Deshpande, C.J:— The question referred to this court by the Income-tax Appellate Tribunal under s. 256(2) of the I.T Act, 1961 (the Act), is as follows:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the cash credits of Rs. 11,724 came out of the intangible additions made in the past two years?”
2. At the outset we may point out, as we did during the course of argument by the learned counsel, Mr. Monga, for the respondent, that the question needs to be reframed. The words in the appellate order of the Income-tax Appellate Tribunal, dated 20th August, 1966, as also in the referring order, dated 21st November, 1969, are “should be treated to have come out”. These words will be substituted in place of the words “came out” in the question. In the assessment year 1961–62, income shown by the assessee in his return was not accepted but was estimated at Rs. 13,000 for 1960–61 and at Rs. 11,000 for 1961–62.
3. In the assessment year 1962–63, with which we are concerned, the cash credit of Rs. 11,724 had to be explained by the assessee in accordance with s. 68 of the Act. The explanation given by the assessee was that the amount consisted of loans advanced to the assessee by four persons and, fifthly, by the employees' security deposit. This explanation was not accepted. The assessee, therefore, alternatively argued that in the preceding two years 1960–61 and 1961–62, intangible additions to the extent of Rs. 18,500 were made and the unexplained cash credit “should be treated to have come out of the intangible additions made in the past two assessment years.” We have reproduced the contention of the assessee before the Tribunal verbatim because it was that contention which was accepted by the Tribunal.
4. The question is whether the requirements of s. 68 of the Act were satisfied by the assessee in regard to the cash credit of Rs. 11,724.
5. Section 68 runs as follows:
“Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.”
6. It is also not disputed that the enactment of s. 68 did not change the previous law on the subject which was the same even before s. 68 came on the statute book. The decisions prior to 1961 would also, therefore, be relevant for the purpose of deciding whether the assessee has offered no explanation about the nature and source of the cash credit or whether the explanation offered by him is not in the opinion of the ITO within the meaning of s. 68. The first thing that strikes us regarding s. 68 is that it is necessary that an explanation has to be given by the assessee regarding the nature and source of the cash credit. That is to say, the assessee must state what the cash credit represents and from where this loan has been; obtained by the assessee. This, to us, appears to be entirely a statement of fact to be made by the assessee. The explanation cannot be a mere legal argument. We find that in the present case the factual explanation given by the assessee was that this cash credit represented a total amount made up of loans advanced to the assessee by five different parties. This explanation squarely falls within the meaning of the word “explanation” in s. 68. Unfortunately, for the assessee this explanation was not satisfactory in the opinion of the the assessing authorities. As pointed out by the Supreme Court in Kale Khan Mohammad Hanif v. CIT, [1963] 50 ITR 1, 6:
“It was open to the assessee to raise the question that the finding that those amounts were income received from undisclosed sources was not based on any evidence or was, for other reasons, perverse.”
7. But the assessee in the present case did not challenge the finding of the assessing authorities regarding the factual explanation given by him on these or any other grounds. The result is that the only factual explanation given by the assessee was disbelieved.
8. In the words of the Tribunal, “alternatively, it has been contended that in the two preceding assessment years, namely, 1960–61 and 1961–62 assessment years, intangible additions to the extent of Rs. 18,500 were made and the unexplained cash credit should be treated to have come out of the intangible additions made in the past two assessment years” We understand this alternative contention to be a contention purely one of law. It meant that according to the assessee if the factual explanation given by him was not accepted then as a pure question of law the assessee was entitled to the benefit of the intangible additions to the extent of Rs. 18,500 made to his income in the previous year.
9. In our view, s. 68 requires only a factual explanation and not such a purely legal argument. In so far as the decision in CTT v. Ram Sanehi. Gian Chand, [1972] 86 ITR 724 (Punj) suggests that benefit of the additions to the disclosed income of the assessee in the previous years can be given to the assessee in the subsequent years to explain the source of the cash credit is a pure question of law, we are respectfully unable to understand how the explanation required by s. 68 can be given by way of a purely legal argument without any statement of fact. Mr. Monga also relied upon two previous decisions of this court, namely, (1) CIT v. Bawa Jagjit Singh, (ITR No. 30 of 1969, decided on 18-7-1973), and (2) Addl. CIT v. Chetan Doss, [1975] 99 ITR 46 (Delhi). We find that both these decisions are distinguishable. In the former case, the Tribunal referred to the decision of the Madras High Court in S. Kuppuswamy Mudaliar v. CIT, [1964] 51 ITR 757, and stated that in the said Madras case the assessee had explained that this amount, namely, that of the cash credit, came out of the intangible additions made to the assessee's income in the earlier assessment years. This seems to us to be a statement of fact by the assessee that what Was regarded as income from undisclosed source was in fact the income which had come out of the previous years' income. The intangible additions made to the previous years' income were, according to Mr. Monga, really income and not only a notional income. We agree with what he says, but we still feel that it is necessary that the assessee must say that the source of the' cash credit is the previous years' income, if he wishes to give that as the explanation within the meaning of s. 68. This distinguishes the decision in Bawa Jagjit Singh's case (ITR No. 30 of 1969, decided on 18-7-1973) as also the Madras decision referred to therein.
