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The appellant is a Hindu undivided family carrying on extensive business in grain as merchants and commission agents. It is one of the premier grain merchants and wholesalers of Sahibganj in the District of Santhal Parganas in the State of Bihar. It has branches at Nawgachia in the District of Bhagalpur and at Dhulian in the District of Murshidabad in West Bengal.

The appellant filed its Income-tax Return for the assessment year 1946-47 showing a loss of Rs. 46,415 in the business. The Income-tax Officer, Patna, however, in the course of the assessment noticed that the appellant had encashed high denomination notes of the value of Rs. 2,9 1,000 on January 19, 1946. The Income-tax Officer asked for an explanation which the appellant gave stating that these notes formed part of its cash balances including cash balance in the Almirah account. The cash balances of the appellant on January 12, 1946, on which date the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, was promulgated were Rs. 29,284-3-9 in its Rokar and Rs. 2,81,397-10-0 in the Almirah account. The Almirah account was an account for moneys withdrawn and kept at home. The appellant sought to prove the fact that the high denomination notes eneashed by it formed part of its cash balances from certain entries in its accounts wherein the fact that moneys were received in high denomination notes had been noted. Portions of these entries to the effect that moneys had been received in high denomination notes were found by the Income-tax Officer to be subsequent interpolations made by the appellant with a view to advance its case that the cash balances contained the high denomination notes encashed by it. The Income-tax Officer found that the appellant's food grains licence at Nawgachia had been cancelled for the accounting year for its failure to keep proper stock accounts and that the appellant was prosecuted under the Defence of India Rules but had been acquitted having been given the benefit of doubt. The Income-tax Officer also had regard to the fact that the appellant was a speculator and that as a speculator the appellant could easily have earned amounts far in excess of the value of the high denomination notes encashed. He con. sidered that even in the disclosed volume of business in the year under consideration in the Head Office and in the branches, there was possibility of his earning a considerable sum as against which it showed a net loss of about Rs.46,000. The Income- tax Officer also noticed that notwithstanding the fact that the period was very favourable to food grains dealers, the appellant had declared a loss for the assessment year 194445 up to 1946-47, though it had the benefit of a large capital on hand. The Income-tax Officer further took into consideration the circumstances that Nawgachia and Dhulian were very important business centers and Sahibganj, the principal place of business, had gained sufficient notoriety for smuggling foodgrains and other commodities to Bengal by country boats. Dhulian which was just on the Bengal, Bihar border was also reported to be a great receiving centre for such commodities. Having regard to all these circumstances, the Income-tax Officer rejected the appellant's explanation that the high denomination notes formed part of its cash balances and treated the sum of Rs. 2,91,000 as the appellant's secreted profits from business and included it in its total income and assessed the appellant for the said assessment year on the income of Rs. 1,39,117. Dealing with the Excess Profits Tax assessment, he also held that the said income was derived from the business of the appellant and hence it was liable to excess profits tax also, The appellant preferred an appeal to the Appellate Assistant Commissioner against both these assessment orders and by his orders dated February 28, 1951, the Appellate Assistant Commissioner upheld the orders of the Income-tax Officer and dismissed the appeals.

-merchants and monies were also required for doing the grain purchase work on behalf of the Government. These monies were credited in the Almirah account which showed heavy cash balances from time to time. In the books of account for previous years it was the practice of the appellant to give details of the notes of high denominations giving the distinctive numbers of these notes received or paid or at least other description e.g., " So many notes " of Rs. 1,000 each. In the assessment year, however, this practice does not appear to have been followed but entries continued to be made of monies thus received from the banks, different branches, Beoparees etc., without any such details being filled therein. A statment of these cash balances viz., the balance in the Rokar and the balance in the Almirah from September 1, 1945, to January 31, 1946 was filed before the Income-tax authorities and this statement showed that apart from the balance in the Rokar the balance in the Almirah rose from Rs. 1,36,397-10-0 on September 1, 1945, to Rs. 1,97,397-10-0 on September 30, 1945, to Rs. 2,23,397-10-0 on October 13, 1945, to Rs. 2,65,397-10-0 on November 27, 1945, to Rs. 2,91,397-10-0 on December 29, 1945, and remained at Rs. 2,81,397-10-0 on January 10, 1946. The balance in the Rokar fluctuated considerably but on the relevant date January 10, 1946, it stood at Rs. 26,092-10-9.It was Rs. 24,976-13-3 on January II, 1946, and Rs. 29,284-3-9 on January 12, 1946, when the High Denomination Bank Notes (Demonetization) Ordinance, [1946, was promulgated. These entries showed that there was with the appellant on on January 12, 1946, an aggregate sum of Rs. 3,10,681-13-9 and it was highly probable that the High Denomination notes of Rs. 2,91,000 were included in this sum of Rs. 3,10,681-13-9. The books of account of the appellant were not challenged in any other manner except in regard to the interpolations relating to the number of high denomination notes of Rs. 1,000 each obviously made by the appellant in the accounts for the assessment year in question in the manner aforesaid and even in regard to these interpolations the explanation given by the appellant in regard to the same was accepted by the Tribunal. Even though the Income-tax Officer made capital out of the interpolations and subsequent insertions in the books of account and styled the evidence furnished by them as created or manipulated evidence thus discounting the story of the appellant in regard to the source of these high denomination notes, the Tribunal was definitely of opinion that there was no other reason to suspect the genuineness of the account books in which these interpolations were