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Case Number

Tax Case No. 43 of 1961

Judges

Jagadisan
Srinivasan, JJ.

Acts

section 66 of the Indian Income-tax Act

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Smart Summary

Judgment Summary — Jagadisan, J.

Factual and Procedural Background

The assessee is a tanner carrying on business at Ambur. In the accounting year ended 31 March 1947 (previous year for assessment year 1947-48) the Income-tax Officer found an unexplained shortage of 7,182 skins in the assessee's books. The assessee attributed the shortage to loss while he was absent owing to a plague scare; the Income-tax Officer rejected that explanation and found, in addition, that purchase values were inflated in the books. For assessment year 1947-48 the officer made additions of Rs. 1,000 (inflation of purchases) and Rs. 27,500 (value of 7,182 skins not proved short), totalling Rs. 28,500.

For the year ended 31 March 1948 (assessment year 1948-49) an addition of Rs. 23,730 was made for gross profit deficiency. Thus, additions in the two years 1947-48 and 1948-49 summed to Rs. 52,230.

Assessments for 1949-50 and 1950-51 were made on 29 March 1950 and 21 March 1951 respectively. The officer discovered that the assessee had advanced Rs. 40,000 on mortgage in the name of his brother on 29 August 1948 (within the previous year for assessment year 1949-50) and had made further advances (including advances to Abdul Shukkur Sahib & Co.) and that family members had introduced money into a firm on 10 February 1950. The officer re-opened the assessments under section 34 and, by orders dated 24 July 1956 and 28 August 1956, added Rs. 40,000 for 1949-50 and Rs. 25,000 for 1950-51 (the text also records that Rs. 27,625 had been included in the assessment of 1950-51 as income from other sources).

The assessee objected, contending that the mortgage loan and advances came out of the earlier additions of Rs. 52,230. The Income-tax Officer treated the prior additions as "intangible additions" and rejected that defence. The assessee appealed to the Appellate Assistant Commissioner, who accepted the assessee's explanation that the advances could be correlated to the earlier additions of Rs. 52,230, set off Rs. 40,000 against those prior additions and held only Rs. 12,230 remained unabsorbed for assessment in 1950-51. The Revenue appealed to the Income-tax Appellate Tribunal, which disagreed with the Appellate Assistant Commissioner, holding that the assessee had failed to disclose sources for the mortgage loan and other advances and that deletion of the earlier additions was erroneous. The present reference arises from that order of the Tribunal.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Rs. 40,000 constituted the income of the assessee from undisclosed sources assessable to tax in the assessment year 1949-50?
Whether, on the facts and in the circumstances, the Tribunal was justified in law in holding that a sum of Rs. 12,230 constituted the income of the assessee from undisclosed sources liable to be assessed in the year of assessment 1950-51?

Arguments of the Parties

Assessee's Arguments

The shortage of skins was explained as loss during the assessee's absence due to a plague scare; the assessee presented this as his account explanation.
The advances (including the Rs. 40,000 mortgage loan and other advances) were drawn from the sums already found to have been earned by the assessee in the prior years — specifically out of the additions totalling Rs. 52,230 made by the department in respect of 1947-48 and 1948-49.

Revenue's Arguments

The Income-tax Officer did not accept the assessee's plague-loss explanation and made additions for inflated purchases, unexplained shortage and gross profit deficiency, treating those additions as grounds for concluding that income had escaped assessment in the prior years.
When the officer later discovered the mortgage and advances he re-opened the assessments under section 34 and treated the prior additions as not providing a tangible source of funds (described as "intangible additions"), thereby contending that the advances represented income from undisclosed sources in 1949-50 and 1950-51.
The Tribunal upheld the revenue's position that the assessee had failed to disclose the sources for the mortgage loan and other advances and held that the appellate authority's deletion of the earlier additions was erroneous.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Lagadapati Subba Ramaiah v. Commissioner of Income-tax [1956] 30 I.T.R. 593	To illustrate that where the revenue assesses undisclosed or secret profits of an entity, it cannot consistently say subsequently that those profits did not exist or were not available for distribution — i.e., assessed undisclosed profits should be treated as real for purposes of deciding availability of funds derived from them.	The Court relied on this decision as a direct illustration of the principle that once the department has assessed a sum as income in an earlier year, it is bound by that position and cannot later deny that the assessed amount represented available funds for the assessee. The precedent was used to support the conclusion that the prior additions of Rs. 52,230 must be treated as the assessee's real income unless the department shows those sums were not available to the assessee.

