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Case Number

Case Referred No. 11 of 1956

Attorney(S)

For the Appellant: C. Kodanad Rao, M. Abdul Karim, T. Narayanachari, Advocates.

Judges

P. Chandra Reddy, C.J
Jaganmohan Reddy, J.

Acts

SECTION 34 A INCOME TAX ACT

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Smart Summary

Structured Summary of the Legal Opinion — Chandra Reddy, C.J.

Factual and Procedural Background

This opinion arises on a reference directed by the High Court to the Income-tax Appellate Tribunal, Madras Bench, asking two specific questions concerning assessment years 1940–1941 and 1942–1943.

The assessee is a firm operating tanneries (including at Ellore) with multiple purchasing centres for raw hides. Purchases at Calcutta were made through an agent, Velak Syed Mohd. Ali, until December 1941 and thereafter through M.K. Md. Makdoom, a former employee of Velak Syed Mohd. Ali.

Originally the partnership comprised six persons; after 1-4-1940 eight additional persons joined so that there were fourteen partners at the relevant time. The firm's books included a personal account for the Calcutta agents.

On 31-3-1940, Rs. 1,15,000 was transferred to the capital account of the then four partners through the personal account of Velak Syed Mohd. Ali. In the following year those entries were reversed and the sum redistributed among all fourteen partners, indicating contribution by all partners. In the next year similar entries were made in favour of all partners and three outsiders (brothers of some partners), totalling Rs. 1,26,000.

During assessment proceedings for 1942–1943 (accounting year 1941–1942), the Income-tax Officer noticed both sets of entries and, suspecting the credits, called upon the assessee to prove their genuineness. The assessee explained these credits were additional capital contributions originating from income from agricultural saltpans etc., initially deposited with partner Syed Mohammed and remitted to Calcutta agents (in 1940–41 as one lump sum, and in the accounting year in question in three instalments: Rs. 20,000, Rs. 75,000 and Rs. 31,000).

The Income-tax Officer rejected the explanation as unconvincing and added Rs. 1,15,000 (for 1940–41) and Rs. 1,26,000 (for 1942–43) as concealed income. The Appellate Assistant Commissioner concurred and confirmed the assessments. The Income-tax Appellate Tribunal dismissed the appeals for both years. The Tribunal discussed the 1940–41 appeal at length but did not provide separate reasons for the 1942–43 disposal, prompting this Court to require the Tribunal to state a case on two specific questions.

Legal Issues Presented

Whether the order of the Tribunal based upon the facts and reasons given in their order, relating to the assessment year 1940–1941 is legal.
Whether the facts relating to the assessment year 1942–1943 are identical to those of assessment year 1940–1941.

Arguments of the Parties

Appellant's (Assessee's) Arguments

The assessee maintained that the entries represented genuine additional capital brought in by partners from identified sources (e.g., income from agricultural saltpans) and remitted via a partner to Calcutta agents in lump sum or instalments.
The assessee relied on joint affidavits (purportedly from all partners) and did not produce separate evidence for the 1942–1943 assessment, asserting the facts and circumstances for 1942–43 were identical to 1940–41.
Counsel argued that credits standing in the names of third parties should have been accepted because the Department had not proved that those amounts did not belong to the third parties but belonged to the assessee; this contention was founded on the decision in Radhakrishna Behari Lal v. Commissioner of Income-tax.

Respondent's (Revenue's) Position

The Income-tax Officer found the explanation unconvincing and assessed the questioned amounts as concealed income for both relevant years.
The Appellate Assistant Commissioner reviewed the circumstances and agreed with the Income-tax Officer, confirming the assessments.
Implicit in the Revenue's position (as reflected in the orders) is that the assessee had the burden to prove the genuineness and source of the credit entries and failed to do so.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Radhakrishna Behari Lal v. Commr. of Income-tax, 1954-26 ITR 344 (AIR 1955 Pat 249)	Held by the Patna High Court that while cash credits in the assessee's name impose on him the burden to show source and nature, sums standing in the names of third parties required the Department to show they belonged to the assessee.	The Court considered this decision but expressly disagreed with its principle that the Department must prove third-party credits belonged to the assessee. The present Court rejected the Patna High Court's distinction between credits in the assessee's name and those in third-party names.
Raghava Reddi v. Commr. of Income-tax, 1956-29 ITR 942 (AIR 1957 Andh Pra 926)	Held that the burden lies upon the assessee to explain a credit entry (including those in third-party names), though the onus might shift to the Income-tax Officer under certain circumstances; warned against creating a rule that allows assessee to avoid burden by making entries in third-party names.	The Court expressed respectful accord with this statement of law and relied on it to support the conclusion that the burden to explain credits is on the assessee irrespective of the name in which they appear.
Govindarajulu Mudaliar v. Commr. of Income-tax, 1958-34 ITR 807 (AIR 1959 SC 248)	Supreme Court authority stating that where an assessee fails to prove satisfactorily the source and nature of cash received, the Income-tax Officer is entitled to draw the inference that the receipts are assessable in nature.	The Court relied on this Supreme Court observation to reinforce its view that absent satisfactory explanation the Department may infer that credited amounts represent suppressed income, applicable whether entries are in partners' names or third parties'.

