- Bookmark
- Share
- CaseIQ
S.R Venkata Ratnam v. Commissioner Of Income-Tax, Karnataka-I And Another
Factual and Procedural Background
The petitioner filed his income-tax return for the assessment year 1975-76 for the first time, disclosing a business income of Rs. 6,100. The Income Tax Officer (ITO) estimated the income at Rs. 7,000. The petitioner also showed a capital investment of Rs. 20,000 in the name of his minor sons in a firm named M/s. Santosh Bombay-Dyeing Show-room, Davangere. The petitioner explained that Rs. 15,000 of this capital was sourced from pigmy savings in the Grain Merchants' Co-operative Bank, Tumkur, and Rs. 5,000 was borrowed from an individual named K.N. Veerabadrappa. The ITO disbelieved the explanation regarding the pigmy savings due to a two-year gap between the withdrawal date (12-2-1973) and the investment date (7-5-1975), and because the petitioner did not adequately explain this discrepancy. Consequently, the ITO treated the Rs. 15,000 as income from an unexplained source for the assessment year 1975-76. The petitioner challenged this assessment by filing a revision petition under section 264 of the Income Tax Act to the Commissioner of Income-tax, Karnataka, who rejected the revision petition on similar grounds. The petitioner then filed the present petition.
Legal Issues Presented
- Whether the ITO was justified in rejecting the petitioner's explanation of the source of Rs. 15,000 capital investment based on the time gap between withdrawal of pigmy savings and the investment without adequate investigation or opportunity to substantiate the claim.
- Whether the Commissioner of Income-tax, in exercising revisional jurisdiction under section 264 of the Income Tax Act, properly exercised judicial discretion in rejecting the revision petition without directing further inquiry or verification of the source of funds.
Arguments of the Parties
Petitioner’s Arguments
- The Commissioner erred in rejecting the source of Rs. 15,000 as pigmy bank savings on the ground that the petitioner did not use bank facilities in Davangere during the two-year interval, which was a capricious and perverse reasoning.
- The Commissioner failed to judicially exercise discretion under section 264 and instead passed the order based on an arbitrary assumption about how the petitioner should have handled the money.
Revenue’s Arguments
- The petitioner had the burden to satisfactorily establish the source of the Rs. 15,000, especially given the two-year gap between receipt and investment.
- The department was not obligated to investigate beyond the petitioner’s explanations.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court found merit in the petitioner’s argument and rejected the revenue’s contention. It held that once the petitioner disclosed the source of Rs. 15,000 as a withdrawal from a pigmy savings account on a specific date, it was not for the ITO or Commissioner to speculate on how the money was handled during the intervening period. The ITO had two options: either reject the explanation based on a finding that no such deposit existed or call upon the petitioner to provide documentary evidence substantiating the claim. Since neither option was exercised, the ITO's rejection based on surmise was improper. Furthermore, the Commissioner failed to exercise judicial discretion under section 264 by not remitting the matter back to the ITO for verification or for the petitioner to substantiate the source. Thus, both the ITO’s and Commissioner’s orders were set aside for lack of proper inquiry and judicial exercise of discretion.
Holding and Implications
The impugned orders of the Commissioner and the ITO are set aside.
The matter is remitted with liberty to the ITO to call upon the petitioner to substantiate the source of Rs. 15,000 used as capital outlay in 1975 and to pass a fresh assessment order in accordance with law. The decision directly affects the parties by requiring further inquiry and reassessment but does not establish any new legal precedent. There is no order as to costs.
Chandrakantaraj Urs, J.:— This petition, after notice to the respondents, is disposed of by the following order:
2. The petitioner, for the first time, filed his income-tax return for the assessment year 1975-76. His return disclosed income from business at Rs. 6,100. The ITO estimated his income at Rs. 7,000. The petitioner-assessee also showed a capital investment of Rs. 20,000 in the name of his minor sons in a firm, M/s. Santosh Bombay-Dyeing Show-room, Davangere.
