Ramanujam, J.:— At the instance of the assessee, the following question has been referred to this court by the Income-tax Appellate Tribunal:
“Whether, on the facts and in the circumstances of the case, the addition of Rs. 2,30,000 to the income returned by the assessee is justified?”
2. The assessee is a public limited company engaged in the manufacture and sale of yarn and cloth. For the previous year covering a period of 18 months from July 1, 1952, to December 31, 1953, the assessee filed a return on December 29, 1954, showing a loss of Rs. 17,048 after setting off of a loss of Rs. 2,53,816 of the preceding year. Later, on April 11, 1957, a revised return was filed showing a loss of Rs. 28,29,632. The Income-tax Officer considered the trading results of the assessee separately for the two periods, one ending June 30, 1953, and the other from July 1, 1953, to December 31, 1953. He found that the consumption of stores as per the assessee's books for Rs. 4,17,884 was somewhat excessive, that some of the items of purchases of stores could not be verified, that some of the purchases have not been entered in the stock book, and that the marginal notes entered in the store receipt books showed that many items of stores had been diverted to the personal use of the managing agents. He also found that the assessee had obtained loan facilities (both open and key loans) from the Central Bank Ltd., the Canara Bank Ltd. and the Punjab National Bank Ltd. by pledging cotton stocks. The cotton pledged with these banks and the stocks as per the assessee's books as on June 30, 1953, were as under:
As per the assessee's books
As per bank statement
Lbs.
Lbs.
CO. 4
2,65,286
3,68,000
Cambodia
3,50,627
4,21,150
Karunganni
2,71,852
2,29,750
Western
3,06,172
1,68,400
3. There was considerable discrepancy between the stocks of cotton as per the assessee's books of account and the stocks declared to the banks. The gross profits as per the assessee's trading account came to Rs. 1,20,000 while the turnover during this period was Rs. 1,09,96,889. The Income-tax Officer considered the gross profit returned as extremely low. He found that some items of purchases of stores were not genuine, that some of the stores purchased had been converted to other non-business purposes, that the purchase of cotton from one Ramaswami Naidu was inflated, that there was inflation also in the wages paid to the workers and that the stock register could not at all be relied upon. He sought an explanation from the assessee as to the discrepancy in the stocks disclosed to the banks and those disclosed in the books of account. The assessee explained that the figures submitted to the banks were inflated in order to get higher loan facilities and that the stock position as disclosed by its books is to be taken as correct. The Income-tax Officer was not, however, satisfied with the said explanation. He took it as indicating the extent to which the assessee would stoop to obtain an advantage. Ultimately, the Income-tax Officer rejected the book results and added a sum of Rs. 5,00,000 towards the deficiency in gross profit. This addition raised the gross profit to 11 per cent. The assessee appealed to the Appellate Assistant Commissioner, who agreed with the Income-tax Officer that the circumstances of the case warranted the rejection of the book results and the estimate of the income. He, however, felt that the best method of estimate would be, as in the past, to make an addition for specific defects instead of making an estimate of gross profit. He then proceeded to consider the specific defects pointed out by the Income-tax Officer. Taking the stores account, he found that the stores purchased to the extent of Rs. 24,727 had not been proved and that a part of the stores purchased had been diverted to non-business purposes. He, therefore, held that an addition of Rs. 50,000 was justified under this head. Regarding the cotton purchases, he agreed with the Income-tax Officer that the purchases made from one Ramaswami Naidu had been inflated. He, therefore, estimated such inflation at Rs. 75,000. With regard to the difference in the cotton stocks, he considered it impossible that the banks would have accepted the assessee's declaration of stocks without proper verification and, therefore, held that the stock declarations made to the banks should be taken to be true and correct and that the value of cotton stocks suppressed would come to Rs. 2,29,132. Thus, the Appellate Assistant Commissioner reduced the additions from Rs. 5,00,000 to Rs. 3,55,000 made up as under:
Rs.
Inflation under stores
50,000
„ „ cotton
75,000
Difference in stock
2,30,000
4. The assessee appealed further to the Appellate Tribunal. The Tribunal reduced the addition under inflation of cotton to Rs. 50,000, but upheld the other additions.
5. The assessee has sought a reference to this court only as against the addition of Rs. 2,30,000 being the value of cotton stocks suppressed.
6. It is the contention of the assessee that there is no justification for making the said addition, that it is quite usual for business houses to exaggerate their stocks for purpose of getting a higher loan from the banks, and that as such the stock declarations made to the banks cannot be taken to represent the true stock position. In support of this contention the learned counsel for the assessee relied on a decision of this court in T.C No. 122 of 1968*. But we are of the view that the above decision cannot be taken to be an authority for the proposition that stock declarations made by the assessee to the banks should not be taken into consideration at all. In that case, there was a discrepancy between the stocks disclosed to the banks and the stocks shown in the books of account. The difference between the two was taken by the revenue to be undisclosed stocks of the assessee. The Tribunal had held that the stock position shown by the assessee's books of account should be taken to be true in view of the fact that the returns submitted by the assessee to the Textile Commissioner during the relevant year were found to be quite in accord with the entries made in the books of account. It was also found that the discrepancy in the stocks was due to the fact that the statement of stocks given to the banks was only on an estimated basis and not based on actuals. This court agreed with the view of the Tribunal taking note of the fact that the declarations made to the banks were on an estimated basis and not on actuals and that the contemporaneous documents such as the returns sent to the Textile Commissioner showed that the book entries were correct.