Court's Reasoning and Analysis

The court's analysis proceeds from established facts in the assessment history: the department had made concrete additions totalling Rs. 52,230 for the years 1947-48 and 1948-49 (Rs. 28,500 for 1947-48 and Rs. 23,730 for 1948-49). The judge treats these additions as "real income" of the assessee for the relevant years and rejects the characterization of those additions as merely notional or fictional.

The court sets out the legal principle that once an assessing authority has added sums to an assessee's income and thereby treated those sums as earned by the assessee, the department cannot subsequently repudiate that position when the assessee points to those additions as the source of later advances or investments. The court frames this as a matter of justice and consistency: the department cannot both assess income as having been earned and then contend that the same assessed amount was not available to the assessee as funds for later transactions. If the department wishes to deny availability, the burden of proof lies on the department to show the assessed source was not available to the assessee.

The court criticises the Tribunal's reasoning that prior additions are "intangible additions" and therefore do not equate to cash available for expenditure or investment. The Tribunal had observed that additions on estimate might err and thus do not necessarily put "hard cash" in the assessee's hands. The court finds this approach mistaken and illogical, holding that an addition, even if made on estimate, is an accepted treatment of income by the department and must be treated as the assessee's income unless the department proves otherwise.

Applying these principles to the facts, the court accepts the Appellate Assistant Commissioner's finding that the advances (including the Rs. 40,000 mortgage loan advanced on 29 August 1948) could be correlated to the prior additions of Rs. 52,230 and that there was no material on record showing the assessee had actually diverted those sums to other uses such that they would be unavailable. Consequently, there was no basis in the record to sustain additions of Rs. 40,000 (for 1949-50) and Rs. 12,230 (for 1950-51) as income from undisclosed sources.

The court thus concludes that the Tribunal misdirected itself by failing to accept the prior additions as a plausible and binding source for the advances and by adopting an incorrect conceptual distinction between "intangible additions" and actual income available to the assessee.

Holding and Implications

Holding: The questions are answered in favour of the assessee. The court held that there were no materials to support additions of Rs. 40,000 (assessment year 1949-50) and Rs. 12,230 (assessment year 1950-51) as income from undisclosed sources, and that the order of the Tribunal sustaining those additions could not be sustained.

Consequences and Implications:

The assessee succeeds and is entitled to the costs which the court directed to be paid by the department; counsel's fee of Rs. 250 was awarded to the assessee.
The direct effect on the parties is the rejection of the Tribunal's conclusions on the two additions in issue and confirmation of the Appellate Assistant Commissioner's approach in correlating the advances to the prior additions of Rs. 52,230.
The opinion does not purport to lay down a broader novel precedent beyond applying established equitable and logical principles of consistency between earlier assessments and later contentions of non-availability of the same sums; no separate wide-ranging new legal doctrine is announced in the text beyond these conclusions.

Disposition recorded in the judgment: "Questions answered in favour of the assessee who will get his costs from the department. Counsel's fee Rs. 250."

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S. Kuppuswami Mudaliar v. Commissioner Of Income-Tax, Madras.

The Judgment of the Court was delivered by

Jagadisan, J.:— The questions that stand referred under section 66 of the Indian Income-tax Act are as follows:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Rs. 40,000 constituted the income of the assessee from undisclosed sources assessable to tax in the assessment year 1949-50?

Whether, on the facts and in the circumstances, the Tribunal was justified in law in holding that a sum of Rs. 12,230 constituted the income of the assessee from undisclosed sources liable to be assessed in the year of assessment 1950-51?”

