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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Bhargava
  • Upadhya, JJ.
Acts
  • section 66(2) of the Indian Income-tax Act:1.
  • section 66(1) of the Indian Income-tax Act
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Bhargava
  • Upadhya, JJ.
Acts
  • section 66(2) of the Indian Income-tax Act:1.
  • section 66(1) of the Indian Income-tax Act
See more information ...
Smart Summary

Structured Summary of the Opinion (as provided)

Factual and Procedural Background

The reference arises under section 66(2) of the Indian Income-tax Act pursuant to an order of this Court dated 5 February 1953. Two questions were referred for opinion. The assessee is the Kanpur Steel Company Limited, which also acted as sole agent for the Aira Sugar Factory and earned a commission of 1% on the factory's sugar sales.

The assessment year in question was 1947–48, the relevant accounting period being 8 November 1945 to 27 October 1946. No commission was received by the assessee during that accounting period. On 17 March 1947 the company received Rs. 15,432 as commission relating to sales for the period relevant to assessment year 1947–48; the company treated that amount as income of the subsequent assessment year (1948–49), but the Income-tax Officer included it in 1947–48.

Separately, on 12 January 1946 (when the High Denomination Bank Notes (Demonetisation) Ordinance, 1946 came into force), the assessee encashed 32 notes of Rs. 1,000 each. The Income-tax Officer required explanation; the assessee said the notes formed part of its cash balance (shown as Rs. 34,313-1-9). The Officer rejected the explanation and treated Rs. 32,000 as suppressed income. On appeal the Appellate Assistant Commissioner affirmed the addition. The Income-tax Appellate Tribunal reduced the addition, finding that seven of the notes (Rs. 7,000) might have been part of the cash balance and thus upheld the addition to the extent of Rs. 25,000. The assessee applied under section 66(1) for a reference to this Court but that application was rejected; the Tribunal then sent a statement of case and the present questions were referred under section 66(2).

Legal Issues Presented

  1. “The assessee company having followed the mercantile method of accounting whether the commission of Rs. 15,432 having been received in the subsequent accounting year, relevant for the assessment year 1948–49, could be brought to tax as accrued income in the assessment year 1947–48 ?”
  2. “Whether there was any material to hold that the sum of Rs. 25,000 being the value of the high denomination notes exchanged in pursuance to the demonetisation ordinance was an income of the assessee company from some undisclosed source ?”

Arguments of the Parties

Assessee's Arguments

  • The commission of Rs. 15,432 related to sales in the accounting period for assessment year 1947–48 but was received later (17 March 1947); the company treated it as income of the subsequent year (1948–49).
  • Regarding the 32 high-denomination notes (Rs. 32,000) cashed on 12 January 1946, the assessee explained those notes formed part of its cash balance which, on that date, stood at approximately Rs. 34,313-1-9. The company asserted it had no contemporaneous detailed record of when each high-denomination note was received because, before demonetisation, such notes were freely used and no special recordkeeping was expected.
  • More generally, the assessee maintained that the entries in annexure 'C' (daily bills) did not conclusively show cash receipts on any given day and therefore could not disprove that high-denomination notes formed part of the cash balance.
  • During oral proceedings, counsel for the assessee (Dr. N.P. Asthana) stated he would not press the first question relating to the commission.

Revenue's (Income-tax Department's) Position

  • The Income-tax Officer held that the commission of Rs. 15,432 had accrued in the previous year corresponding to assessment year 1947–48 and therefore should be taxed in that year.
  • The Officer concluded that the Rs. 32,000 represented suppressed income from undisclosed sources because the assessee could not satisfactorily explain possession of the 32 high-denomination notes when they were exchanged after the demonetisation ordinance.
  • The Income-tax Appellate Tribunal accepted in part that seven notes (Rs. 7,000) might be part of the cash balance but otherwise upheld additions treating the remainder as undisclosed income, relying on statements in annexure 'C' and a daily cash-balance statement showing a steadily increasing cash balance.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Mehta Parikh & Co. v. Commissioner Of Income Tax, Bombay, [1956] 30 I.T.R. 181 Supports the proposition that, where an assessee gives a reasonable explanation for possession of demonetised high-denomination notes and the revenue has not discharged the burden of proof, such notes should not be treated as undisclosed income. The Court noted its view was in line with this Supreme Court decision and relied on it to support the holding that there was no material to treat the Rs. 25,000 as income from undisclosed sources.
Chunilal Ticamchand Coal Co. Ltd. v. Commissioner of Income-tax, Bihar and Orissa, [1955] 27 I.T.R. 602 (Patna High Court) Approved by the Supreme Court in Mehta Parikh; supports similar principle regarding burden of proof and treatment of demonetised notes. The Court observed that the Supreme Court in Mehta Parikh approved the Patna High Court decision; the present Court aligned its conclusion with these earlier authorities in rejecting the finding that the notes represented undisclosed income.

