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Judges
  • V. Bhargava
  • Upadhya, JJ.
Acts
  • section 66(2) of the Income-tax Act
  • S. 66(1) of the Income-tax Act
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Cites
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Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • V. Bhargava
  • Upadhya, JJ.
Acts
  • section 66(2) of the Income-tax Act
  • S. 66(1) of the Income-tax Act
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Smart Summary

Structured Summary of the Opinion — V. Bhargava, J.

Factual and Procedural Background

The Income-tax Appellate Tribunal referred a question to this Court under section 66(2) of the Income Tax Act asking whether there was material to support the Tribunal's conclusion that Rs. 68,958 of cash deposits in the assessee's personal accounts represented concealed income of the previous year for assessment year 1945-1946.

The assessee, sole proprietor Sri M.L. Garg, maintained two accounts: a personal account and a loan account. The loan account showed withdrawals of Rs. 47,222-8-0 in March immediately before the previous year closed; the Tribunal held those March withdrawals could not have funded earlier deposits, but accepted that earlier withdrawals could have been used for deposits and deducted those withdrawals from deposits when calculating unexplained deposits.

On that basis the Tribunal found deposits of Rs. 1,80,212 required explanation. The assessee submitted explanations identifying various sources including opening bank balance, realisations from prior sales, profits of prior year, and agricultural income from a horticultural farm. The Income-tax authorities accepted some explanations and rejected others. Ultimately they held that the assessee had failed to adequately explain deposits amounting to Rs. 68,958 and treated that sum as concealed income, adding it to taxable income. The assessee challenged that conclusion in the reference.

Legal Issues Presented

  1. “Whether there was any material on which the Tribunal could come to the conclusion that the amount of Rs. 68,958/- out of the cash deposits appearing in the assessee's personal accounts represented his concealed income of the previous year of the assessment year 1945-1946?”

Arguments of the Parties

Appellant's Arguments

  • The learned counsel for the assessee contended that the Tribunal's rejection of the various explanations given by the assessee for the sources of the deposits was incorrect and without material, and that the Tribunal's order rejecting those explanations should be scrutinized and corrected by this Court.

The opinion does not set out any detailed or separate arguments advanced by the Revenue in this reference.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Mithoo Lal Tek Chand v. Commissioner of Income-tax, U.P., 1953-23 ITR 494 : AIR 1953 All 701 (A) Explains the law on drawing inferences where an assessee's books show receipt of money: (a) if the assessee explains and the explanation is accepted, matter ends; (b) if explanation is rejected the Tribunal must, on available materials, decide whether the money represents revenue receipt taxable in that year; (c) burden is initially on the assessee to show true nature of receipt; (d) an unsatisfactory explanation may be a circumstance but does not inevitably lead to treating the receipt as taxable income; each case is a question of fact to be decided on available materials. The Court applied this principle to hold that: (i) it must accept the Appellate Tribunal's factual findings about the rejection of explanations (the correctness of those findings was not before the Court); (ii) rejection of explanation by itself does not automatically establish that the deposit represents taxable revenue, but can be a relevant circumstance; and (iii) the Tribunal had erred by treating the whole burden as on the assessee and by failing to consider whether other material supported the inference of revenue income.

Court's Reasoning and Analysis

The Court proceeded in these steps, strictly following the materials and findings presented to it:

  1. Scope of reference: The Tribunal's question was whether there was material to support the conclusion that Rs. 68,958 of deposits represented concealed income of the relevant previous year.
  2. Acceptance of Tribunal's factual findings: The Court noted that the correctness of the Tribunal's factual findings on whether the assessee's explanations were correct was itself a question of fact and that the assessee had not sought, under section 66(1) before the Tribunal or section 66(2) before this Court, a reference of the legality of those findings. Therefore the Court treated the Tribunal's factual findings as binding for the purposes of the present reference.
  3. Legal framework on inferences: The Court relied on the Mithoo Lal Tek Chand decision to restate that, where receipts appear in account, the assessee must explain their source; if explanation is rejected the revenue authorities must consider available materials to determine whether the receipts are revenue of that year; an unsatisfactory explanation is a relevant circumstance but does not automatically compel a finding of taxable income — each case turns on its materials.
  4. Error in Tribunal's approach: The Court observed that the Tribunal committed a serious error by placing the entire burden of proof on the assessee in formulating the issue. The Tribunal had framed the question as whether the assessee had proved that the deposits were accumulated capital from earlier years used as capital investment, rather than first seeking to identify materials suggesting the receipts were revenue income and then considering whether explanations left those materials unanswered.
  5. Failure to consider additional material: The Tribunal rejected the explanations and then proceeded to treat that rejection as inevitably leading to a finding of taxable income, without assessing whether other materials existed that made that inference reasonable. Thus the Tribunal did not apply its mind to whether there was material, aside from the rejected explanations, to justify treating the deposits as undisclosed income.
  6. Positive factual findings supporting concealment: Notwithstanding the Tribunal's analytical errors, the Court examined the assessment and appellate records and found clear findings by the income-tax authorities that certain items of income/profit had been suppressed or mis-stated: additions had been made of Rs. 26,397 (sales of seeds), Rs. 403 (sales of plants), and the disallowance of a declared loss of Rs. 12,782 in the vegetable contract account.
  7. Logical linkage between suppressed items and deposits: The Court reasoned that it was reasonable to infer that at least part of the Rs. 68,958 deposited represented amounts the proprietor retained by manipulation or suppression of these items in the accounts; those particular items must have remained available to the proprietor and used to make part of the deposits.
  8. Division of the deposit sum: The Court divided the total Rs. 68,958 into (a) amounts that corresponded to items already added back/taxed (the three specific sums), and (b) other amounts for which the income-tax authorities could not trace suppression in the accounts but where the circumstances (unsatisfactory bookkeeping, rejection of explanations, and proven suppression in parts) justified inferring concealed revenue income for the year.
  9. Avoidance of double taxation: The Court held that amounts already added back (and thus already taxed) could not be treated again as concealed income for the same assessment; consequently, only the portion of Rs. 68,958 that had not already been added back could be now assessed as concealed income.
  10. Conclusion from materials: Considering the admitted/proved suppressions together with the unsatisfactory accounts and the rejected explanations, the Court found a reasonable inference could be drawn that the whole Rs. 68,958 represented concealed income, subject to the qualification that previously added-back amounts must be excluded from further assessment to prevent double taxation.

Holding and Implications

Holding:

The Court answered the reference that the sum of Rs. 68,958/- does represent concealed income of the assessee of the previous year for the assessment year 1945-1946, but because parts of that sum (Rs. 26,397/-, Rs. 403/- and Rs. 12,782/-) had already been added back and taxed, only Rs. 29,376/- (i.e., Rs. 68,958/- less the amounts already taxed) can be further added to determine the assessee's total income on the basis of the deposits appearing in his books.

Immediate consequences for the parties

  • The assessment may treat Rs. 29,376 as the amount chargeable as concealed income on the basis of the deposits (the remainder having been already dealt with in prior additions).
  • The Court directed that, in the circumstances of the case, the parties should bear their own costs.

Broader implications

The opinion reiterates and applies the established principle (as stated in Mithoo Lal Tek Chand) that rejection of an assessee's explanation is a relevant circumstance but does not automatically convert a receipt into taxable revenue; the revenue authorities must examine whether other materials support the inference. In this specific case, however, proven suppressions and unsatisfactory accounts supported a reasonable inference of concealed income for the year, subject to avoiding double taxation on items already added back.

Reference answered. (Order also records that the parties shall bear their own costs.)

Show full summary ...

    L.R. Brothers v. Commr. Of Income Tax

    V. Bhargava, J.:— The following question has been referred by the Income-tax Appellate Tribunal for opinion to this Court in compliance with the orders passed by this Court under section 66(2) of the Income Tax Act:

    “Whether there was any material on which the Tribunal could come to the conclusion that the amount of Rs. 68,958/- out of the cash deposits appearing in the assessee's personal accounts represented his concealed income of the previous year of the assessment year 1945-1946?”