found. As a matter of fact the Tribunal accepted these books of account as genuine and worked up its theory on the basis of the entries which obtained in these books of account. The Tribunal had before it the statement of large amounts received by the appellant from the banks, different branches of the appellant and its Beoparees or merchants which showed that between February 6, 1945, and January 11, 1946, amounts exceeding Rs. 1,000 aggegrating to Rs. 5,04,713 had been received by the appellant. Even though large amounts may have been paid out by the appellant in this manner between the said dates, the entries of the balance in Rokar and the balance in Almirah showed that on January 12, 1946, the balance in Rokar was Rs. 26,234-3-9 and the balance in Almirah was Rs. 2,81,397-10-0 the total cash balance thus aggregating to Rs. 3,10,681-13-9. Nobody had any inkling of the promulgation of the High Denomination Bank Notes (Demonetization) Ordinance, 1946, on January 12, 1946, and if in the normal course of affairs and situated as the appellant was, the appellant kept these large cash balances in High Denomination Notes of Rs. 1,000 each, there was nothing surprising or improbable in it. If the appellant had to disburse such large sums of monies at short notices at the different branches of the appellant and also to its Beoparees apart from financing the Government for grain purchase work which it used to carry on, it would be convenient for it to handle these large sums of monies in high denomination notes of Rs. 1,000 each and the most natural thing for it to do was to keep these cash balances in as many high denomination notes as possible. The Tribunal in fact took count of this position and after giving due weight to all the circumstances arrived at the conclusion that the appellant might be expected to have possessed as part of its business cash balance at least Rs. 1,50,000 in the shape of high denomination notes on January 12, 1946, when the Ordinance above mentioned was promulgated. This conclusion of the Tribunal could only be arrived at on the basis that the entries in the books of account in regard to the balance in Rokar and the balance in Almirah were correct and represented the true state of affairs, in spite of the interpolations and -subsequent insertions which had been made to bolster up the true case.

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 ex- planation of the appellant in part as to Rs. 1,50,000 and reject the same in regard to the sum of Rs. 1,41,000-0-0. 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. The Tribunal, however, appears to have been influenced by the suspicions, conjectures and surmises which were freely indulged. in by the Income-tax Officer and the Appellate Assistant Commissioner and arrived at its own conclusion, as it were, by a rule of thumb holding without any proper materials before it that the appellant might be expected to have possessed as part of its business, cash balance at least Rs. 1,50,000 in the shape of high denomination notes on January 40 12, 1946,- a mere conjecture or surmise for which there was no basis in the materials on record before it. The Income-tax Officer had indented in support of his conclusion the surrounding circumstances, viz., that the appellant was one of the premier Arhatdars and grain merchants of Sahibgan1 with branches, doing similar business, at Nawgachia and Dhullian and all these places were very important business centres and Sahibganj, the principal place of business, had gained sufficient notoriety for smuggling foodgrains and other commodities to BenLal by country boats, and Dhulian which was just on the Bihar- Bengal border was reported to be a great receiving centre for such commodities, that the foodgrains licence of the appellant at Nawgachia was also cancelled during the accounting year for not keeping proper stock accounts and the appellant was prosecuted under the Defence of India Rules but was given the benefit of doubt and was acquitted, that the accounting year and the year preceding it as also the year succeeding it were very favourable for the foodgrain dealers but the appellant though he had large capital in hand declared losses all through from 1944-45 assessment year up to 1946-47 assessment year, the loss according to its books in the year under consideration being to the tune of about Rs. 46,000, that the appellant was in very favourable circumstances in which there was a pos- sibility of its earning a considerable amount in the year under consideration, that it also indulged in speculation (a loss of about Rs. 40,000 shown in Nawgachia branch (in Kalai account)), in which profit in a single transaction or in a chain of transactions could exceed the amounts involved in the high denomination notes, that even in the disclosed volume of business in the year under consideration in the Head Office and in branches there was possibility of its earning a considerable sum as against which showed a net loss of about Rs. 45,000 and that the appellant had all these probable source or sources from which the appellant could have earned the sum of Rs. 2,91,000 which was represented by the high denomination notes of Rs. 1,000 The Appellate Assistant Commissioner also emphasized the said aspect but based his conclusion mainly on the ground that the appellant had failed to prove that the high denomination notes had their origin in capital and not in profit and held that the Income-tax Officer was justified in treating the sum of Rs 2,91,000 as secreted profits. This was the background against which the Tribunal came to its own conclusion. Even though it recognised that it was not improbable that when very large sums, say in excess of Rs. 10,000 at a time were received, a fairly good portion thereof consisted of high denomination notes and as high denomination notes were valid tender and nobody could have foreseen that they would be demonetised suddenly in January 1946, there was nothing out of the way in persons dealing with tens of thousands of rupees and whose balances ran to lakhs, being in possession of a fair proportion of their balances in the shape of high denomination notes. While recognizing this probability of the appellant having been in possession of a fair proportion of its balances in the shape of high denomination notes, the Tribunal unconsciously though it was, fell into an error when it held that the appellant might be expected to have possessed at least Rs. 1,50,000 in the shape of high denomination notes as part of its cash balance, thus treating the remaining Rs. 1,41,000 in the high denomination notes of Rs. 1,000 each as outside the purview of these cash balances.

