Patna High Court
Hardwarmal Onkarmal vs Commissioner Of Income-Tax on 25 August, 1973
Equivalent citations: [1976]102ITR779(PATNA)
Author: N.L. Untwalia
Bench: N.L. Untwalia
JUDGMENT Untwalia, C.J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter called "the Act"), made by the Income-tax Appellate Tribunal, Patna Bench, on the following question of law:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in treating the sum of Rs. 45,900 as income of the assessee from undisclosed sources ?"
2. The assessee is a registered firm consisting of eight partners. At the time of inspection of the books of account, the Income-tax Officer noticed various cash credits in the names of the partners, the aggregate of which was Rs. 45,900. Each of the seven partners had one-ninth share in the partnership and the eighth one had two-ninths share. The cash credit found deposited was Rs. 5,100 in the name of each of the partners who had one-ninth share each and a sum of Rs. 10,200 was found credited in the name of the partner who had two-ninths share. In other words, the deposits were exactly in proportion to the shares of the partners in the business. The stand of the assessee before the Income-tax Officer was that the deposits were out of the income of the partners and should be assessed in their hands; they were not the income of the registered firm.
3. Of course, it was admitted before the Income-tax Officer that the source of the money brought in by the partners could not be explained. The Income-tax Officer did not find the explanation satisfactory and added the amounts to the income of the firm.
4. The assessee went up in appeal. The Appellate Assistant Commissioner maintained the addition and dismissed the appeal. A further appeal was taken before the Income-tax Appellate Tribunal and the Tribunal, mainly relying upon Section 68 of the Act, upheld the addition holding that since the explanation given by the assessee had not been found to be satisfactory, the addition was justified in view of the said provision of law. On being asked by the assessee to state a case to this court, the Tribunal has done it and referred the aforesaid question of law to this court.
5. Learned counsel for the assessee placed reliance upon several decisions of the various courts in support of his argument that the addition has been made by the department on mere surmises and conjectures, and the Tribunal has committed an error of law in thinking that Section 68 of the Act has changed the position of law and, therefore, misdirected itself in maintaining the addition. The cases are Narayandas Kedarnath v. Commissioner of Income-tax, [1952] 22 ITR 18 (Bom), Balbhadra Chand Munnalal v. Commissioner of Income-tax, [1958] 33 ITR 781 (All), Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax, [1959] 37 ITR 288 (SC), Bai Velbai v. Commissioner of Income-tax, [1963J 49 ITR (SC) 130 and Orient Trading Co. Ltd. v. Commissioner of Income-tax, [1963] 49 ITR 723 (Bom). Learned counsel for the department wanted to rely on the following decisions : A. Govindarajulu Mudaliar v. Commissioner of Income-tax, [1958] 34 ITR 807 (SC), Lakshmichand Baijnath v. Commissioner of Income-tax, [1959] 35 ITR 416 (SC) and Commissioner of Income-tax v. M. Ganapathi Mudaliar, [1964] 53 ITR 623 (SC).
6. Before I proceed to briefly discuss the cases cited at the Bar, I may state that the law before the introduction of Section 68 in the Act was well-settled. The law has been that if cash credits are found in the assessee's books of account then primarily the onus is on the assessee to explain the source from where he got the money for making those deposits. If the explanation is found not to be satisfactory, the amount of cash credits can be added to the income of the assessee. It has also been held that if a cash credit stands in a third party's name and the assessee proves that the amount was actually deposited by that third party, it is not required of him further to prove from where that third party got the money. In such a case if the primary onus is discharged by the assessee, the onus shifts to the department to prove that it was not actually the third party's money but it was the secreted income of the assessee himself. Cases have also opined that largely this is a question of fact and it depends upon the facts and circumstances of each case whether the addition to the income of the assessee on account of cash credit found in his account books is justified or not. If, however, the explanation of the assessee has been found to have been rejected on some surmises or conjectures then it has become a question of law as to whether the finding recorded by the Tribunal or the departmental authorities is binding in a reference case. It has also been held that if the finding is recorded upon no evidence or is so perverse that any reasonable body of persons could not have taken that view then also the finding is not binding on the High Court, If the money was found to have been deposited by the partners in the books of account of their partnership firm and if the fact of deposit was believed then the mere failure of the partners to explain from where they got the money did not justify the addition of the amount of cash credit in the firm's income. In the background of these broad principles of law, I proceed to examine the facts of the instant case.
7. Before the Income-tax Officer it was asserted that the sum of Rs. 45,900 has been brought by the eight partners from sources which could not be explained but the money had been deposited in the firm. The Income-tax Officer rejected this explanation and chiefly on two grounds--(i) that in the assessment year 1960-61 the assessee-firm was found to be maintaining double set of account books and two big sums to the tune of Rs. 1,06,000 were added to the assessee's income, and this, in the opinion of the Income-tax Officer, proved that the profits of the business outside the books had been divided amongst the partners, and (ii) that the very fact that the amounts have been deposited in proportion to the shares of the partners in the business goes to prove that it was the secreted income of the firm, which was, by this method, divided amongst the partners.