    2. It appears from the statement of the case submitted by the Tribunal that in the accounts submitted by the assessee there were two accounts in the name of the sole proprietor Sri M.L Garg, One was the personal account of the proprietor and the other was a loan account. These two accounts showed various defects as well as some withdrawals during the previous year in question. In the loan account there were withdrawals to the extent of Rs. 47,222/8/-, which were made in the month of March just before the previous year closed. It was held by the Tribunal that the sums received by the proprietor by these withdrawals in the month of March could not have been available to him for making the deposits which were made earlier. The Tribunal, however, accepted the view that all other withdrawals which had been made earlier by the proprietor could have been availed of by him in order to make the various deposits. Consequently, for the purpose of calculating the amount of deposit which the proprietor had to explain, those withdrawals were deducted out of the deposits.

    3. On this basis it was found that the assessee was required to account for deposits amounting to Rs. 1,80,212/-. The assessee on being called upon to submit his explanation presented a statement showing the sources from which he had drawn the money in order to make these deposits. There were various sources amongst which were bank balance available on the first day of the opening of the previous year, realisations made in respect of sales effected during the preceding year and profits for the preceding year.

    4. Another source disclosed was agricultural income earned by the assessee by carrying on an horticultural farm during a number of years preceding the previous year in question. The explanation given by the assessee was scrutinized by the Income-tax authorities. The explanation of some of the sources was accepted whereas for others it was rejected.

    5. Ultimately it was held that the assessee had failed to give any adequate explanation for the deposits amounting to Rs. 68,958/-. This amount was then held to be concealed income of the previous year in question and was therefore added to the taxable income. In this reference, the assessee has challenged the correctness of this view taken by the Income-tax Appellate Tribunal.

    6. Learned counsel for the assessee, while arguing this reference before us, wanted to urge that the order of the Income-tax Appellate Tribunal rejecting the various explanations given by the assessee for the sources from which he had drawn the money in order to make those deposits was incorrect and was without material, so that portion of the order of the Appellate Tribunal should be scrutinized by us and corrected.

    7. It is to be noticed that the question whether the explanation given by the assessee was or was not correct was a question of fact. Neither in the application under S. 66(1) of the Income-tax Act before the Appellate Tribunal nor in the application under section 66(2) of the Income-tax Act before this Court did the assessee seek any reference to this Court of the question whether the findings given by the Appellate Tribunal holding that the explanation was not correct were without material and vitiated in law.

    8. That question, therefore, is not before us in this reference. For the purpose of this reference, we have to accept the findings of fact given by the Appellate Tribunal on this point. Consequently, this reference has to be decided on the basis that, with regard to the deposits amounting to Rs. 68,958/- by the proprietor in the accounts of the assessee, either the assessee has failed to give an explanation or give explanations which were not accepted as correct.

    9. The whole of this sum of Rs. 68,958/- is shown as receipts during the previous year in question. The question arose whether in these circumstances a reasonable inference could be drawn that this amount represented the concealed income of the previous year in question. On this point our attention was drawn to a decision of a Bench of this Court in Mithoo Lal Tek Chand v. Commissioner of Income-tax, U.P, 1953-23 ITR 494 : (AIR 1953 All 701 (A)), where the law on the question of drawing inferences under such circumstances was explained after a discussion of the cases decided by various High Courts. The view expressed was as follows:

    “An examination of these cases would, therefore, go to show that, if from the books of account of the assessee it appears that during the relevant account period he had received certain sums of money, it is for him to explain from where he got the same, and if his explanation is accepted there is an end of the matter. The question then might arise, which would be in most cases a question of law whether the assessee's claim that the receipt—its true source being known—is not taxable income is justified or not.

    10. Where, however, his explanation is rejected, the Tribunal has to record a finding on such materials as may be available, whether the money represents revenue receipt taxable as income of the relevant account period. The burden, in the first instance, must be on the assessee to show the true nature of the receipt and why he claims that it is not taxable income. When the assessee furnishes an explanation if that explanation is unsatisfactory, that may in itself be a circumstance which the income-tax Officer may be entitled to take into consideration but it need not necessarily, in every case, lead to the conclusion that the receipt is a revenue receipt taxable as income received in a particular year.