Court's Reasoning and Analysis

The Court's analysis focuses on the second question (the demonetised notes). The reasoning proceeded as follows:

  1. The Court emphasized that the burden of proof lay on the Department to establish that the Rs. 32,000 (32 notes of Rs. 1,000) represented suppressed income from undisclosed sources; it was not the assessee's burden to prove how it received the notes.
  2. Prior to the High Denomination Bank Notes (Demonetisation) Ordinance, 1946 (which came into force on 12 January 1946), high-denomination notes circulated freely and holders had no reason to retain specific records of when each such note was received; hence the assessee's inability to show dated receipt of each note was not fatal.
  3. The assessee presented an explanation: on 12 January 1946 the company's cash balance was about Rs. 34,000 and odd; consequently it was possible that the 32 notes formed part of that cash balance. The Court found this explanation "fairly satisfactory" and noted the Tribunal did not find it false.
  4. The Court criticized the Tribunal's reliance on the annexure 'C' statement of sales (6 January–12 January 1946) as improperly substituting bills for the cash book. Annexure 'C' recorded bills and bill numbers, not cash receipts; therefore it was not a reliable basis to infer absence of any transaction producing notes of Rs. 1,000 or more. The Tribunal failed to examine the cash book which would show daily cash receipts.
  5. The Court noted additional reasonable possibilities that the Tribunal overlooked: multiple bills payable by a single payer could have been settled in a single cash payment exceeding Rs. 1,000; and payers might hand over a Rs. 1,000 note and receive change even for transactions of a few hundred rupees. These possibilities meant the annexure 'C' entries did not negate the assessee's explanation.
  6. The Tribunal's reference to a steadily increasing cash balance was not a sufficient basis to reject the assessee's explanation; in fact, a steadily increasing balance could rationally explain holding larger amounts in high-denomination notes for convenience and easier storage/counting.
  7. The Court concluded the Tribunal's contrary conclusion rested on surmise and on reasoning not supported by material in the record. The Tribunal's acceptance that seven notes (Rs. 7,000) might be part of the balance, but rejection of the remainder, was similarly unsupported and speculative.
  8. Because the Department failed to produce material displacing the assessee's reasonable explanation, the Court held there was no material to justify treating the Rs. 25,000 as undisclosed income.
  9. As to the first question (the commission), the Court did not decide it on the merits because counsel for the assessee expressly declined to press that point; the Court therefore considered it unnecessary to express an opinion and permitted the Tribunal to proceed on the basis that the point was decided against the assessee.

Holding and Implications

Holding: The Court answered the reference on the second question in favour of the assessee: there was no material for holding that the sum of Rs. 25,000 (being the value of high-denomination notes exchanged pursuant to the High Denomination Bank Notes (Demonetisation) Ordinance, 1946) represented income of the assessee company from some undisclosed source.

On the first question (commission of Rs. 15,432), the Court declined to express an opinion because the assessee's counsel did not press the point; the Tribunal is entitled to proceed on the basis that this point is decided against the assessee.

Direct consequences and immediate implications:

  • The record was to be returned with the Court's opinion on the second question as expressed.
  • The assessee company was awarded costs against the Department in the amount of Rs. 250.
  • The Court expressly aligned its view with earlier authorities (Mehta Parikh & Co. and Chunilal Ticamchand Coal Co. Ltd.), and did not purport to lay down a novel principle beyond applying those precedents to the facts; no broader new precedent-making implications are discussed in the opinion.

Reference answered accordingly.

Show full summary ...

    Kanpur Steel Co. Ltd. v. Commissioner Of Income-Tax, Uttar Pradesh

    1. The following two questions have been referred for our opinion in compliance with the order of this Court dated 5th February, 1953, under section 66(2) of the Indian Income-tax Act:

    “1. The assessee company having followed the mercantile method of accounting whether the commission of Rs. 15,432 having been received in the subsequent accounting year, relevant for the assessment year 1948–49, could be brought to tax as accrued income in the assessment year 1947–48 ?