8. When the matter went up in appeal before the Appellate Assistant Commissioner, he recorded some more facts in his order. Findings recorded by him are that the assessee had no evidence to prove that the partners had actually deposited the money and the firm had no need for money and which compelled the partners to make those deposits of Rs. 45,900 at one and the same time. It may be mentioned here that the account books of the assessee's firm for the assessment year in question, namely, 1962-63, closed on November 7, 1961. Only a week before the closing of the accounts, the entire sum of Rs. 45,900 was deposited on October 31, 1961. The Appellate Assistant Commissioner also found that in the past capital has not been contributed by the partners in proportion to their shares, there was a great variance in them, some partners had contributed less and some partners had contributed much more than the proportion required according to their share. It would thus be seen that according to the findings recorded by the departmental authorities almost at the fag end of the accounting year the sum of Rs. 45,900 was shown as having been contributed by the partners--not known from where the partners got the money--not proved as to whether they actually deposited the money. In such circumstances if the departmental authorities came to the conclusion that the explanation offered by the assessee was not satisfactory and, therefore, the amount should be added to the assessee's income, can it be said that they were unreasonable or perverse or that they had recorded these findings without any material ?
9. Before the Tribunal, apart from relying upon some authorities which I shall presently discuss, an alternative argument was also advanced that there was an addition of Rs. 1,06,000 in the assessment year 1960-61 and, therefore, it should be considered that the cash credit of Rs. 45,900 emerged out of the said added income. The arguments advanced before the Tribunal were repelled on the ground that, in view of the provision of law contained in Section 68 of the Act, if the explanation is not satisfactory, the cash credit can be added to the income of the assessee.
10. There was no provision in the Indian Income-tax Act, 1922, corresponding to Section 68 of the Act. Section 68, however, was enacted, as it appears, mainly to give a statutory recognition to the principles of law laid down by the various authorities making a departure in regard to two matters only, as pointed out by the learned authors Kanga and Palkhivala in The Law and Practice of Income Tax, 6th edition, volume I, page 537. Previously, a dispute had arisen as to whether a cash credit found in a particular accounting year of the assessee could be taken to be the income of that accounting year or whether it should be taken to be of a separate previous year according to the financial year. This matter has been set at rest by Section 68 which says that in all events the income of the assessee has to be treated of that previous year in which the cash credit has been found. Another dispute which had cropped up in various cases was as to whether the amounts found deposited on the very first day of the accounting year could be treated as the secreted income of the assessee of that accounting year. That matter has also been set at rest by Section 68. But on the main question the argument advanced on behalf of the assessee before us that the section has not brought about any change in law seems to be correct. Section 68 reads as follows :
"Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof, or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year."
11. If the assessee offers no explanation for the sum found credited in his books, the sum so credited has got to be added to the income of the assessee. To that extent there is no difficulty in saying that previously the law was exactly the same. But if an explanation is offered which, in the opinion of the Income-tax Officer, is not satisfactory then also Section 68 provides that the cash credit can be added to the income of the assessee. In this regard also, if I may say so, a departure does not seem to have been made from the law laid down authoritatively by the Supreme Court in various decisions. The matter ultimately comes to the Tribunal. The question of law is said to be arising but of the order of the Tribunal and it has to be considered whether the explanation has been rejected as being unsatisfactory on materials or evidence or without there being any material or evidence to justify the rejection. It can also be examined as to whether the rejection is perverse. But in this case the findings of the Tribunal can be appreciated in the background of the findings recorded by the departmental authorities. In this background the Tribunal committed no error of law in saying that when the assessee was unable to explain satisfactorily, the addition was justified in view of Section 68 of the Act; the Income-tax Officer was justified in adding the sums to the assessee's income under Section 68 of the Act. In my opinion, judging the order of the Tribunal in the background of the facts recorded by the Income-tax Officer and the Appellate Assistant Commissioner, it is difficult to accept the argument put forward on behalf of the assessee that the decision of the Tribunal is perverse or is based upon no evidence or material. On the other hand, I am inclined to think that the decision is reasonable, correct and perfectly warranted by the facts and circumstances of this case. The assessee could not persuade the Tribunal to record a finding in its favour that the money found deposited in its account books was actually the money brought by the partners and deposited.
12. Let me now proceed to examine briefly the case law on the point. Naraynadas Kedarnath v. Commissioner of Income-tax, [1952] 22 ITR 18 (Bom) is a Bench decision of the Bombay High Court. There certain amount standing to the credit of some of the partners of the assessee-firm was found to be the amount actually brought in by them from their native place by means of bank draft, although the source from where the partners brought the money was not known. It was known, however, that it was the partners who had deposited the amount in the firm's account books and consequently it was held to be not the secreted profit of the firm.
13. Balbhadra Chand Munnalal v. Commissioner of Income-tax, [1958] 33 TTR 781 (All) is a Bench decision of the Allahabad High Court, The facts of this case are in conformity with the Bombay decision and the principles laid down are almost identical.