2. The assessee is a tanner carrying on business at Ambur. In the year of account ended 31st March, 1947, the previous year for the assessment year 1947-48, the Income-tax Officer found in the assessee's books of account a shortage of 7,182 skins not accounted for. When called upon to explain this shortage the, assessee submitted that the skins might have been lost during his absence from Ambur for about 40 days due to the scare of plague in that area. The Income-tax Officer did not accept this explanation. He also found that there was an inflation of purchase value of skins as entered in the account books. So, for the assessment year 1947-48, the following addition was made to the returned income of the assessee:

1. Rs. 1,000— Inflation of purchase 2. Rs. 27,500— Value of 7,182 skins not proved short Rs. 28,500

3. In respect of the year ended March 31, 1948, the previous year for the assessment year 1948-49, an addition of Rs. 23,730 was made by the Income-tax Officer on the ground that the gross profit shown by the assessee was deficient: Thus, there was an addition to the assessable income of the assessee in the two assessment years 1947-48 and 1948-49 of a total sum off Rs. 52,230.

4. The assessments for the years 1949-50 and 1950-51 were made by the officer on March 29, 1950, and March 21, 1951, respectively. In the assessment of the latter year he included a sum of Rs. 27,625 as income from other sources not explained by the assessee, and which income was kept outside his books of account. He had advanced between January 7, 1950, and February 10, 1950, Rs. 35,000 to Abdul Shukkur Sahib & Co. Thereafter the Income-tax Officer received information that the assessee had lent a sum of Rs. 40,000 on a mortgage in the name of his brother, Murugesa Mudaliar, on August 29, 1948, which was within the “previous year” for the assessment year 1949-50. The officer also came to know that the assessee's wife and married daughter had advanced the sums of Rs. 15,000 and Rs. 10,000 respectively as and for their share capital in the firm of S: Kuppuswami Mudaliar and Co. on February 10, 1950. With this information in possession the officer initiated proceedings under section 34 of the Act and issued appropriate notices to the assessee for re-opening the assessment of the years 1949-50 and 1950-51. The assessee objected but the Income-tax Officer by his orders dated July 24, 1956, and August 28, 1956, found that income had escaped in the relevant years in question and, accordingly, added the sum of Rs. 40,000 in the assessment for the year 1949-50 and Rs. 25,000 for the assessment year 1950-51. The contention of the assessee before the officer was that the mortgage loan and other advances came out of the sum of Rs. 52,230 which had been found to have been earned by the assessee by the officer himself in the assessment proceedings relating to the years 1947-48 and 1948-49. But the officer was of the opinion that the assessee could not have got these amounts from the additions made, which additions he described as “intangible additions”.

5. The assessee filed appeals to the Appellate Assistant Commissioner against the three assessments relating to the years 1949-50 and 1950-51, namely, the regular assessment for 1950-51 and the two reassessments under section 34. The Appellate Assistant Commissioner found that the department was not justified in making the addition of Rs. 40,000 in the reassessment for the year 1949-50 as there was no reason to disbelieve the assessee's version that this sum came out of the sum of Rs. 52,230, the addition made by the department in the prior years. He also found that in respect of the year 1950-51 the only addition that could be made was the sum of Rs. 12,230 which remained unabsorbed out of the total of Rs. 52,230 after deducting the mortgage loan advanced and taken in the name of Murugesa Mudaliar. We are concerned in this reference only with these additions and it is not necessary to refer to the other portion of the order of the Appellate Assistant Commissioner dealing with matters which do not arise for our consideration here.

6. The department preferred appeals to the Income-tax Appellate Tribunal. The Tribunal however reached the conclusion that the assessee had failed to disclose the sources for the mortgage loan and other advances and that the order of the appellate authority deleting the addition of Rs. 52,230 in all was erroneous and unsustainable. It is this order which has given rise to the present reference.