3. He explained the source of his capital outlay by accounting for it as having received Rs. 15,000 from pigmy savings in the Grain Merchants' Co-operative Bank, Tumkur, and as having borrowed a further sum of Rs. 5,000 from one K.N Veerabadrappa. The 2nd respondent-ITO disbelieved the explanation of the assessee in respect of the sum claimed to have been received from the pigmy savings account from the’ Grain Merchants' Cooperative Bank, Tumkur, for the following reasons:
“It is not clear from the assessee's argument to which year the pigmy deposits related and also it is not properly explained why the assessee withdrew the amount on 12-2-73 when this amount was introduced in the firm on 7-5-1975.”
4. Therefore, rejecting the explanation offered by the assessee-petitioner, the said sum of Rs. 15,000 was brought to tax as income from unexplained source for the relevant assessment year 1975-76. Aggrieved by the assessment order, the petitioner preferred a revision under s. 264 of the I.T Act to the Commissioner of Income-tax, Karnataka, respondent No. 1 herein. The Commissioner disposed of the revision petition rejecting the same, observing as follows:
“Thus there is a gap of two years between the withdrawal of the pigmy amount and the investment in Davangere business. The assessee cannot claim ignorance of bank facilities because he has kept money in pigmy deposits and was about to start business in Davangere where there are several banks functioning. In the absence of corroborative evidence that the money invested in 1975 was out of pigmy savings withdrawn in 1973, I see no reason to interfere in the matter.”
5. Sri K. Srinivasan, learned counsel for the assessee-petitioner, has contended that the portion of the order extracted above clearly indicated that the Commissioner who admitted the source of Rs. 15,000 as having come from the pigmy bank was not correct in rejecting the same on the perverse reasoning that the petitioner did not utilise the banks at Devangere in the intervening period of two years as it was open to the petitioner to use or not to use the bank facilities. It is, therefore, contended that the Commissioner did not judicially exercise the discretion vested in him under s. 264 of the I.T Act but proceeded to pass the order on a capricious surmise as to what a person should or should not do with the money he had obtained.
6. As against this, the learned counsel for the revenue has contended that it was for the assessee-petitioner to satisfactorily establish the source of the said sum of Rs. 15,000 which was utilised for capital outlay two years after the same was received and not for the department to investigate.
7. There is some force in the argument of the learned counsel for the petitioner and the argument advanced by the revenue is, therefore, without any force. Once the petitioner-assessee disclosed the source as having come from the withdrawal made on a given date from a given bank, it was not for respondents Nos. 1 and 2 to concern themselves with what the assessee did with that money, i.e, whether he had kept the same in his house or utilised the services of a bank by depositing the same. The ITO had only two choices before him. One was to reject the explanation as not believable for the reason that on his investigation no such pigmy deposit was ever made in the bank. In the alternative he ought to have called upon the assessee-petitioner to substantiate his claim by documentary evidence. Having exercised neither of the choices, it was not open to the ITO to merely surmise that it would not be probable for the assessee to keep Rs. 15,000 unutilised for a period of two years. The ITO should have given an opportunity to the assessee to substantiate his assertion as to the source of his capital outlay.
8. The Commissioner-1st respondent who had jurisdiction under s. 264 of the I.T Act should have remitted the matter to the ITO with a direction to ascertain from the bank whether such a deposit was withdrawn as contended by the assessee or with the direction that the ITO should call upon the petitioner to substantiate his assertion as to the source of the capital of Rs. 15,000. Neither of the respondents having approached the problem in this manner, it cannot be said that the 1st respondent-Commissioner exercised his revisional jurisdiction under s. 264 of the I.T Act judicially and properly.
9. Therefore, the impugned orders of the Commissioner and the ITO are set aside. Liberty is reserved to the ITO to call upon the petitioner to substantiate his assertion as to the source of Rs. 15,000 which he utilised as capital outlay in the year 1975, and to pass a fresh assessment order in accordance with law. Rule will accordingly issue and be made absolute.
10. There will be no order as to costs.
Alert