Court's Reasoning and Analysis

The Court proceeded in two connected strands of analysis: (1) whether the Tribunal erred in disposing of the 1942–1943 appeal without separate reasons, and (2) the legal question whether credits in third-party names require the Department to prove they belonged to the assessee.

On the procedural/substantive sufficiency of the Tribunal's disposal for 1942–43:

The Court examined the record and the statement of the case submitted by the Tribunal and found that the proceedings for both years proceeded simultaneously and the lines of enquiry were similar.
The assessee had filed joint affidavits (purporting to be for both proceedings) from all partners and had stated that no additional evidence was available for the 1942–43 assessment beyond what was produced in the re-assessment for 1940–41.
Counsel had claimed before the Appellate Assistant Commissioner and before the Tribunal that the facts and circumstances for 1942–43 were identical to those for 1940–41 and did not advance separate arguments for 1942–43. Given that the Tribunal had discussed the matter at length in relation to 1940–41, the Tribunal's not repeating detailed reasons for 1942–43 was found by the Court to be unobjectionable: the Tribunal had not failed to apply its mind to the facts of the relevant period.

On the legal question of burden of proof for credits in third-party names:

The Court considered the Patna High Court decision in Radhakrishna Behari Lal which placed the onus on the Department to show that amounts standing in third-party names belonged to the assessee. The present Court, with respect, declined to adopt that proposition, observing practical difficulties in obliging the Department to prove positively that such credits were not genuine and belonged to the assessee.
The Court approved the view expressed in Raghava Reddi that the burden to explain credit entries lies on the assessee, regardless of whether the entry is in the assessee's name or a third party's name, subject to the possibility that the onus may shift to the Income-tax Officer in certain circumstances.
To reinforce this position, the Court cited the Supreme Court in Govindarajulu Mudaliar to show that where the assessee fails satisfactorily to prove the source and nature of cash receipts, the Income-tax Officer is entitled to draw the inference that the receipts are assessable income.
Consistent with these authorities and the facts (assessee's lack of separate evidence for 1942–43 and unconvincing explanation), the Court concluded that credits in third-party names are not distinguishable in principle from those in partners' names and, in the absence of satisfactory explanation, the Department may infer that such amounts belong to the assessee and represent suppressed income.

Holding and Implications

Holding: The reference questions were answered by the Court in favour of the Revenue. The Court held that the Income-tax Appellate Tribunal's disposal of the 1942–1943 appeal was not vitiated by failure to apply its mind, and that credits in the names of third parties are not distinguishable from those in the names of partners for the purpose of the assessee's burden to explain. Consequently, the Tribunal's dismissal of the appeal was upheld.

Implications:

Direct effect on the parties: The assessee's appeal (relating to assessment year 1942–1943) was dismissed and the assessments confirmed; the assessee was ordered to pay the costs of the reference and an advocate's fee fixed at Rs. 250.
On the specific legal point discussed in the opinion, the Court held that the burden to explain credit entries rests on the assessee irrespective of whether the entries are in the names of partners or third parties; in the absence of a satisfactory explanation the Department may draw the inference that the amounts represent concealed income.
The opinion answers the two questions referred by the Court: (i) it found no legal defect in the Tribunal's order on the 1940–41 assessment as based on facts and reasons given, and (ii) it found that the Tribunal was entitled to treat the 1942–43 matter as governed by the same considerations, given the identical factual and evidentiary position presented by the assessee.

Costs: The assessee will pay the costs of the reference. Advocate's fee fixed at Rs. 250.

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M.M.A.K Mohideen Thambay And Co., Ellore v. Commissioner Of Income-Tax, Madras .

