The Judgment of the Court was delivered by

Srinivasan, J.:— The year of assessment in question is 1947-48, the account year relevant thereto ending with the 31st of March, 1947. During the years preceding, the assessee has been carrying on a particular canteen business. The business came to an end in April, 1946, during the “previous year”. The outstandings relating to this canteen business were being realised during the year of account and in November, 1946, the assessee started a new business in the name and style of “British and Eastern Engineering Company”. Till the end of the accounting year, that is, March 31, 1947, this company was mainly concerned in setting itself up. No actual business was done, expenses only being incurred in connection with entering into negotiations for import of machinery and tools from abroad. Up to the end of the accounting year, there was a loss of Rs. 9,532 which has been accepted by the department.

2. In the account books of this business, however, certain credit entries purporting to be borrowals in cash appeared under date January 6, 1947. A total of Rs. 29,000 was so recorded, the creditors being the father of the assessee and his cousins. There were no documents to establish the genuineness of those borrowals and it is common ground that these creditors had migrated to Pakistan at the time of the partition of India. These amounts were subsequently transferred to the capital account of the assessee and his brother on March 31, 1948. The department called upon the assessee to explain these borrowals. The assessee's explanation was that these borrowals were actually on dates prior to January 6, 1947, and that the amounts were introduced into the books as and when occasion arose for the purpose of the new business which involved remittances of large amounts in respect of orders placed abroad. It was also claimed by the assessee that these amounts were displayed in the wealth statement submitted by him as part of the liabilities. Though it was stated that certain promissory notes had been executed in favour of these creditors, the documents themselves were not produced. The Income-tax Officer, however, found that the liabilities indicated in the wealth statement of the assessee were in respect of persons different from those from whom the borrowals were claimed to have been effected. It was explained by the assessee that the names of the fathers had been given in the wealth statement while the names of the actual lenders appeared in the books of account. The assessee was unable to establish the identity between the two sets of persons; the exact dates of borrowals also failed of proof. For these reasons and also for the reason that there were ample realisations from the discontinued canteen business which rendered it unnecessary for the assessee to resort to borrowals, the Income-tax Officer came to hold the view that these amounts must represent profits from undisclosed sources. He, accordingly, brought this amount into assessment.

3. In the appeal before the Appellate Assistant Commissioner, it was urged that the only business that was being conducted was that of the British and Eastern Engineering Company which had not actually transacted any sales and it was wholly improbable that this business would have yielded an income of Rs. 59,000. Some letters were produced before the appellate authority purporting to be reminders from the creditors in support of the assessee's version of borrowals. The Appellate Assistant Commissioner found that even at that stage there was no reconciliation possible between the names of the lenders as they appeared in the accounts, the amounts, etc., with like details appearing in the wealth statement. Though more than five years had passed since the date of the borrowals, no renewed document or correspondence supporting the borrowals were made available. For these reasons, the appeal was dismissed, the addition being confirmed.

4. The further appeal to the Tribunal also failed. Before the Tribunal it was pointed out that during the two preceding assessment years, the assessee's accounts had been rejected and large additions had been made to his returned income. It was contended on behalf of the assessee that if the assessee was held to have realised large incomes in the preceding years of assessment, it must necessarily follow that he had ample funds which he could introduce into his accounts. The Tribunal no doubt realised the force of this contention, but took the view that even if the assessee had such sums in his hands, they were off-set by the liabilities of Rs. 63,000 and odd which were shown in the wealth statement. In the view of the Tribunal, out of the large additions made to the income in the prior assessment years, nothing could have been left in the hands of the assessee which would have rendered probable the conclusion that this sum of Rs. 59,000, though entered in the names of the relations of the assessee, really represented part of the income realised in the preceding years.

5. The application of the assessee for a reference having been dismissed, this court directed the Tribunal to state a case and refer the following question for the decision of this court:

“Whether, on the facts and in the circumstances of the case, there is material to sustain the finding of the Tribunal that the amount of Rs. 59,000 was income of the assessee from undisclosed source?”