10. In Addl. CIT v. Chetan Doss, [1975] 99 ITR 46 (Delhi) referred to above, Mr. B.N Kirpal, learned counsel for the revenue, has contended that the assessee had failed to link the withdrawals in the three accounts with the loans amounting to Rs. 30,000. The court observed that the Supreme Court in Kale Khan's case, [1963] 50 ITR 1 did not hold that the loan given in one, account can, in no case, be linked with or explained by reference to the earlier withdrawals in other accounts. In that case the Tribunal, had reached the conclusion that these bans were sufficiently explained as having been covered by the withdrawals of Rs. 50,000 in the three accounts barely two months earlier. In this decision also, therefore, there is a clear link between the loans and the withdrawals and the explanation of facts, therefore, was according to s. 68 of the Act.
11. In the present case, the question whether the; explanation of fact as to the source of the cash credit was given by the assessee can be decided only on the strength of the order passed by the Tribunal in the appeal and the order made by the Tribunal in referring this question to us. In both these orders the only explanation of fact given was disbelieved and what remained was only a legal contention that the amount of the cash credit “should be treated to have come out of the intangible additions” The words “should be treated”, in our view, mean that even though the assessee had not stated that the cash credit had actually come out of the previous years' income, yet only because the previous years' income had been assessed by the addition of intangibles, the cash credit should be deemed to have come out of the previous years' income since the intangible additions made were larger than the amount of the cash credit. The argument, therefore, is that on the mere ground that intangible additions larger than the cash credit had been made in the previous years that very cicumstance should come to the help of the assessee in the succeeding year and the cash credit should be deemed to have come out of the previous years' income. Such a view will practically dispense with the necessity of the assessee giving any explanation of fact under s. 68 when in the previous years such intangible additions have been made to the income of the assessee. The law will then be that whenever an intangible addition is made to the income of the assessee in a particular year, in the subsequent year the assessee will get the benefit of those intangible additions to the extent of any unexplained cash credit by the mere fact that no explanation is to be given at all. The explanation then will be only a presumption of law that the cash credit which was unexplained income must in law be deemed to have come out of the previous years' income. Mr. Monga earnestly argued that we should construe the words in the orders of the Tribunal to mean that the assessee had actually given an explanation of fact that the amount of the cash credit had in fact come from the previous years' income. The line of demarcation between an allegation of fact, and an argument based on law may be fine, but it is nevertheless real. In this case, howsoever sympathetically the orders of the Tribunal are read, we cannot draw from them the conclusion that the assessee had given a statement of fact that the cash credit had come out of the previous years' income. Since the assessee only advanced a legal argument as an alternative to the statement of fact which; had been disbelieved, we are of the view that a mere legal argument is not sufficient as an explanation under s. 68.
12. In Kale Khan Mohammad Hanif's case, [1963] 50 ITR 1 (SC), the question was whether the unexplained cash credit should be regarded as having its source in the intangible additions made to the income of the assessee for the same assessment year. The argument was that it would be double taxation of the assessee if the benefit of the additions of the intangible income is not given to the assessee as an explanation of the source of the cash credit also. This contention was rejected by the Supreme Court at page 5 in the following words:
“The question would seem to suggest that because the income from a disclosed source has been computed on the basis of an estimate and not on the basis of the return filed in respect of it, an income represented by a credit entry in the books of account of that source cannot be held to be income from another and undisclosed source. We do not see why it cannot be so held. It appears from the judgment of the High Court that the reason given in support of the suggestion was that if that income was held to be income of an undisclosed source, the result would be double taxation of the same income which the Income-tax Act does not contemplate. Apparently, it was said that there would be double taxation because it was assumed that the same income had once been earlier taxed on the basis of an estimate. This reason is obviously fallacious, for, if the income is treated as one from an undisclosed source which the question postulates, it is not treated as income of the disclosed source which had previously been assessed to tax and, therefore, there is in such a case no double taxation. It is not a case where the income sought to be taxed was held to be undisclosed income of a disclosed source, the income of which source had previously been taxed on the basis of an estimate. If it were so, the question of double taxation might have been legitimately raised. That, however, is clearly not the case here as the question as framed itself shows.”
13. Mr. Monga sought to distinguish this observation of the Supreme Court on the ground that in the case before us the intangible additions to the income were made in the previous years, while in the case before the Supreme Court they were made in the same year in which the cash credit was regarded as income from an undisclosed source. We are of the view that there is no difference in principle between the case before us and the case before the Supreme Court. Whether the intangible additions are made in the previous years or in the same year, the requirement of s. 68 remains the same. The point which clearly emerges from the Supreme Court observations is that by the mere fact of the intangible additions to the income there is no presumption that the income from the undisclosed source is to be regarded as being income from a disclosed source to the extent the intangible additions was made. In view, of this Supreme Court decision the point appears to us to be beyond controversy. For the above reasons, we answer the referred question as modified by us in the negative. No order as to costs.
14. Question answered in the negative.