    11. The question must always remain a question of fact which has to be decided on the materials available. In each case the revenue authorities are entitled to take into consideration the fact that the explanation given by the assessee is either unreasonable or is false and then to consider whether that circumstance alone or the other materials available along with that circumstance would entitle them to hold that the amount so deposited represented the undisclosed income of the assessee in the year in question.”

    12. In the instant case, so far as the sums of money deposited in the name of the proprietor in respect of which explanation has been accepted by the Income-tax Authorities is concerned that ends the matter. With regard to the remaining amount, it appears from the facts found that the exact sources of the receipts by the assessee could not be ascertained. The assessee had given his explanation for the sources from which he had drawn this money in order to make the deposits but that explanation was rejected.

    13. When an explanation is found unsatisfactory that in itself could be a circumstance which the Income-tax Officer was entitled to take into consideration but it did not necessarily lead to the conclusion that the receipt was a revenue receipt taxable as income received during the previous year in question. As held in the case cited above, the revenue authorities were entitled to take into consideration the fact that the explanation was not acceptable and then to consider whether that circumstance alone or the other materials available along with that circumstance would entitle them to hold that the amount so deposited represented the undisclosed income of the assessee for the year in question.

    14. In deciding this question, it appears that the Appellate Tribunal committed a serious mistake by placing the entire burden of proof on the assessee when formulating the question which came up for decision before it. The Tribunal said that the simple point for determination as regards the cash credits before them was whether the appellant had been able to prove that the cash deposits represented his accumulated income from the year 1930 to 1944 from his agricultural farm and from his business of seeds etc., and was as alleged by him brought in the year of account as capital investment for increasing the volume of business as and when necessity arose.

    15. This was not the real question that arose in the appeal. It was for the taxing authorities to first discover the materials on the basis of which it could be held that the receipts were revenue income taxable in the relevant year. The assessee no doubt had the burden of giving an explanation but as held above the mere fact that the explanation was not found to be correct does not necessarily in every case lead to the inference that it was revenue income liable to be taxed.

    16. In some case, the fact that the explanation given was either unreasonable or false could be treated as a circumstance which might alone justify an inference that the income was revenue income taxable as income of that very year. The Tribunal did not pay any attention at all to this aspect of the case. What the Tribunal did was to reject the explanation given by the assessee and thereupon, without examining the reasonableness of the inference, it laid down as an inevitable consequence that the receipts were taxable income of the previous year.

    17. The Tribunal did not apply its mind at all to the question whether there was any material in addition to the fact that the explanation had been rejected and whether, if there was such material, in the particular circumstances of the case the inference drawn by the Tribunal was or was not justified. The consequence is that the order of the Appellate Tribunal has not been of much assistance to us in answering the question referred for our opinion.

    18. Having gone through the order of the Appellate Tribunal as well as the assessment order and the order of the Appellate Assistant Commissioner we have found that in this case there was no suggestion on the part of the income-tax authorities that during the previous year in question the assessee was carrying on any other business besides those shown by him in his books of accounts.

    19. The only other source of income disclosed by the assessee was agricultural income derived from the horticultural farm worked by him. If this amount of Rs. 68,958/- is held to be concealed income of the previous year in question, it can, in these circumstances be taxed only as income derived from the business in respect of which the accounts were submitted by the assessee. The Appellate Assistant Commissioner has dealt with this question of various businesses carried on by the assessee.

    20. The order of the Appellate Assistant Commissioner was noticed by the Appellate Tribunal and it appears that the explanation accepted by the Appellate Assistant Commissioner with respect to the speculative business and celery business was cited with some disapproval by the Appellate Tribunal. Even, therefore, the Appellate Tribunal did not differ from the Appellate Assistant Commissioner.

    21. The Tribunal relied on the fact that even the appellant had not been able to meet the point raised by the Income Tax Officer relating to the appellant's having a contract for packing and about the appellant's doing business in the supply of seeds in the previous year in question. Thereafter, the Appellate Tribunal went on to hold that the manner in which the appellant kept the accounts of his business left much room for leakage of profits and it could be safely presumed that the accounts of the appellant did not reflect his full income and profits from these sources.

