Patna High Court
Lakshmi Rice Mills vs Commissioner Of Income-Tax on 15 April, 1974
Equivalent citations: [1974]97ITR258(PATNA)
JUDGMENT S.K. Jha, J.
1. A statement of case has been submitted to this court tinder Section 66(1) of the Indian Income-tax Act, 1922, by the Income-tax Appellate Tribunal, Patna "Bench, by an order dated the 15th July, 1969, referring the following question of law for the opinion of this court:
"Whether, in view of the fact that notes of Rs. 1,000 were legal tender on the date of promulgation of the Ordinance (January 12, 1946), the Tribunal had erred in coming to the conclusion that the cash balance of Rs. 1,70,038 did not include 140 high denomination notes when they were presented on January 22, 1946, to the bank for encashment ?"
The assessee is a registered firm, and the subject-matter of assessment covered by this reference is the assessment year 1946-47 relating to the accounting period November 25, 1944, to February 13, 1946, in accordance with the prevalent practice and manner regularly employed by the assessee for maintaining its books of account.
2. The short facts necessary for the disposal of this reference case may be stated as follows. On August 17, 1946, the assessee filed its return for the relevant assessment year. On November 7, 1946,, the assessment proceedings were taken up by the Income-tax Officer when the books of account of the assessee were first examined. An order of assessment was made on October 4, 1948. The assessee took up the matter in appeal to the Appellate Assistant Commissioner of Income-tax, who by his order dated November 14, 1949, set aside the assessment order of the Income-tax Officer and remanded the case to him for reassessment. By an order dated January 27, 1958 (copy marked annexure "A" to the statement of the case), the Income-tax Officer passed an order of reassessment which was affirmed in so far as the present question is concerned by the Appellate Assistant Commissioner by his order dated October 31, 1965, (annexure "B" to the statement of the case). The assessee then went up in second appeal before the Income-tax Appellate Tribunal, Patna Bench, which by its appellate order, dated December 22, 1967 (copy marked annexure "C" to the statement of the case), dismissed the assessee's appeal with regard to the question at issue.
3. The material facts giving rise to this reference are that on January 12, 1946, the Imperial Government promulgated Ordinance No. 3 of 1946, known as the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, which was declared to have come into effect forthwith. By the aforesaid Ordinance, all bank notes of the denomination 6f Rs. 1,000 or above were declared to be not legal tender and a time limit, of ten days was set, and in some cases two weeks, for the exchange of the demonetised notes from either the Reserve Bank or the then Imperial Bank of India amongst other scheduled banks. On the date the Ordinance was promulgated and came into effect, that is, on January 12, 1946, the assessee had a cash balance of Rs. 1,70,038 in its books of account. On the 22nd of January, 1946, within the time prescribed by law, the assessee deposited, according to it, 157 notes of the denomination of Rs. 1,000 each in the Imperial Bank of India. The demonetised notes presented to the bank thus amounted in value to Rs. 1,57,000. This amount of Rs. 1,57,000 was the subject-matter of controversy between the assessee and the revenue. The Income-tax Officer held that Rs. 17,000, out of the abovementioned amount of Rs. 1,57,000, represented the 17,1,000-rupee notes which the assessee had shown to have received from the Imperial Bank itself. The balance amount of Rs, 1,40,000, according to the Income-tax Officer, had not been sufficiently explained in so far as they were represented by denomination of 1,000-rupee notes. The Income-tax Officer, with whom the Appellate Assistant Commissioner in appeal also agreed, held that the assessee had not discharged the burden of proving the source of 140 notes of the, denomination of Rs. 1,000 each. I must state here that the books of account of the assessee were not challenged in so far as their genuineness was concerned, and the revenue all along proceeded upon the assumption that on January 12, 1946, the crucial date, the assessee had a cash balance of Rs. 1,70,000 odd. The contention put forward on behalf of the assessee all along was that this cash balance of Rs. 1,70,000 odd which it had on that date covered the disputed amount of Rs. 1,40,000, for the notes of the denomination of Rs. 1,000 were legal tender till the 12th of January, 1946, and the assessee was well within the legal limits of its rights in converting notes of small denomination to the notes of high denomination for the purpose of safe keeping and in the interest of security. None-the-less, the contention or the explanation put forward on behalf of the assessee was rejected both by the Income-tax Officer and the Appellate Assistant Commissioner who concurrently held that the assessee had not discharged the onus of proving the source of the high denomination notes. When the appeal was pursued before the Tribunal, the Tribunal again rejected the explanation put forward by the assessee, holding, inter alia, that :
(i) There was no custom or practice prevalent in the market for any merchant to keep the number of the high denomination notes.