7. The learned counsel then points out that though there is discrepancy in the stocks of various types of cotton, the overall position alone should be considered. It is pointed out that so far as CO. 4 and Cambodia are concerned, the statement of stocks given to the banks showed larger stock but as regards Karunganni and Westerns are concerned, the stocks disclosed in the books were in excess of the stocks disclosed to the banks. This, according to the learned counsel, showed that the assessee was anxious to show larger quantities of superior quality of cotton to get more overdraft facilities from banks. It was also pointed out that the total quantity of stocks declared to the banks was less than the total stocks on hand, that the banks do not normally make physical verification of the stocks, and, therefore, it was possible for the assessee to get more overdraft facilities by declaring larger stocks of cotton than the actual stocks on hand. The question is how far the assessee's explanation is acceptable.
8. Admittedly an excess stock of CO. 4 and Cambodia cotton had been declared to the banks and such an excess comes to 1,73,237 lbs. valued at Rs. 2,29,132. The assessee's submission is that the stocks of all the varieties had to be taken together on an overall basis, and if so taken, there was an excess of 6,631 lbs. as per its books, that it is possible that it committed a mistake in declaring the quantities in respect of each of the varieties of cotton and that CO. 4 commodity of cotton was a controlled commodity and as such stocks of the magnitude shown in the declarations made to the banks would be out of question, He also pointed out that the department itself accepted the overall stock position as revealed by the books of account as on December 31, 1958, and that the same thing would have been done even during the year in question. The Tribunal was not inclined to accept the assessee's stand that the overall stock position should alone be considered. According to the Tribunal the assessee is in a fiduciary capacity in respect of the stock declared to the banks, that the assessee would not have resorted to exaggerate the stock position as there was the possibility of the bank officials checking the stocks and any manipulation discovered by the banks would be against its interests and, therefore, the assessee should be taken to have given the correct stock particulars to the banks in respect of each variety. The Tribunal also took the view that it is improbable that the assessee confused one variety of cotton for the other and declared the stocks to the banks incorrectly because of such a mistake and that the stocks declared to the banks should, therefore, represent the true stock position and the stock position as shown in the books of account cannot be relied on.
9. The learned counsel for the assessee, however, submits that the Tribunal should have taken judicial notice of the practice followed by the business houses of declaring larger stocks to the banks purely for the purpose of getting higher loans or overdraft facilities. We are not convinced that any such practice is shown to exist or that it has been recognised in the commercial circles or by courts. Even assuming that such a practice exists the Tribunal is not expected to take judicial notice of such sub-standard morality on the part of the assessee so as to enable them to go back on their own sworn statements given to the banks as to the stocks held and hypothecated by them to the banks. In a case like this where the assessee is confronted with his own sworn statements which show a different state of affairs than the one shown in his own books of account, heavy burden lies on the assessee to prove that the books of account alone give the correct picture, and the sworn statements given to the banks were motivated. As already stated, in this case the assessee's books of account have not been accepted by the Income-tax Officer for various reasons. The Appellate Assistant Commissioner also holds that the rejection of the books of account is quite justifiable on the facts and circumstances of this case. The fact that the Appellate Assistant Commissioner did not accept the addition made by the Income-tax Officer on the basis of the gross profit, but proceeded to make the additions for each defect will not lead to the fact that the assessee's books of account were acceptable as regards the stock position. Having regard to the assessee's own statements given to the banks which show a larger stock of cotton in respect of CO. 4 and Cambodia than had been actually shown in the account books, it cannot be said that the rejection of the stock account of the assessee is not warranted, so long as the assessee's explanation that the stocks were purposely inflated for the purpose of getting higher overdraft facilities from the banks had not been accepted.
10. The learned counsel for the assessee points out that the assessee's explanation that the stock of CO. 4 and Cambodia cotton were inflated for a specific purpose has to be considered in the light of the following facts. The assessee is not a dealer in cotton and he is only a manufacturer of yarn and cloth. If the excess cotton had been utilised in the manufacture of yarn, the out-turn would have indicated the true position. The assessee is regularly maintaining the mixing books and if the excess stocks had been there, the mixing books would have indicated as to how the excess cotton had been utilised. The above factors will throw considerable light on the truth of the explanation given by the assessee. We are of the view that though the factors referred to above may be material, it cannot be said that they are conclusive to show that the assessee did not have the excess stock of cotton than the quantities shown in the account books. Even though the assessee's account books do not show any dealing in cotton, a transaction of sale of suppressed cotton cannot altogether be ruled out especially when the account books have been rejected. If the excess stock of cotton had not been utilised in the manufacture of yarn, the out-turn would not indicate any difference. There is no reason for assuming that the excess cotton could not have been sold as such. As regards the mixing books, the Appellate Assistant Commissioner has specifically found that no reliance can be placed on the mixing records in view of the enormous amount of manipulations found therein.