    2. Whether there was any material to hold that the sum of Rs. 25,000 being the value of the high denomination notes exchanged in pursuance to the demonetisation ordinance was an income of the assessee company from some undisclosed source ?”

    2. The assessee is a private limited company known as the Kanpur Steel Company Limited which, in addition, was carrying on the work of sole agency of the Aira Sugar Factory and was receiving a commission of one per cent. on the sales of sugar of that factory.

    3. The assessment year in question is 1947–48 and the relevant accounting period is from 8th November, 1945, to 27th October, 1946. No commission was received by the assessee company during the relevant accounting year.

    4. Subsequently, however, a sum of Rs. 15,432 was received by the company, as commission accrued upon the sales for the period relevant to the assessment year in question, on 17th March, 1947. This amount was shown by the assessee company as income relating to the subsequent assessment year 1948–49. The Income-tax Officer, however, held that this income had accrued to the assessee during the previous year corresponding to assessment year 1947–48 and, consequently, added it to the income for that year and included it in the assessment.

    5. A second point, that cropped up before the Income-tax Officer, related to the encashment of 32 high denomination currency notes of Rs. 1,000 each by the assessee company on 12th January, 1946, when the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, came into force. The Income-tax Officer called upon the assessee to explain how those 32 currency notes of Rs. 1,000 each came into possession of the assessee. The assessee claimed that the currency notes represented part of his cash balance which, on 12th January, 1946, stood at the figure of Rs. 34,313-1-9. The Income-tax Officer rejected this explanation and, consequently, held that the amount of Rs. 32,000 represented by those currency notes of Rs. 1,000 each to be suppressed income of the assessee from some undisclosed source. The assessee appealed unsuccessfully before the Appellate Assistant Commissioner of Income-tax. When the appeal came up before the Income-tax Appellate Tribunal, the assessee again failed on both the points but the Tribunal held that there was a possibility that seven high denomination currency notes of the value of Rs. 7,000 could represent part of the cash balance and, consequently, reduced the amount, which had been added back to the income of the assessee, to that extent. The Tribunal thus upheld the adding back of the sum of Rs. 25,000. The assessee then applied to the Tribunal under section 66(1) of the Indian Income-tax Act to make a reference to this Court. That application was rejected. When the assessee moved this Court, this reference was called for and, consequently, the Tribunal have sent a statement of the case after framing the two questions mentioned above.

    6. With regard to the first question, it has become unnecessary for us to enter into any discussion, as Dr. N.P Asthana, appearing for the assessee company, made a statement that he would not press this question, particularly, in view of the facts that emerged during the discussion after the scrutiny of the statement of the case submitted by the Income-tax Appellate Tribunal and in view of the fact that the sum of Rs. 15,432 had not been included in the income of the assessee for the subsequent assessment year 1948–49 and had only been included during the assessment year 1947–48. Consequently, we consider it unnecessary to express any opinion on this question but, in view of the concession of the learned counsel, the Tribunal will be entitled to proceed on the basis that this point is decided against the assessee.

