- Bookmark
- Share
- CaseIQ
Commissioner Of Income-Tax, Tamil Nadu-V v. K.S.M Guruswamy Nadar & Sons.
Factual and Procedural Background
The assessee is a firm operating a hotel in Coimbatore. For the assessment years 1965-66 and 1966-67, the assessee declared gross profits of 5.5% and an unspecified amount respectively, while showing certain cash credits as loans from hundi bankers. The Income Tax Officer (ITO) found the declared gross profits to be understated and estimated a gross profit rate of 23%, making additions of Rs. 69,311 and Rs. 58,127 as concealed profits for the respective years. Additionally, the ITO disallowed the genuineness of the cash credits and added Rs. 85,000 and Rs. 57,042 for the two years respectively. On appeal, the Appellate Assistant Commissioner (AAC) upheld these additions but accepted the assessee's contention that the gross profit addition should be telescoped with the cash credit addition, sustaining Rs. 85,000 and Rs. 60,000 as additions for the two years. The Revenue challenged this telescoping before the Tribunal, which upheld the AAC's order, reasoning that the concealed profits represented by the lower gross profit rate were the same as those reflected in the bogus cash credits, thus precluding two separate additions. The Revenue then obtained a reference to this Court on two questions of law concerning the correctness of telescoping the two additions and the nature of the cash credits.
Legal Issues Presented
- Whether the Appellate Tribunal was correct in law to hold that two separate additions—(i) for deficiency of gross profit and (ii) for unproved cash credits—should be telescoped and covered into one addition?
- Whether the Appellate Tribunal was justified and had sufficient materials to hold that the cash credits in the assessee’s books were undisclosed profits from its business?
Arguments of the Parties
Revenue's Arguments
- The two additions were made under distinct heads and must be treated separately; telescoping one into the other is impermissible.
- The Tribunal erred in requiring the Revenue to establish a separate source of income for bogus cash credits, asserting that the assessee had no other business besides the hotel.
- Relied on Supreme Court decisions in CIT v. Durga Prasad More and CIT v. M. Ganapathy Mudaliar to argue that once an amount is credited in the books as income, the source need not be identified.
Assessee's Arguments
- After the genuineness of cash credits was rejected, the assessee claimed these cash credits represented concealed profits from the hotel business.
- Thus, the additions for suppressed profits and cash credits relate to the same income and should be telescoped into a single addition.
- Relied on the Supreme Court decision in Commissioner Of Income Tax, U.P v. Devi Prasad Vishwanath Prasad which permits telescoping when the assessee proves that cash credits represent already taxed suppressed profits.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Kale Khan Mohd. Hanif v. CIT, [1963] 50 ITR 1 (SC) | Revenue argued it prohibits telescoping of additions. | The court noted the Revenue's reliance but did not accept this as overriding in the facts. |
| CIT v. Durga Prasad More, [1969] 72 ITR 807 (SC) | Once income is found credited, the Revenue need not locate its exact source. | The court held this principle does not apply where there are two additions and the assessee claims the cash credits represent suppressed profits already added. |
| CIT v. M. Ganapathy Mudaliar, [1964] 53 ITR 623 (SC) | Income credited in books is income of the assessee; source need not be identified. | The court distinguished this case as not helpful when two separate additions exist and the assessee offers an explanation linking them. |
| Commissioner Of Income Tax, U.P v. Devi Prasad Vishwanath Prasad, [1969] 72 ITR 194 (SC) | Permits taxing both cash credits and suppressed profits separately unless the assessee proves the cash credits represent already taxed suppressed profits, allowing telescoping. | The court relied on this as authoritative support for allowing telescoping when the assessee establishes the connection. |
| CIT v. S. Nelliappan, [1967] 66 ITR 722 (SC) | Supports telescoping when there is a connection between suppressed profits and cash credit entries. | The court cited this case to affirm that the Tribunal’s inference of connection between the two additions was not speculative and was legally tenable. |
Court's Reasoning and Analysis
The Court analyzed the relationship between the two additions—one for suppressed gross profits and the other for unproved cash credits. It recognized that while the Revenue contended these additions must stand separately, the Supreme Court's precedent allows the assessee to demonstrate that the cash credits represent the suppressed profits already added. The Court distinguished the cited precedents relied upon by the Revenue, noting that those apply where only a single addition for cash credits is made without a corresponding addition for suppressed profits. Here, since additions existed under both heads, the assessee's explanation that the cash credits were a reflection of concealed profits was a valid ground for telescoping the two additions into one. The Court found the Tribunal’s inference of a connection between the suppressed profits and cash credits to be reasonable and not speculative, consistent with Supreme Court rulings. Accordingly, the Court held the Tribunal's decision to telescope the additions was legally sound.