(ii) During the course of the business these notes were received in change for smaller notes but since we are making a presumption against the assessee for not keeping on record of flow in the business of notes, the position remained that the assessee has not been able to prove that he received high denomination notes in exchange for other notes.
(iii) When there are high denomination notes tendered for encashment the onus is on the assessee to prove the origin and source of these notes.
(iv) Where the assessee keeps a cash book the onus is to a considerable extent discharged by the mere fact that there are sufficient cash balance on the dates earlier to the Ordinance.
(v) If the Income-tax Officer wants to reject the books of account the onus is upon him to show that the books are unreliable or not written in the ordinary course of the business.
(vi) After October 24, 1945, the assessee withdrew Rs. 2,70,000 from the bank, of which Rs. 17,000 was in high denomination notes and the balance of Rs. 2,53,000 was not in high denomination notes, and the assessee received Rs. 27,000 from other parties in notes, the denomination of which is not known, although they were in sums of more than Rs. 1,000 in each case.
Having thus recorded its findings, the Tribunal went on to hold that examining strictly from the point of view of onus and legal rights, the assessee had not established by definite evidence that it received Rs. 27,000 in high denomination notes and, therefore, the assessee had not discharged the onus of showing that Rs. 27,0.00 was received in high denomination notes. It was further held that, as regards the balance of Rs, 1,40,000, the assessee had not been able to establish that it received these sums in high denomination notes from the bank, and the assessee's theory that these notes were exchanged during the course of the business into high denomination notes remained unproved ; and the assessee had not discharged the onus of proving that this money came in the form of high denomination notes.
4. Summing up the position, therefore, while: accepting the position that the assessee had on the 12th of January, 1946, a cash balance duly entered in its books of account a sum of Rs. 1,70,000 odd and accepting the genuineness of the books of account of the assessee, the matter was decided, more or less, on the applicability of the doctrine of onus. The underlying current behind the order of the Tribunal as well as those of the subordinate assessing or appellate authorities seems to be that the assessee must in such cases prove the source of receipt of the high denomination notes. This, in my view, is not the correct position in law. As has been held by an early decision of this court in the case of Sri Nilkantha Narayan Singh v. Commissioner of Income-tax, [1951] 20 I.T.R. 8 (Pat.) where account books are accepted by the fact-finding authorities as genuine and there was hence no material upon which the Tribunal could reach the inference that the high denomination notes were not the saving of the assessee and where the cash balance had not exceeded the amount of the value of the high denomination notes subsequently demonetised, it was not necessary for the assessee to explain the source of receipt of such high denomination notes covered by the cash balance showed. It was held in that case on facts more akin to the facts of the instant case thus :
"In my opinion, there is no onus thrown upon the Raja (the assessee) to indicate from whom each note to the value of Rs. 10,000 was received, and no adverse inference ought to have been drawn by the Tribunal against the assessee."
It is, in my view, a fundamental principle governing the taxation of any undisclosed income or secreted profits that the income or the profits as such must find sufficient explanation at the hands of the assessee. If the balance at hand on the relevant date is sufficient to cover the value of the high denomination notes subsequently demonetised and even more, in the absence of any finding; that the books of account of the assessee were not genuine, the source of income is well disclosed and it cannot amount to any secreted profits within the meaning of the law. What has to be disclosed and established is the source of the income or the receipt of money, not the source of the receipt of the high denomination notes which were legal tender at the relevant time. Reference in this connection and in support of the view that I have taken may be made to the case of Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax, [1959] 37 I.T.R. 288 (S.C.) where the Supreme Court held that the entries in the rokar and the almirah accounts of the assessee showed that that there was an aggregate cash balance of Rs. 3,10,681 and it was highly probable that high denomination notes of the value of Rs. 2,91,000, which amount was the subject-matter of dispute in that case, were included therein. In the case being dealt with by their Lordships of the Supreme Court, the books of the assessee were not challenged in any other manner except in regard to the interpolations relating to the number of the high denomination notes, and the Tribunal had accepted these books of account as genuine and had worked up its theory on the basis of the entries which obtained in those books of account. In such circumstances it was held by the Supreme Court that it was not open to the Tribunal to accept the genuineness of those books of account and accept the explanation of the assessee in part and reject the same in regard to the sum of Rs. 1,41,000. It was further held on the facts and in the circumstances of that case which are, more or less, akin to the case with which we are dealing, that the circumstances relied on by the revenue were matters of pure conjecture, suspicion and surmises. The conduct of the assessee in that case, the notoriety he had achieved as a smuggler and the other clandestine business activities were matters lending support to a strong suspicion, but it was held that howsoever strong the suspicion may be it would be still within the realm of conjecture and surmises to treat it as a ground for rejecting the explanation which may be probable. As a matter of fact, the facts of the present case stand on a stronger footing than the case of Lalchand Bhagat Ambica Ram, which the Supreme Court was concerned with.