6. We have set out most of the relevant data. We must now refer to the incidents of assessment of the preceding years, as part of the arguments both before the Tribunal and before us relate to them. In the assessment year 1944-45, the assessee returned an income of Rs. 2,643. He was assessed on an income of Rs. 5,000. In the year 1945-46, the return was for Rs. 5,323. The Income-tax Officer assessed him on an income of Rs. 79,541 which was later reduced by the Tribunal on appeal to Rs. 50,000. In the assessment year 1946-47, immediately preceding the present assessment, the assessee returned a loss of Rs. 78,395. The Income-tax Officer rejected the accounts of the assessee and assessed him on an income of Rs. 1,52,679 which on appeal the Appellate Assistant Commissioner reduced to Rs. 1,22,679. The further appeal to the Tribunal failed. In effect, therefore, for the assessment year 1946-47, as against a loss of Rs. 78,395 returned by the assessee, there was in fact an assessment on an income of Rs. 1,22,679; that is to say, the assessee was found to have concealed an income of roughly Rs. 2 lakhs in that year. As a result of these orders of assessment during the three preceding years, the assessee was found to have an amount of income concealed from assessment to the extent of nearly Rs. 2 ½ lakhs. These facts have a considerable bearing upon the assessability of the sum of Rs. 59,000 in the assessment year now in question.

7. The assessee follows the mercantile method. In so far as his return displaying the loss of Rs. 9,532 is concerned, the department has not rejected it. The credit of Rs. 59,000 in the year of account appearing in the names of the relations has been disbelieved. The rejection of the explanation with regard to these credits leads us to the conclusion that these sums do not represent any genuine borrowals but the assessee's own moneys. It is not the case of the department that the assessee had any business other than the canteen business which stopped functioning in April, 1946, and the machine tool business which he commenced in November, 1946. While the rejection of the assessee's explanation with regard to the entries alleged to represent borrowals might justifiably lead to the inference that it is the assessee's own money, it does not, according to the arguments of the learned Advocate-General appearing for the assessee, follow that it is income, and much less that it is income of the account year relevant to the assessment year. Nowhere in the orders of the departmental officers and the Tribunal do we find any suggestion that the account's of the businesses were unreliable except in so far as these entries are concerned; that is to say, barring these entries, the department does not deny that these businesses yielded no income, and was prepared to accept the claim that the result of the business during the year of account was a loss. The learned Advocate-General refers to Mehta Parikh & Co. v. Commissioner Of Income Tax, Bombay [1956] 30 I.T.R 181 in support of his contention that against that background, the view taken by the Tribunal as well as the department was based merely on surmise. In that case, the assessee encashed 61 high denomination notes of Rs. 1,000 each in the year of account. During the course of the proceedings before the departmental officers, affidavits were produced to show that the assessee received 43 such notes during the relevant period. The Appellate Assistant Commissioner did not accept this explanation. The Tribunal however accepted the explanation as to 31 of the notes and rejected it as to Rs. 30,000. The High Court holding that the finding was one of fact and was not arbitrary or unreasonable, the matter came by way of appeal to the Supreme Court. Their Lordships of the Supreme Court found that as the cash book of the appellant was accepted, the entries therein not being challenged and the persons who gave the affidavit not being cross-examined, it was not open to the revenue to challenge the correctness of the cash book entries or the statements made in the affidavits and that in so far as the Tribunal split up the claim and held that Rs. 30,000 represented concealed profits, the conclusion was rested on pure surmise and that the explanation of the assessee could not in reason have been accepted only in part and discarded in part. Reliance is placed upon this decision; it is urged that the account books of the assessee have not really been rejected for the reason that the loss claimed by him on the basis of these account books has been accepted; that the assessee, though he has furnished in the early stages what was probably an untrue explanation of the entries relating to this sum of Rs. 59,000 has in fact established that he must be deemed to have been in possession of the large amount of profits flowing from the preceding account years and that this fact has not been given due regard to by the Appellate Tribunal. Even apart from that, it is contended by the learned Advocate-General that there is no proof that it is the income of the relevant account year, nor any express finding to that effect given by the Tribunal.

