, it was not open to him to fall back on a claim that these unexplained credits must be taken to

have come out of the additions made in the earlier years. Even if it was open to him to put forward such a case, it was for him to prove positively

that though the credits stood in the names of third parties, still it was his money which was brought into account in the names of third parties and the

money itself came from the additions made to his assessments in the previous years. Incidentally, this will involve his explaining why he brought his

own money into the accounts in the names of third parties. The assessee in the present case has not proved any such thing. It is exactly this position

which the Income Tax Officer in his order pointed out while making the additions. The Tribunal without, considering any of these facts proceeded

as if the decision of this court in S. Kuppuswami Mudaliar Vs. Commissioner of Income Tax, Madras, laid down a universal proposition of law

that whenever an assessee failed to explain the credits found in his books of account, it was open to him to claim a set-off of those credits as

against the additions made to his income in the previous years'' assessments. As we pointed out already, no such proposition has been laid down

by this court in the decision referred to above. As a matter of fact, apart from removing the misconception arising from the inaccurate and

misleading use of the expression ""intangible additions"", this court did not lay down any-such general proposition of law, as if the additions made to

the income returned by an assessee, by the department, constitute his last refuge whenever he finds himself in a tight corner not being able to

explain the credits found in his accounts. The truth is that such additions are as real an income, at any rate as far as the department is concerned, as

the income returned by the assessee, and one can as much as the other constitute the source to explain the credits in the accounts in the subsequent

years. Therefore, the decision of this court does not invest such additions with any special significance as a source to explain the credits in the

subsequent years. In any case, it will be a question of fact whether there was evidence to find that such additions were the source of the

subsequent credits and in this behalf there is no difference between this source and any other source, apart from the position that with regard to the

income assessed in the earlier years, its existence as a possible source of the credits will be a matter of record with the department while with

regard to other sources, their existence may be a matter to be proved.

The learned counsel for the assessee brought to our notice a decision of the Bench of the Punjab and Haryana High Court in Commissioner of

Income Tax Vs. Ram Sanehi Gian Chand, In that case, the assessee was a Hindu undivided family and was parrying on business with headquarters

at Ladwa with a branch at Yamuna Nagar. A partial partition in the family was effected on March 31, 1964, whereby the capital of both the shops

was pooled together and divided equally amongst the members of the family. During the assessment proceedings for the assessment year 1964-65,

it was found on an examination of the account books of the Yamuna Nagar branch that the capital of that branch on March 31, 1964, was only

Rs. 31,459.10, whereas, according to the partition document, the amount pooled from this branch was Rs. 51,463.45 making a difference of Rs.

20,004.35. The Income Tax Officer not being satisfied with the assessee''s explanation added the difference of Rs. 20,004.35 as income from

undisclosed sources. The case of the assessee both before the Income Tax Officer and the Appellate Assistant Commissioner was that the real

capital in the branch at Yamuna Nagar was only Rs. 31,459.10 and it was mistakenly shown in the partition deed as Rs. 51,463.45. This case was

rejected by the Income Tax Officer as well as the Appellate Assistant Commissioner. When the- assessee filed further appeal before the Income

Tax Appellate Tribunal, the Tribunal held that the assessee''s explanation that there had been a mistake in the partition deed in stating the amount of

capital contributed by the Yamuna Nagar branch as Rs. 51,463.45 instead of Rs. 31,459.10 was an after-thought and that the discrepancy of Rs.