Holding and Implications
The Court answered both questions in the affirmative and against the Revenue, upholding the Tribunal’s order to telescope the two additions into one.
The immediate effect is that the assessee’s concealed profits and unproved cash credits are treated as a single addition, preventing double taxation on the same income. The Court awarded costs in favor of the assessee. No broader precedent beyond the facts of this case was established.
Ramanujam, J.:— The assessee in this case is a firm running a hotel in Coimbatore. For the assessment year 1965-66 the assessee had disclosed a gross profit of 5.5%. The assessee had also shown certain credits in the shape of loans from various hundi bankers. The ITO felt that the gross profit shown was considerably low and estimating the gross profit at 23% he made an addition of Rs. 69,311 as concealed profits. As regards cash credits, the explanation of the assessee was that the loans as entered in the books of account were genuine and the ITO after rejecting that explanation made an addition of Rs. 85,000 on that account. Similarly for the year 1966-67 on the same lines a gross, profit addition of Rs. 58,127 had been made and the cash credit addition made was a sum of Rs. 57,042. Aggrieved by the said additions, the assessee appealed to the AAC, who sustained the addition made both in gross profit as well as towards cash credit. But he accepted the assessee's statement that the gross profit addition should be telescoped with the addition made for cash credit. In that view he sustained the addition of Rs. 85,000 for the year 1965-66 and Rs. 60,000 for the year 1966-67.
2. The Revenue took the matter in appeal before the Tribunal contending that the AAC was in error in telescoping the gross profit addition with the addition made on cash credit and that such telescoping cannot be sustained in view of the decision of the Supreme Court in Kale Khan Mohd. Hanif v. CIT, [1963] 50 ITR 1. The Tribunal, however, did not accept the case of the Revenue and proceeded to hold that the profits concealed by showing a lesser gross profit rate should be taken to be the amount brought in by way of bogus cash credits and that, therefore, it is not possible to have two separate additions.
3. In this view, the Tribunal accepted the assessee's claim that the additions on account of cash credit should be merged with the gross profit additions in the trading account and upheld the order of the AAC. Aggrieved by the decision of the Tribunal, the Revenue sought and obtained a reference to this court on the following questions of law:
“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the two separate additions made, (1) for deficiency of gross profit, and (ii) for unproved cash credits, should be telescoped and covered into one addition?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right and had materials to hold that the cash credits in the books of the assessee were nothing but undisclosed profits in its business?”
4. The learned counsel for the Revenue contends that in this case the two additions came to be made under two separate heads; one addition was made for suppression of gross profit by showing a lesser gross profit rate and the second addition came to be made towards cash credit in favour of third parties, which the assessee was not able to explain. These two additions have to be treated separately and one cannot be telescoped into the other as has been done by the AAC as well as by the Tribunal. According to the learned counsel for the Revenue, the Tribunal is in error in stating that to sustain a separate addition towards bogus cash credit, the Revenue has to establish that the assessee had any other separate source of income and that the assessee in this case has not been shown to have any other business, other than that of hotel business and, therefore, the separate addition towards bogus cash credit cannot be sustained. The learned counsel refers to the decisions in CIT v. Durga Prasad More, [1969] 72 ITR 807 (SC) and CIT v. M. Ganapathy Mudaliar, [1964] 53 ITR 623 (SC). In CIT v. Ganapathy Mudaliar, [1964] 53 ITR 623, it was pointed out by the Supreme Court that (headnote):
“Once it is held that an amount credited in the account books of the assessee is the income of the assessee, it is not necessary for the department to locate its exact source.”