Chandra Reddy, C.J:— This Court has directed the Income-tax Appellate Tribunal, Madras Bench to state a case on the following questions:

1. “Whether the order of the Tribunal based upon the facts and reasons given in their order, relating to the assessment year 1940–1941 is legal; and

2. Whether the facts relating to the assessment year 1942–1943 are identical to those of assessment year 1940–1941.

2. The reference relates to the assessment year 1942–1943, the accounting year being 1941–1942. The assessee is a firm having tanneries at Ellore and at other places. It had several purchasing centres of raw hides. In addition, purchases were made on a large scale at Calcutta through one Velak Syed Mohd. Ali, a brother of some of the partners, up to December 1941 and thereafter through one M.K Md. Makdoom, a former employee of Velak Syed Md. Ali aforesaid. The partnership consisted originally of six persons. Subsequent to 1-4-1940, eight other persons joined the partnership, with the result that at the relevant time there were fourteen partners. This partnership had a personal account for the Calcutta agents in its books for the respective periods of their agency. On 31-3-1940, a sum of Rs. 1,15,000/- was transferred to the capital account of the then four partners through the personal account of Velak Syed Mohammed Ali aforesaid. At the close of next year, the entries mentioned above were reversed and the sum was re-distributed amongst all the fourteen aforesaid partners, thereby showing that this was contributed towards the capital by all the partners. Similar entries were made at the end of the next year in favour of all the partners and three outsiders, who are no other than the brothers of some of the partners, totalling Rs. 1,26,000/-.

3. In the course of assessment proceedings for 1942–1943, the Income-tax Officer noticed both sets of entries and, since he suspected the genuineness of these credits, he called upon the assessee to prove that they were genuine ones. The explanation offered by the assessee was that the credit in both the years, i.e, for the years 1941–1942 and 1942–1943 represented the amounts brought in by the partners by way of additional capital. They explained that they were in receipt of income from their agricultural saltpans etc., that they first deposited these monies with one of the partners, Syed Mohammed and that when the purchasing agents at Calcutta required monies for making purchases, they sent them in the year 1940–1941 in one lump sum and in the accounting year in question in three instalments, Rs. 20,000/-, Rs. 75,000/- and Rs. 31,000/-.

4. Having regard to the nature of this explanation and other factors set out in his order, the Income-tax Officer felt that it was unconvincing and rejected it. In the result, he added Rs. 1,15,000/- for the accounting year 1940–1941, and Rs. 1,26,000/- for the charging period, i.e, for 1942–1943 as the concealed income. On appeal, the appellate Assistant Commissioner, on a review of all the circumstances, concurred in the opinion of the Income-tax Officer, with the result that the assessments made by the Income-tax Officer were confirmed. The assessee carried further appeals to the Income-tax Appellate Tribunal, who dismissed both of them.

5. The matter was discussed at some length in the appeal relating to the assessment year, 1940–1941, i.e, the one in which proceedings under Section 34 of the Income-tax Act were started, Since the considerations that applied to that Appeal also governed the appeal arising out of the assessment proceedings for the year in question, the Tribunal did not give elaborate reasons in support of its conclusion. It is because the order did not contain the grounds for the dismissal of the appeal in regard to the year 1942–1943, this Court required the Tribunal to state the case on the questions referred to above.

6. The main point for consideration is whether the disposal of the appeal by the Tribunal in regard to the assessment year 1942–1943 is vitiated by its failure to apply its mind to the facts and circumstances of the case bearing on the relevant period as contended for by the appellant. We feel, after going through the whole record and the accounts contained in the statement of the case submitted by the Tribunal, that, having regard to the attendant circumstances, the course adopted by the Appellate Tribunal could not be regarded in any way as defective. It should be borne in mind that the Income-tax Officer noticed the entries both in relation to the year 1940–1941 and 1942–1943 only while he was scrutinising the accounts in the course of the assessment proceedings for 1942–1943.

7. The proceedings in both the matters went on simultaneously; the lines of enquiry being similar. It also appears from the statement of the case that the assessee filed affidavits purporting them to be joint for both the proceedings from all the partners. The further explanation of the second set of items was the same as to the individual sources, initial payment of the contribution into the hands of the partner, Syed Mohammed and the manner of transmission of the cash through messengers as that bearing on the year 1940–1941. The assessee when called upon by the Income-tax Officer to joroduce evidence in regard to the assessment proceedings for the year 1942–1943, stated categorically that he had no evidence other than what the company produced in the re-assessment proceedings for 1940–1941.