20,004.35 between the two figures had to be explained. Once the Tribunal came to that conclusion, the assessee raised a new contention before

the Tribunal, that is, the difference between the capital at the Yamuna Nagar branch as per its books and the capital transferred to the head office

at the time of the partial partition represented the intangible additions made to the assessee''s income not only in the present assessment year but

also in the earlier assessment years. The department''s representative objected to the Tribunal allowing such a new contention at that stage. The

Tribunal, however, held that the contention sought to be raised by the assessee was legal in nature and should be allowed to be raised. In view of

this conclusion, the Tribunal allowed the assessee to raise this contention and set aside the orders of the Appellate Assistant Commissioner and

directed him to consider the assessee''s case on the basis of the new contention raised before him. This conclusion of the Tribunal was challenged

in the form of a reference to the High Court and the High Court stated--See Commissioner of Income Tax Vs. Ram Sanehi Gian Chand, :

It is true that before the Income Tax Officer and the Appellate Assistant Commissioner this plea was not taken. It may be that the assessee was

not aware of the legal position, that is, that it was entitled to take advantage of the intangible additions made in the previous years and it is quite

evident from the facts of this case that this point was urged before the Tribunal by the learned counsel for the assessee. Since this was a point of

law, the assessee was not supposed to know it and it will be wholly unfair not to allow him to raise that plea simply because he did not urge it

before the Income Tax Officer or the Appellate Assistant Commissioner. On the intangible additions made in the previous years the assessee had

paid the Income Tax and possibly penalty for not disclosing it, and if the law permits the assessee to take advantage of those intangible additions

for explaining the capital in the subsequent assessment years, the opportunity should be allowed to it in the interest of equity and fair play.

Nothing has been said by the learned counsel for the petitioner as to why it was not open to the Tribunal to allow the assessee to raise the plea and

substantiate it. There is no question of investigation on facts because the intangible additions made in that year or in the previous years were on the

record of the Income Tax Officer and only a reference had to be made to the previous assessment orders. No new fact had to be investigated or

proved.

With respect to the learned judges, we are unable to agree with the above reasonings and conclusions. In the first place, there was no question

of there being any legal position or any point of law, because it was simply a question of fact by way of explaining as to where the sum of Rs.

20,004.35 came from. For this purpose, no knowledge of the legal position on the part of the assessee was necessary and if the sum of Rs;

20,004.35 came from the additions made to the previous years, he was the only person who could have knowledge of the same and nothing could

have been easier for him than to have stated so at the earliest possible opportunity. As a matter of fact, before the Income Tax Officer as well as

the Appellate Assistant Commissioner, the assessee took an entirely different stand, namely, that the figure mentioned in the partition deed was a

mistake, thereby implying that the sum of Rs. 20,004.35 was not there at all. To allow such a person to go back on his stand and urge for the first

time before the Tribunal that the said sum of Rs. 20,004.35 was there and came from the additions made to his income during the previous

assessment years will be neither equity nor justice. Apart from this, we are unable to share the view of the learned judges that the entire thing was a

pure question of law and there was no question of investigation on facts, because even if the assessee could be allowed to raise such a point, still it

had to be verified whether the additions made to the assessee''s income in the previous years'' assessments remained intact without being spent

away for other purposes to explain the additional capital in the Yamuna Nagar branch. Whether that amount remained intact or the whole of it or

any part of it was spent away will be a question of fact to be investigated into and established. Only if it was established that an amount to the

extent of Rs. 20,004.35 out of the previous years'' additions was available, then there will be the possible question of the assessee explaining that

this sum of Rs. 20,004.35 came out of"" those previous years'' additions. Therefore, that was again a question of fact to be ascertained and

established and it is not possible to hold that the point raised for the first time by the assessee before the Tribunal was a simple question of law.

Under these circumstances, we are of the opinion that the decision of the Punjab and Haryana High Court referred to above cannot be relied upon

in support of the order of the Tribunal in the present case.

For these reasons, we are of the opinion that the Tribunal completely erred in relying upon the decision of this court in S. Kuppuswami

Mudaliar Vs. Commissioner of Income Tax, Madras, as an authority for deleting the addition of Rs. 31,000 made by the Income Tax Officer and

affirmed by the Appellate Assistant Commissioner in the present case. Consequently, we answer the first question extracted above in the negative

and against the assessee. In view of our answer to the first question, it is not necessary for us to answer the second question.

There will be no order as to costs.