5. Reference in this connection may also be made to a Bench decision of the Allahabad High Court in the case of Kanpur Steel Co. Ltd. v. Commissioner of Income-tax, [1959]37 I.T.R. 288 (S.C.) wherein it was held that the burden of proof lay upon the department to prove that the sum said to be representing the suppressed income of the assessee was from undisclosed sources and the burden was not on the assessee to prove how it had received the high denomination notes, for, until the Demonetisation Ordinance came into force, high denomination currency notes could be used as freely as notes of any lower denomination and no one had any idea that it would be necessary for him to explain the possession of high denomination currency notes. Again, in the case of Bai Velbai v. Commissioner of Income-tax, [1957] 32 I.T.R. 56 (All.) the principle was reiterated by the Supreme Court, that, in the absence of materials to show that the sum in question which was being sought to be treated as secreted profits did form part of the cash balance and the source of the money had not been satisfactorily explained, the department was justified in holding it to be the assessable income of the assessee from some undisclosed source. The crux of the matter is to explain or establish the source of the income or the receipt of money and not the source of receipt of the high denomination currency notes.
6. Mr. Tarkeshwar Prasad, learned counsel appearing on behalf of the department, placed strong reliance on the cases of S.N. Ganguly v. Commissioner of Income-tax, [1963] 49 I.T.R. (S.C.) 130, Sreelekha Banerjee v. Commissioner of Income-tax, [1953] 24 I.T.R. 16 (Pat.), Sovachand Baid v. Commissioner of Income-tax, [1963] 49 I.T.R. (S.C.) 112 and Commissioner of Income-tax v. Manna Ramji and Co., [1958] 34 I.T.R. 650 (S.C.) in support of the proposition that the source of receipt of the high denomination notes must be satisfactorily explained by the assessee, who bore a heavy burden on him to discharge the obligation, in the absence of which a presumption shall be drawn against the assessee in so far as the source of the receipt of the money was concerned. I am afraid, none of the cases relied upon by learned counsel for the department supports this proposition of law. In the case of S.N. Ganguly, the amount encashed by the assessee did not find a place in the books of account. As a matter of fact, the amount so encashed was in the name of the wife of the assessee who was held to be none else than a mere name-lender for the husband. In the case of Sovachand Baid, the Income-tax Appellate Tribunal did not accept the account books of the assessee as genuine, and thus there was nothing to support the contention of the assessee that the cash balance, if any, had included the value of the high denomination notes. In the case of Sreelekha Banerjee, which was being dealt with by the Supreme Court, the assessee's explanation before the Income-tax Officer that the high denomination notes formed part of the cash balance at hand was rejected as being untrue. So also in the case of Manna Ramji, the Supreme Court was not concerned with the case of the nature with which we are dealing. The question in that case which arose for consideration was as to whether an item of income was in the nature of capital income or revenue income. The principle underlying that decision has therefore, in my view, no beating upon the point at issue in the instant case. Mr. Tarkeshwar Prasad, when confronted with this position, submitted that he had placed reliance upon the case of Manna Ramji, for the purpose of showing that the matters with which we are concerned in the instant case were as much matters of fact as were those which were being considered by the Supreme Court in that case and that, therefore, in any event, learned counsel submitted, the finding of the Tribunal must be treated as a finding of fact based upon certain materials discussed by the Tribunal in rejecting the assessee's contention and that no question of law can be said to arise out of the finding or the decision of the Tribunal. I am, however, definitely of the view that the findings of the Tribunal based upon the observations or materials already quoted in detail at an earlier place go to show that the so-called findings of fact, if any, arc based upon placing a wrong onus of proof and applying not the correct principles of law governing such cases. On the facts as discussed by the Tribunal and the subordinate appellate or assessing authorities, no tangible material has been brought on the record to take the shape of any legal evidence for the purpose of recording a finding that the assessee's explanation was not worthy of acceptance. This by itself is a question of law arising from the Tribunal's decision.
7. For the foregoing reasons, I am of the view that the question referred to us by the Tribunal must be answered in the affirmative, and I hold that on the facts and in the circumstances of this case the Tribunal had erred in coming to the conclusion that the cash balance of Rs. 1,70,038 did not include 140 high denomination notes when they were presented on January 22, 1946, to the bank for encashment. This reference is accordingly answered in favour of the, assessee and against the revenue. I also hold that the assessee will be entitled to the costs of this hearing at a consolidated figure of Rs. 150 only.
S.N.P. Singh, Actg. C.J.
8. I agree.