8. It is elementary that any inference as to the nature of a receipt must depend upon the facts and circumstances of each case. If there is no satisfactory explanation forthcoming regarding the source and nature of such cash credits as in the present case, the Income-tax Officer is undoubtedly entitled to infer that the receipt is of an assessable nature. Their Lordships of the Supreme Court observed in V. Govindarajuly Mudaliar v. Commissioner Of Income Tax, Hyderabad :

“There is ample authority for the position that where an assessee fails to prove satisfactorily the source and nature of a 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.”

9. Quite obviously, that they are receipts relevant to that accounting year would also be a reasonable inference for the Income-tax Officer to make. Even though the department and the Tribunal have not stated in express terms that this receipt represents the undisclosed income of the account year relevant to the assessment year, it is clear from the circumstance that these amounts were brought into account only on 6th January, 1947, they have really held that it relates to the account year in question.

10. It is unnecessary to examine the further decisions cited. As inference of this kind would be fully justified, and as pointed out, the inference must take into account all the circumstances relevant thereto.

11. The most important circumstance in this case to which due weight has not been attached by the Tribunal is that in the preceding years the assessee had been found to have concealed profits. It was urged before the Tribunal that these additions made to the income of the assessee in the preceding years and upon which income he has been assessed, cannot but lead to the conclusion that he had that amount at his disposal. The Tribunal conceded that it should be so, but thought that even on that basis the liabilities set out in the wealth statement must have accounted for that extra income. We are not satisfied that this is supported at all by any material. We have pointed out that in the immediately preceding year, the assessee was held to have really concealed an income of nearly rupees two lakhs. The Tribunal has not attempted to find out what amount would be available in the hands of the assessee after the payment of the tax thereon. Nor has it dealt likewise with the assessment for the year 1945-46 in which an addition of nearly Rs. 45,000 was made to the returned income of the assessee. Even allowing for the liabilities of Rs. 68,000 and odd, which were shown in the wealth statement of the assessee for the assessment year 1946-47, it seems to us that the assessee could very well have had in his hands this sum of Rs. 59,000 which he brought into his accounts in the names of his father and other close relations. Beyond dismissing the argument without making any investigation into the matter, the Tribunal has not taken into consideration these very important circumstances in reaching the conclusion it did.

12. Mr. Ranganathan, for the department, vaguely argued that even if the assessee had been assessed on a certain amount as the undisclosed income of the previous year, he could not bring that amount into account and that he could, if he did so, be assessed again in the subsequent year; that is to say, even if this sum of Rs. 59,000 really represented a part of the undisclosed income of the previous year which had been assessed in that year, learned counsel for the department would contend that when it was brought into the accounts in the subsequent year, it was liable to be taxed. We confess our inability to appreciate this argument. The department cannot possibly be allowed to take contradictory stands. If a certain sum was dealt with as the income of one year of assessment and brought to tax as the undisclosed income of that year, if the assessee in the next year of account brought that amount into the accounts of the business, it would still continue to retain the character of the income of the previous year and would not, become income of the subsequent year. We must reject this argument of the learned counsel for the department.

13. In reaching the conclusion it did, the Tribunal has ignored a very material circumstance which has a bearing upon the assessability of the amount in question. It is not a case where the Tribunal has examined the matter and reached a conclusion of fact. Had it done so, this court in the exercise of its jurisdiction under section 66 of the Act would have been powerless to interfere, unless such a conclusion could be declared to be perverse. But, in our view, that is not the case here. This is clearly a case where the Tribunal has not applied its mind to very material and relevant circumstances. It should, therefore, follow that the finding of the Tribunal in this regard cannot be sustained.

14. The question referred to us is accordingly answered in the negative and in favour of the assessee. The assessee will be entitled to his costs. Counsel's fee Rs. 250.

15. Question answered in the negative.