11. The learned counsel then contends that even assuming that there were excess stocks of cotton, it would not automatically lead to the conclusion that it is the undisclosed income of the assessee, and that the onus of showing that the excess stock represents receipts of the assessee and that such receipts amounted to income of the assessee was on the revenue. Reference has been made to the decision in Parimisetti Seetharamamma v. Commissioner of Income-tax [1965] 57 I.T.R 532, where the Supreme Court held that in all cases in which a receipt is sought to be taxed as income the burden lies on the department to prove that it is within the taxing provisions, and that once a receipt is proved to be of the nature of income, the burden of proving that it is not taxable lies on the assessee. Chainrup Sampatram v. Commissioner Of Income Tax, West Bengal is also relied on by the assessee. In that case it was pointed out that it is a misconception to think that any profit “arises out of the valuation of the closing stock”, that the valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, but it can in no sense be regarded as the “source” of such profits. In K.S Kannan Kunhi v. Commissioner Of Income-Tax, Kerala [1969] 72 I.T.R 757 Ker.., the Kerala High Court had expressed the view that it is not the law that, when once the explanation of the assessee for certain credit in his accout books is rejected, it automatically follows that the receipts are income, that whether an explanation is acceptable and whether it should be inferred that the receipts constitute income are different aspects of the same question, and that the question as to whether the receipts constituted income or not had to be decided on a consideration of all the facts and circumstances of the case.
12. It is true that the decisions referred to above establish the position that it is for the revenue to show that a particular receipt is an income, that whether the explanation given by the assessee as to the source of that receipt is acceptable or not is primarily a matter for the Tribunal and that the explanation of the assessee as to the source from which the receipts had been obtained had to be considered in the light of all the facts and circumstances. The assessee, relying upon these decisions, points out that the Tribunal was not justified in drawing the inference that the excess stocks of cotton should represent the assessee's income, merely because the assess-see's explanation that there were no excess stocks was not acceptable. But, as pointed out by the Supreme Court in Commissioner of Income-tax v. Durga Prasad More [1969] 72 I.T.R 807 S.C., the principle that once it is found that a receipt by the assessee was his income, it is not necessary for the revenue to locate its exact source, applies alike to cases in which an entry is found in the books of accounts of the assessee as to cases in which no such entry is found. In V. Govindarajuly Mudaliar v. Commissioner Of Income Tax, Hyderabad [1958] 34 I.T.R 807 S.C. it has been laid down that where an assessee fails to prove satisfactorily the source and nature of certain amounts of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipts are income. This decision has also been followed in Kale Khan Mohammad Hanif v. Commissioner of Income-tax [1963] 50 I.T.R 1 S.C. and Commissioner Of Income Tax, Madras v. M. Ganapathi Mudaliar [1964] 53 I.T.R 623 S.C.. In Kalekhan Mohammad Hanif v. Commissioner of Income-tax certain amounts of cash credits were found in the assessee's books of account and the assessee's explanation was not accepted. The account books of the assessee also were found incomplete and unreliable. In those circumstances the cash credits were taken to represent income from undisclosed sources. The Supreme Court upheld the same, holding that the amount of cash credits could be assessed to tax as income, from undisclosed sources in addition to the business income and the taxing authorities were not precluded from treating the amounts of credit entries as income from business simply because the entries appeared in the books of a business whose income had previously been computed on a percentage basis.
13. The learned counsel for the revenue contends that the question whether an explanation offered by the assessee is acceptable or not is a pure question of fact, and this court is not entitled to examine the correctness of such a finding on a reference. In Commissioner of Income-tax v. Ganapathi Mudaliar the Supreme Court pointed out that where the question referred to the High Court is regarding the existence of the material to support a finding of fact arrived at by the Tribunal, the High Court should not act as an appellate court and consider whether the finding was justified.
14. As pointed out already, once the assessee's explanation has not been accepted by the Tribunal, the resultant position is that there were excess stocks undisclosed in the books of account, and that the non-disclosure was only with a view to suppress the income. Once the Tribunal finds that there were excess stocks after rejecting the explanation of the assessee, the conclusion is inescapable that the excess stocks should have come from undisclosed sources. As already pointed out, the finding of the Tribunal that there were excess stocks cannot be interfered with by this court, as it is exclusively a matter for the Tribunal to accept or reject the assessee's explanation on the facts and circumstances of this case. We are, therefore, of the view that the Tribunal is justified in taking the view that the excess stocks should represent the income of the assessee from undisclosed sources. The result is that the reference is answered in the affirmative and against the assessee. The revenue will have its costs. Counsel's fee Rs. 250.
15. Reference answered in the affirmative.