8. It also transpires that before the Appellate Assistant Commissioner the counsel claimed that the facts and circumstances of the year 1942–1943 were identical to those of the assessment year 1940–1941. Again, even before the Tribunal, the assessee does not seem to have advanced separate arguments in regard to the relevant period. This course was adopted obviously for the reason that in regard to both the years, the common question was as to the capacity of the partners to make contributions towards the capital as also the story as to sending money, to Calcutta through their messengers. The conclusion seems to be inescapable that the assessee did not attempt to put forward any separate arguments in the appeal arising out of the assessment proceedings for the year 1942–1943. Since the point that presented itself in both the appeals was the same and since the arguments addressed in both were also the same, the Tribunal having dealt with the matter at some length in the other appeal, did not give separate reasons in support of its conclusion that the explanation regarding the entries was rightly rejected by the Income-tax Officer and the Appellate Assistant Commissioner.

9. Another argument presented by the counsel for the assessee is that whatever might be the position with regard to the entries standing in the names of the partners, so far as the credits in favour of third parties are concerned, the Tribunal should have allowed the appeal because the Department had not proved that the amounts standing in their names did not belong to them but belonged to the assessee. This argument is founded on the decision in Radhakrishna Behari Lal v. Commr. of Income-tax, 1954-26 ITR 344 : ((S) AIR 1955 Pat 249). It was ruled by Ramaswami and Ahmad, JJ., of Patna High Court that while with regard to cash credits in the assessee's name in his books the burden of proof was on him to show positively the source and nature of the amount shown in the items and in the absence of a satisfactory explanation it was open to the Revenue to draw the inference that the receipt was of an income nature, the position was different in regard to sums standing in the names of third parties.

10. In the opinion of the learned Judges, in such a case, the onus was upon the Department to show by some material the amounts standing in the names of third parties did not belong to them, but to the assessee. With great respect to the learned Judges, we are not able to subscribe to the proposition enunciated by them. It is very difficult for the Department to establish positively that these credits were not genuine ones and that the amounts represented thereby belonged to the assessee and the entries were fictitious ones. In our view, the burden both with regard to the credits in the names of the partners as also in the names of third parties is on the assessee to explain the credit entries irrespective of the whose names they stand.

11. A Bench of our High Court in Raghava Reddi v. Commr. of Income-tax, 1956-29 ITR 942 : (AIR 1957 Andh Pra 926), dissented from the view expressed by the Patna High Court cited above viz., 1954-26 ITR 344 : ((S) AIR 1955 Pat 249). Subba Rao, C.J, (as he then was) who delivered the opinion of the Bench, remarked thus at page 948 (of JTR): (at p. 929 of AIR):

“We do not think that the question of burden of proof can be made to depend exclusively upon the fact of a credit entry in the name of a third party. In either case, the burden lies upon the assessee to explain the credit entry, though the onus might shift to the Income-tax Officer under certain circumstances. Otherwise, a clever assessee can always throw the burden of proof on the Income-tax authorities by making a credit entry in the name of a third party either real or pseudonymous.”

We express our respectful accord with the statement of law contained in the above passage. We think that our opinion is also reinforced by the observations in the judgment of the Supreme Court in Govindarajulu Mudaliar v. Commr. of Income-tax, 1958-34 ITR 807 : (AIR 1959 SC 248), which is to the following effect:”

“There is ample authority for the position 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.”

This indicates that the learned Judge did not make any distinction between the entries in the names of partners and those in the names of third parties. Therefore, our conclusion is that the credits in the names of third parties are not distinguishable from those in the names of the partners and even in regard thereto, in the absence of a satisfactory explanation, it is open to the Department to infer that these moneys also belong to the assessee and represent the suppressed income. It follows that the appeal was rightly dismissed by the Income-tax Appellate Tribunal. The reference is answered accordingly. The assessee will pay the costs of this reference. Advocate's fee is fixed at Rs. 250/-.

AD/D.H.Z

12. Answer accordingly.

M.M.A.K Mohideen Thambay And Co., Ellore v. Commissioner Of Income-Tax, Madras .

Structured Summary of the Legal Opinion — Chandra Reddy, C.J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Assessee's) Arguments

Respondent's (Revenue's) Position

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

M.M.A.K Mohideen Thambay And Co., Ellore v. Commissioner Of Income-Tax, Madras .

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