7. The basis for the addition of Rs. 27,500 in the accounts of the assessee in the accounting year 1946-47 is quite clear from the order of the Appellate Assistant Commissioner in the appeal which came up before him out of the assessment for the year 1947-48. It is true that the assessee explained the shortage of skins by saying that they were lost and were therefore not available to him. If this explanation had been accepted, there could not have been any addition for the value of those skins. But both the Income-tax Officer and the Appellate Assistant Commissioner rejected this version of the assessee and were inclined to hold that the 7,182 pieces of skins were actually sold by the assessee to outsiders and their value not brought into the accounts. This was what the Appellate Assistant Commissioner says in his order: “In the circumstances the Income-tax Officer was fully justified in adding back the price of 7,182 sheep skins and the basis of computation of the price at Rs. 3-13-4 per skin is also quite fair and reasonable. From the way in which the appellant has evaded furnishing proper explanation and acquiesced in the shortage being disallowed would indicate that he might have sold out these skins outside the books at even higher rates.” The addition of Rs. 1,000 was made on the ground that there was inflation of purchases by the assessee. In other words, according to the department the assessee had shown as expenses more than what he actually incurred by way of cost of purchases. The addition of Rs. 23,730 for gross profit deficiency in the year 1948-49 would also clearly indicate that the assessee had suppressed the real income. The materials on record, therefore, fully establish that the assessee earned a sum of Rs. 52,230 during the two years, 1946-47 and 1947-48. If that is the true position the advance of Rs. 40,000 on August 29, 1948, within four months after the end of the accounting year 1947-48 and a portion of advances to Abdul Shukkur Sahib & Co., between January 7, 1950, and February 10, 1950, might have well come out of this sum of Rs. 52,230. It is this ground which prevailed with the Appellate Assistant Commissioner. He states in his order as follows: “In the instant case the appellant has indicated the source from which the advance could have been drawn by him. In that event, the Income-tax Officer cannot reject the explanation and hold that the amount is the appellant's income from undisclosed sources. In these circumstances, I accept the appellant's explanations that the advance could be correlated to the intangible additions made to the income in the years on which he had paid tax. The total of these additions as pointed out earlier is Rs. 52,230. The appellant's family consists of two persons, himself and his wife. Even the income according to the books in the prior years was sufficient for his household expenses. Therefore, I do not desire to reduce the intangible additions by any amount. I would set off the full amount of Rs. 40,000 and hold that the excess amount of Rs. 12,230 would still be available with the appellant for investment…. The excess of Rs. 12,230 carried forward from the prior year will, however, be adjusted and the total income for the year under appeal will be reduced by this amount.”

8. The question in issue is quite simple and yet the Tribunal misdirected itself and went wrong. It is a hard fact that for the two years 1947-48 and 1948-49 a total addition of Rs. 52,230 was made by the department in computing the assessable income. This was, therefore, treated as the real income of the assessee for the years in question. There was nothing notional or fictional about it. However convenient it might be to describe the addition as “intangible” as has been done by the department and the Tribunal, the fact is that it was found to have accrued to the assessee and was not merely supposed to have been earned by him. Once the addition is made the department is fixed to the position that the assessee earned the amount in the relevant year. There can be no relaxation from that position and we have no doubt that the department cannot deviate from or wriggle out of it without departing from ordinary standards of justice and fair play. If in such a case the assessee points to that addition as the source from which he got a particular amount which he is called upon to explain, the department is bound to accept it as exceedingly likely and probable, consistent with its previous act in treating the addition as income, unless it be that it is possible to say that the source was not available to the assessee. The onus of proving this would be on the department. Otherwise, it would amount to the department saying, “heads I win, tails you lose”.

9. The decision of the Andhra High Court in Lagadapati Subba Ramaiah v. Commissioner of Income-tax [1956] 30 I.T.R 593. is a case in point. In that case the assessee was a shareholder of a private limited company styled the Nellore Bus Transport Co. Ltd. According to the books of the company its profits for its entire period of existence, that is to say, for the years of account ending with 31st December, 1946, 31st December, 1947, 31st December, 1948, nth May, 1949, amounted in all to Rs. 34,352. The revenue declined to accept the books of the company and estimated its income at a higher sum on which tax to the tune of Rs. 62,000 was assessed and paid. The company purported to issue the dividend warrants to its shareholders aggregating to a sum of Rs. 1,16,280. The assessee stated that he got the dividends of Rs. 6,800 and Rs. 4,800 for the account years ending with 31st December, 1946, and 31st December, 1947, respectively, the dividends having been declared by the company on 2nd March, 1949. The assessee, however, claimed a refund on the basis of only one dividend warrant dated June 9, 1949, for Rs. 6,800. The department as well as the Tribunal rejected the claim of the assessee. The view taken was that after the payment of income-tax of Rs. 62,000 levied on the company there were no funds available with it out of which dividends could have been declared and paid. The question before the High Court was whether the assessee was not entitled to a refund of tax in respect of the dividends in question. In dealing with the matter, Viswanatha Sastri J. observes thus at page 599:

“In the present case, it is somewhat difficult to say that there were no profits of the company out of which a dividend could have been paid. When the revenue authority levied a tax of Rs. 62,000 on the company, it proceeded on the basis that the books of the company which showed a total income of only Rs. 34,532 for all the four years of its existence were unreliable and that the bulk of the company's profits had been kept outside its books. Now those secret profits less the income-tax paid, therefore, would be available with the company for distribution as dividends. Once the secret profits had been assessed to tax, it would have been open to the company to bring those profits into the books and distribute them, or what remained after payment of tax, as dividends…. Having assessed the company on a large sum as its undisclosed income, it cannot, at the same breath, say that these profits did not in fact exist because they did not appear from the company's books and could not, therefore, have been available for the payment of dividends. Among common men, such an attitude would be regarded as blowing hot and cold or playing fast and loose.”

10. The order of the Tribunal shows that it has missed the real point for decision. The only question that the Tribunal had to decide was whether the assessee could have derived the amount of Rs. 52,230 from the prior years which according to the department the assessee did earn. The Tribunal does not say, nor would the materials on record enable it to say, that the sum was not available to the assessee either to advance the mortgage loan in the name of Murugesa Mudaliar or for the other advances. If there had been any evidence to show that the assessee devoted that amount for other purposes it may well be that the mortgage loan and other advances were made from an unexplained or undisclosed source. But that is not so in the present case. The Tribunal's conception of “intangible additions” is somewhat queer and we confess our inability to appreciate it. The Tribunal observes in its order: “Intangible additions, as the name itself suggests, are purely matters of estimate which may err on the wrong side for the department. For want of proper evidence, additions on account of deficiency of gross profit or other defects may be made but this would not mean putting in possession of the assessee their equivalent in hard cash available for expenditure or investment. It may be said that having suffered a harsh assessment in a particular year, the assessee's case should be considered sympathetically in the subsequent year when an investment of the nature we are discussing is brought to light.”

11. Additions are no doubt made very often on estimate basis. But it can never be said, or at any rate the department cannot contend, that the amount of the addition is not the real income but something which the assessee may not have earned. It is wholly illogical for the department to contend that the addition was only for purposes of taxation and that it should never be taken as true income of the assessee. We must point out that the Tribunal is wrong in thinking that an assessee suffers a “harsh assessment” when his income is computed by making additions. Such an assessment is perfectly within the four corners of the Act and there is no reason to suppose that it is in any way inequitable or unjust. We are also unable to understand the real scope of a sympathetic treatment of the assessee in the matter of assessment to tax. The assessee is either liable to tax or not, and if he is really liable to tax he cannot get rid of it by pleading equity or by invoking the sympathy of the assessing authority. The faulty reasoning of the Tribunal was certainly not conducive to a correct conclusion in the matter.

12. In our opinion, there are no materials for the addition of Rs. 40,000 and Rs. 12,230 in respect of the two assessment years 1949-50 and 1950-51 respectively, and that the order of the Tribunal cannot be sustained.

13. The questions are answered in favour of the assessee who will get his costs from the department. Counsel's fee Rs. 250.

14. Questions answered in favour of the assessee.

S. Kuppuswami Mudaliar v. Commissioner Of Income-Tax, Madras.

Judgment Summary — Jagadisan, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

S. Kuppuswami Mudaliar v. Commissioner Of Income-Tax, Madras.

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