    7. So far as the second question is concerned, it appears that the Income-tax Appellate Tribunal lost sight of the fact that the burden of proof lay upon the Department to show that the sum of Rs. 32,000, represented by the 32 high denomination currency notes of Rs. 1,000 each which were cashed by the assessee, represented suppressed income of the assessee from undisclosed sources. The burden was not on the assessee to prove how it had received those high denomination currency notes. Until the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, came into force, the high denomination currency notes could be used as currency 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. The use of high denomination currency notes depended upon convenience of the individual possessing them and upon the nature of the transaction that he may have to go through. It was only when the High Denomination Bank Notes (Demonetisation) Ordinance of 1946 came into force on the 12th of January, 1946, that it became necessary in this case for the assessee company to explain its possession of those currency notes. The assessee company had naturally not kept any statement indicating when it received each one of those currency notes, because, at the time when it received them, it had no idea that it would be required to give such an explanation and, therefore, it was not in a position to prove how and when it came into possession of those currency notes. The assessee company, however, gave an explanation which, it appears to us, was fairly satisfactory and which the Tribunal has not found to be false. On 12th January, 1946, the assessee company had a cash balance of Rs. 34,000 and odd and, consequently, there is the possibility that the assessee company had 32 currency notes of Rs. 1,000 each in its possession as part of that balance. This explanation was not accepted by the Income-tax Appellate Tribunal but we have not been able to find any satisfactory reasons for this view taken by the Tribunal. The Tribunal has taken into account a statement of sales relating to a few days just preceding the date on which the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, came into force. The statement of sales for those date's, which begin on 6th January, 1946, and end on 12th January, 1946, has been appended as annexure ‘C’ to the statement of the case. It appears to us that such a statement was hardly relevant to the question which the Tribunal had to examine. In order to find out whether there was any one transaction on any of those dates when the assessee company received a sum of Rs. 1,000 or more from one individual, the account book, that should have been examined, was the cash book in which, on the receipt side, there would have been entries of the various items of cash received by the assessee company in the course of each day. The statement contained in annexure ‘C’ refers to bills of each day but does not mention that they represented the cash amounts received on each of those days. In fact, the mention in the annexure of numbers of bills would indicate that the entries do not relate to cash sales. Cash might have been received by the assessee company on each day in respect of cash sales of that day as well as in payment of previous credit sales. In the circumstances, we are constrained to hold that the Income-tax authorities, in relying on the entries relating to bills of each day, committed an error and no inference should have been drawn from them. Further it appears to us that even the inferences drawn are not justified. It has been mentioned by the Tribunal that, according to the statement contained in annexure ‘C’ there was no single transaction on any of those dates in which sale proceeds exceeded Rs. 1,000. The highest amount of any one single transaction was Rs. 399-9-3. The Tribunal do not appear to have examined the entries to find out whether several of the sales of the same date might not be in favour of the same individual, iso that one single payment may have been made for several bills and might have exceeded the sum of Rs. 1,000. Further, the Tribunal have not at all touched upon the possibility that, in case of payments for transactions amounting to several hundreds, such as Rs. 380 (which is a figure that occurs very frequently on these dates) the payer might have chosen to hand over currency notes of Rs. 1,000 asking for the return of the balance in notes of lower denomination. These entries could not, therefore, in any way, indicate that these 32 currency notes of Rs. 1,000 each could not have come into the hands of the assessee in the course of its business transactions and could not have formed part of its cash balance. The Tribunal has also referred to another statement of the cash balance of the assessee on each day beginning with 20th December, 1945, and ending on 12th January, 1946. The Tribunal noted from this statement that the cash balance of the assessee company was steadily increasing. If the cash balance of the assessee company was steadily increasing it would not be at all unreasonable to accept the explanation given by the assessee company that, for the sake of convenience, the cash balance was being kept in high denomination currency notes. High denomination currency notes could be stored more easily and, at the time of accounting, they would have facilitated counting. Since the balance was increasing steadily, the assessee might not have felt it necessary to keep the balance in currency notes of low denomination in excess of Rs. 2,000 or so. It would thus appear that the Tribunal rejected the explanation of the assessee company on surmises and their opinion, which is not based on any material at all but on reasoning which is not necessarily correct, can hardly be acceptable. In this case, therefore, it cannot be said that the explanation given by the assessee company was either unreasonable or wrong. When the assessee company had given an explanation which was reasonable, the Income-tax authorities could have been entitled to treat the sum of Rs. 32,000 as income from undisclosed sources only if there was some other material from which such inference could have been drawn. No other material has been mentioned by the Tribunal in their appellate judgment or in the statement of the case. It further appears that the Tribunal, in holding that seven high denomination currency notes of the value of Rs. 7,000 only could form part of the cash balance and the remaining currency notes could not do so, were acting on their surmises for which there was no basis and which had no support from any material on the record. In these circumstances, it must be held that there was no material for holding that the sum of Rs. 25,000 being the value of high denomination currency notes exchanged in pursuance of the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, represented income of the assessee company from some undisclosed sources. This view of ours is in line with the decision of the Supreme Court in Mehta Parikh & Co. v. Commissioner Of Income Tax, Bombay, Bombay [1956] 30 I.T.R 181., in which case their Lordships of the Supreme Court also approved of a decision of the Patna High Court in Chunilal Ticamchand Coal Co. Ltd. v. Commissioner of Income-tax, Bihar and Orissa [1955] 27 I.T.R 602..

    8. Let the record be returned with our opinion on the second question as expressed above. The assessee company will be entitled to its costs from the Department which we assess at Rs. 250.

    9. Reference answered accordingly.

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    Comments

    Kanpur Steel Co. Ltd. v. Commissioner Of Income-Tax, Uttar Pradesh
    (Feb 18, 1957)