14. The case of Lalchand Bhagat Ambika Ram v. Commissioner of Income-tax, [1959] 37ITR 288 (SC) is a decision of the Supreme Court whereby the Bench decision of this court had been reversed. It was a case of encashment of high denomination notes. The assessee had huge cash balances in its account books. The departmental authorities had added the entire amount to its income. The Tribunal upheld the addition of a part but upset the addition of the rest. In such circumstances, in the light of the well-settled principles of law in various decisions of the Supreme Court, to which reference has been made in the judgment by Bhagwati J., it was observed at page 297 :
"If these were the materials on record which would lead to the inference that the appellant might be expected to have possessed as part of its cash balance at least Rs. 1,50,000 in the shape of high denomination notes on January 12, 1946, when the Ordinance was promulgated, was there any material on record which would legitimately lead the Tribunal to come to the conclusion that the nature of the source from which the appellant derived the remaining 141 high denomination notes of Rs. 1,000 each remained unexplained to its satisfaction. If the entries in the books of account in regard to the balance in rokar and the balance in almirah were held to be genuine, logically enough there was no escape from the conclusion that the appellant had offered reasonable explanation as to the source of the 291 high denomination notes of Rs. 1,000 each which it encashed on January 19, 1946. It was not open to the Tribunal to accept the genuineness of these books of account and accept the explanation of the appellant in part as to Rs. 1,50,000 and reject the same in regard to the sum of Rs. 1,41,000. Consistently enough, the Tribunal ought to have accepted the explanation of the appellant in regard to the whole of the sum of Rs. 2,91,000 and held that the appellant had satisfactorily explained the encashment of the 291 high denomination notes of Rs. 1,000 each on January 19, 1946."
15. After having said that, the learned judge thought that the Tribunal was influenced by suspicions, conjectures and surmises which were freely indulged in by the Income-tax Officer and by the Appellate Assistant Commissioner in arriving at their conclusions. If I could take an identical or a similar view of facts in this case also, I must have followed the decision of the Supreme Court in Lalchand Bhagat's case as this court was bound to follow it. If, on the other hand, the decision of the departmental authorities as also of the Tribunal is based upon relevant materials, not only it is not perverse but seems to be reasonable also, then it is not open to this court to say that the findings arrived at by the departmental authorities or the Tribunal are vitiated in law. This same view has been expressed in the case of Bai Velbai, [1963] 49 ITR (SC) 130, where it has been pointed out that a finding on a question of fact is open to attack in reference as being erroneous in law when there is no evidence to support it or if it is perverse or has been reached without due consideration of the several materials relevant for such a determination. Orient Trading Co, Ltd. v. Commissioner of Income-tax, [1963] 49 ITR 723 (Bom) is a decision of the Bombay High Court, in which it has been pointed out that if the credit entry stands in the name of the assessee himself, the burden is undoubtedly on him to prove satisfactorily the nature and source of the amount of that entry ; if the entry stands in the name of the assessee's near relation, in that case also the burden is on him. If the entry, however, stands in the name of a third party then the assessee discharges his burden if he proves to the satisfaction of the Income-tax Officer the identity of the third party and also supplies evidence to show prima facie that the entry is not fictitious. If I may say so, the case in hand falls within the second category. If cash credits are found in the account books of a partnership firm in the names of the partners then such cash credits are in the names of persons who cannot call themselves as being related to the firm but surely are in the names of persons who constitute the firm itself. That being so, in such a case, the onus is on the assessee to establish that the partners had actually deposited the money and that the entries were not fictitious.
16. Venkatarama Aiyar J., delivering the judgment on behalf of the court, pointed out in Govindarajulu Mudaliar v. Commissioner of Income-tax, [1958] 34 ITR 807 (SC) at page 810 :
"There is ample authority for the position (proposition) that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipts are of an assessable nature."
17. The same learned judge opined in the case of Lakshmichand Baijnath v. Commissioner of Income-tax, [1959] 35 ITR 416 (SC) that the finding of the Appellate Tribunal that the cash credit did not represent the family jewels was a finding of fact, which could not be interfered with in a reference unless it was shown that there was no evidence to support it or that it was perverse. As the credit was found in the business account, it was not an unreasonable finding that it was a receipt from business.
18. In Commissioner of Income-tax v. M. Ganapathi Mudaliar, [1964] 53 ITR 623 (SC) it has been pointed out by the Supreme Court that if there is existence of the materials to support a finding of fact arrived at by the Tribunal, the High Court should not act as an appellate court and once it is held that an amount credited in the account books of an assessee is the income of the assessee, it is not necessary for the department to locate its exact source.
19. In the instant case, as I have discussed above, the materials, the facts and the circumstances, as discussed in the orders of the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal were sufficient to indicate that the credit entries to the tune of Rs. 45,900 found in the books of account of the assessee-firm could be added to the income of the assessee once the explanation put forward by it was not found to be satisfactory, In that view of the matter, the question of law referred to this court is answered in the affirmative, against the assessee and in favour of the department. It is held that, on the facts and in the circumstances of this case, the Appellate Tribunal was justified in treating the sum of Rs. 45,900 as income of the assessee from undisclosed sources. The assessee must pay the costs of this reference. Hearing fee Rs. 150 only.
S.K. Jha, J.
20. I agree.