5. But we do not see how the said decision is of any help to the Revenue. That was a case where certain amount was found credited in the account books of the assessee as income. The court held that once it is held that an amount credited in the account books of the assessee is the income of the assessee, it is not necessary for the Department to locate its exact source. Though the assessee has shown certain cash credits, he has not explained the genuineness of the same. It is, therefore, possible to treat this as bogus credit entries. But when the assessee has come forward with a plea, after his explanation as to the genuineness of the cash credit entries was rejected, that cash credits represented his concealed profits from the hotel business, the Department is bound to investigate the same.
6. CIT v. Durga Prasad More, [1969] 72 ITR 807 (SC), was a case where the Supreme Court, relying on CIT v. Ganapathy Mudaliar, [1964] 53 ITR 623 (SC), expressed the view that (headnote):
“Once it is found that a receipt by the assessee was income of the assessee, 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 account of the assessee as to cases in which no such entry is found.”
7. We are, therefore, of the opinion that this decision also does not apply to the facts of this case. This decision will apply only if there has been an addition towards the bogus cash credit alone. But in this case in addition to the bogus cash credit there is an addition towards suppression of profit. In such a case as this, when there are two additions, it is always open to the assessee to explain that the suppressed profits during the year has been brought in as cash credits and, therefore, one has to be telescoped into the other and there can be only one addition. The position that the assessee is entitled to claim that both the additions should be telescoped into one in such a situation is clear from the decision of the Supreme Court in Commissioner Of Income Tax, U.P v. Devi Prasad Vishwanath Prasad, [1969] 72 ITR 194. The facts in that case are more or less similar to the facts in this case. In the case before the Supreme Court there were two additions, namely, one towards suppressed business profits and the other towards the bogus cash credits. The Supreme Court first held that (p. 196):
“There is nothing in law which prevents the Income-tax Officer in an appropriate case in taxing both the cash credit, the source and nature of which is not satisfactorily explained, and the business income estimated by him under section 13 of the Indian Income-tax Act, 1922, after rejecting the books of account of the assessee as unreliable.”
8. The Supreme Court, however, proceeded to say that (p. 197):
“Where there is an unexplained cash credit, it is open to the Income-tax Officer to hold that it is income of the assessee, and no further burden lies on the Income-tax Officer to show that that income is from any particular source. It is for the assessee to prove that, even if the cash credit represents income, it is income from a source which has already been taxed.”
9. As per the decision of the Supreme Court, it is open to the assessee to prove that the cash credits came from the suppressed profits towards which an addition has already been made, and, therefore, there should be telescoping of one with the other.
10. The decision of the Supreme Court in CIT v. S. Nelliappan, [1967] 66 ITR 722, also, in a way, supports the case of the assessee. In that case also there were two additions, one towards bogus cash credit and the other towards profits suppressed. It was found by the Tribunal that there is a connection between the profits withheld by the assessee in the account books and the cash credit entries found therein and, therefore, it can be concluded that only one addition could be made. When the matter came to this court, this court rejected the reference and then the matter was taken to the Supreme Court. The Supreme Court dismissed the appeal holding that (p. 725):
“It is true that there is no direct evidence of any connection between the cash credit entries and the income withheld from the books of account by the assessees.
But if the Tribunal inferred that there was a connection between the profits withheld from the books and the cash credit entries, it cannot be said that the conclusion is based upon speculation.”
11. It is thus clear that the view taken by the Tribunal in this case that the additions towards the suppressed book profits should be telescoped with the additions towards the cash credit is legally tenable. The questions are, therefore, answered in the affirmative and against the Revenue. The assessee will have its costs from the Revenue. Counsel's fee Rs. 500.
Alert