    22. This view expressed by the Appellate Tribunal would indicate that, according to it, this concealed income of Rs. 68,958/- was derived from the business in supply of seeds and the contract for packing which the assessee had been carrying on during the previous year in question and the income was concealed by improper maintenance of accounts. Our opinion has to be given on the basis that this sum of Rs. 68,958/- has been taxed as concealed income derived from those very businesses in respect of which accounts were submitted.

    23. Examining this aspect, we have discovered that the findings of fact given by the Income-tax Authorities go to show that some instances of concealment of the profits were proved. A sum of Rs. 26,397/- had to be added back for sales of seeds and a sum of Rs. 403/- for sales of plants. In addition the assessee had shown a loss of Rs. 12,782/- in vegetable contract account and the finding given was that no such loss was incurred.

    24. It can very reasonably be inferred that a part of this sum of Rs. 68,958/- which was deposited by the proprietor must consist of the amounts which he was able to retain in his hands by such manipulation, of accounts and suppression of; these items of income. These three items of Rs. 26,397, Rs. 403/- and Rs. 12,782/- which were either suppressed from the turnover or which were wrongly shown as loss in the account must have remained in the hands of the-proprietor and they must have been utilised by him, for the purpose of making at least a part of the deposits in question.

    25. When there are clear findings indicating that profits were suppressed or losses were wrongly shown, in the accounts, in our opinion, the income-tax authorities were justified in inferring that this sum of Rs. 68,958/- represented suppressed income which, had been earned in the previous year in question. This sum can be divided into two parts. One part; consists of those items of concealed income which, have already been added back such as the sum of Rs. 26,397/-, added for sales of seeds, the sum of Rs. 403/-, added for sales of plants and the sum of, Rs. 12,782/- added for wrongly showing loss in vegetable contract account.

    26. This sum cannot be held to include within it the sum of Rs. 7,724/- which was the suppressed income from the packing business because credit for that amount has already been given to the assessee by the Appellate Assistant Commissioner by deducting that amount from the profits in order to avoid double taxation. The other part of the sum, of Rs. 68,958/- consists of those amounts in respect of which the income-tax authorities could not discover from the books of accounts how the suppression of this income has taken place and could not-consequently add back those amounts when calculating the taxable income.

    27. There is, however, the circumstance that the account maintained by the assessee were unsatisfactory; that he had been unable to give a satisfactory explanation of the sources from which he derived this amount in order to make the deposits and that at least in respect of a part of this amount of Rs. 68,958/- there was clear material to show that it did represent the suppressed income of the previous year in question.

    28. In these circumstances a reasonable inference can be drawn that even the other part of this sum of Rs. 68,958/- in respect of which the actual source could not be discovered by the income-tax authorities was concealed revenue income of the previous year in question. It appears that in these circumstances, though the whole amount of Rs. 68,958/- has to be held to be concealed income of the previous year in question, the amounts, which have already been added back as concealed income or extra profits or in respect of losses wrongly shown, cannot be taxed as concealed income of the previous year in question because they have already been taxed and added back and double taxation of the same income is not permissible.

    29. What can be taxed on the basis of the deposits made by the proprietor are only those items which have not been added back already when calculating the taxable income and those are the only sums which can be taxed as concealed income of the previous year when making the assessment for the assessment year 1945-1946.

    30. Our answer, therefore, is that the sum of Rs. 68,958/- represents concealed income of the assessee of the previous year for the assessment year 1945-1946 but, out of this sum, the sums of Rs. 26,397/-, Rs. 403/- and Rs. 12,782/- have already been taxed and, therefore, instead of Rs. 68,958/-, only a sum of Rs. 29,376/- can be added to determine the assessee's total income on the basis of the deposits appearing in his books. In the circumstances of this case, the parties should bear their own costs.

    M.K.S

    31. Reference answered.

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    Comments

    L.R. Brothers v. Commr. Of Income Tax
    (Feb 4, 1957)