Unless the Tribunal had at the back its mind the various probabilities which had been referred to by the Income-tax Officer as above it could not have come to the conclusion it did that the balance of Rs 1,41,000 comprising of the remaining 141 high denomination notes of Rs. 1,000 each was not satisfactorily explained by the appellant. If the entries in the books of account were genuine and the balance in Rokar and the balance in Almirah on January 12, 1946, aggregated to Rs. 3,10,681-13-9 and if it was not improbable that a fairly good portion of the very large sums received by the appellant from time to time, say in excess of Rs. 10,000 at a time consisted of high denomination notes, there was no basis for the conclusion that the appellant had satisfactorily explained the possession of Rs. 1,50,000 in the high denomination notes of Rs. 1,000 each leaving the possession of the balance of 141 high denomination notes of Rs. 1,000 each unexplained. Either the Tribunal did not apply its mind to the situation or it, arrived at the conclusion it did merely by applying the rule of thumb in which event the finding of fact reached by it was such as could not reasonably be entertained or the fact found were such as no person acting judicially and properly instructed as to the relevant law could have found, or the Tribunal in arriving at its findings was influenced by irrelevant considerations or indulged in conjectures, surmises or suspicions in which event also its finding could not be sustained. Adverting to the various probabilities which weighed with the Income-tax Officer we may 'observe that the notoriety for smuggling foodgrains and other commodities to Bengal by country boats acquired by Sahibgunj and the notoriety achieved by Dhulian as a great receiving centre for such commodities were merely a background of suspicion and the appellant could not be tarred with the same brush as every Arhatdar and grain merchant who might have been indulging in smuggling operations, without an iota of evidenec in that behalf. The cancellation of the foodgrain licence at Nawgachia and the, prosecution of the appellant under the Defence of India Rules was also of no consequence inasmuch as the appellant was acquitted of the offence with which it had been charged and its licence also was restored. The mere possibility of the appellant earning considerable amounts in the year under consideration was a pure conjecture on the part of the Income-tax Officer and the fact that the appellant indulged in speculation (in Kalai account) could not legitimately lead to the inference that the profit in a single transaction or in a chain of transac- tions could exceed the amounts, involved in the high denomination notes,-this also was a pure conjecture or surmise on the part of the Income-tax Officer. As regards the disclosed volume of business in the year under consideration in the Head Office and in branches the Income-tax Officer indulged in speculation when he talked of the possibility of the appellant earning a considerable sum as against which it showed a net loss of about Rs. 45,000. The Income-tax Officer indicated the probable source or sources from which the appellant could have earned a large amount in the sum of Rs. 2,91,000 but the conclusion which he arrived at in regard to the appellant having earned this large amount during the year and which according to him represented the secreted profits of the appellant in its business was the result of pure conjectures and surmises on his part and had no foundation in fact and was not proved against the appellant -on the record of the proceedings. If the conclusion of the Income-tax Officer was thus either perverse or vitiated by suspicions, conjectures or surmises the finding of the Tribunal was equally perverse or vitiated if the Tribunal took count of all these probabilities and without any rhyme or reason and merely by a rule of thumb, as it were, came to the conclusion that the possession of 150 high denomination notes of Rs. 1,000 each was satisfactorily explained by the appellant but not that of the balance of 141 high denomination notes of Rs. 1,000 each.