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Smt. Annamma Paul v. Commissioner Of Income-Tax, Ernakulam.
Structured Summary of the Opinion by Gopalan Nambiyar, C.J.
Factual and Procedural Background
The assessee (an individual whose accounting year was Malayalam year 1124 / 1948–49) conducted businesses in arrack, medicines and also received share of profits from two firms. The original assessment by the ITO was completed on December 28, 1951. Subsequently the ITO discovered items of income that had escaped assessment, including certain capital-account credits totalling Rs. 65,000. The assessment was reopened and additions were made; the matter went on appeal to the Income-tax Appellate Tribunal (ITAT).
The assessee argued that certain earlier "intangible additions" (including an item of Rs. 48,000 for 1948–49 and other amounts) were the source of the unexplained credits. The Tribunal did not accept that explanation in full; it allowed a set-off of Rs. 15,000 out of an intangible addition of Rs. 17,000, but confirmed an addition in relation to other amounts and did not record a specific finding on the Rs. 48,000 claim in its earlier order.
The ITO later reopened the assessment a second time after receiving information about unledgerised cash credits appearing in the books of a firm (Paul Perincherry & M. I. Chakkoru) in the name of the assessee. The ITO calculated unledgerised cash credits amounting to Rs. 1,29,700 and allocated them between years (Rs. 68,200 for 1950–51 and Rs. 61,000 for 1951–52). Approval from the Central Board of Direct Taxes was obtained for reopening because the ordinary 8-year period had run out. Notices were issued to the assessee's legal representative (his wife) after the assessee's death, and the ITO added Rs. 49,700 (the peak amount falling in the accounting year) to the income by an order dated March 26, 1969.
Appeals to the AAC failed and the Tribunal dismissed the appeals, rejecting the assessee's jurisdictional objections and relying on a Division Bench decision of this Court in M.I. Chakkoru v. Commissioner of Income-Tax (No. 61 of 1965, since reported as [1980] 121 ITR 440 (Ker)). That decision was taken to mean that the onus to explain cash credits and to trace their source lies on the assessee and not on the department.
At the instance of the assessee this Court was asked to answer four specific questions of law forwarded by the ITAT for opinion; these focused on the legality of reassessment under s. 147(a), the correctness of particular findings about set-off of intangible additions, the preclusion of the assessee from claiming set-offs, and whether the burden of proof lay on the department.
Legal Issues Presented
- Whether, on the facts and circumstances, the reassessment proceedings under section 147(a) of the Income-tax Act, 1961, are legal and valid; and whether the Appellate Tribunal was justified in sustaining the addition of Rs. 49,700.
- Whether the Tribunal's finding that the assessee's claim that an intangible addition of Rs. 48,000 for 1948–49 was available for set-off in 1950–51 is justified in law, and whether the Tribunal's interpretation of its earlier order dated November 21, 1961 is proper and valid.
- Whether the Appellate Tribunal was justified in holding that the assessee is precluded or disabled from claiming set-off of Rs. 48,000 or Rs. 7,150 for the reasons stated in paragraph 16 of the Tribunal's order.
- Whether the burden of proof was on the department to show that the admitted intangible additions of the prior years were not available for set-off in the subsequent year; and if so, whether the department discharged that burden.
Arguments of the Parties
Assessee's Arguments
- The unledgerised cash credits discovered in the firm's books and in the assessee's accounts were, in substance, re-introductions of earlier intangible additions made in prior assessments (notably an intangible addition of Rs. 48,000 for 1948–49 and other intangible additions).
- The assessee argued that those earlier intangible additions should be available for set-off against the unexplained credits in subsequent years (i.e., the asserted source for the unledgerised credits).
- The assessee raised objections to jurisdiction of reopening (on limitation grounds) and contended, by implication, that reassessment was barred or that the department should bear the burden to disprove availability of earlier additions for set-off.
Revenue's / Department's Arguments
- The department (revenue) contended, and the AAC and Tribunal noted, that the assessee did not provide a convincing explanation of the source of the unledgerised credits and that the contention that the credits came from earlier intangible additions was speculative or vague.
- Counsel for the revenue stressed that the onus rested on the assessee to explain and trace the source of the cash credits, relying on precedent holdings of this Court that place the burden on the assessee.
- The revenue relied on the legal position that the period for reopening assessments under s. 147(a) is a period of limitation (not a jurisdictional bar), and that the longer limitation period applicable before March 31, 1959 was available to the revenue in this case (i.e., the reopening was not time-barred).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| M.I. Chakkoru v. Commissioner Of Income-Tax, Kerala (No. 61 of 1965) — reported [1980] 121 ITR 440 (Ker) | It is for the assessee to explain cash credits and to trace their source; if explanation refers to earlier intangible additions, the assessee must prove that connection; no onus cast on the department to show otherwise. | The Court approved and adopted the principle and treated the Tribunal's reliance on M.I. Chakkoru as correct; this supported the conclusion that the burden of proof lay on the assessee and that the Tribunal was right to reject the assessee's set-off claims where explanation was inadequate. |
| Abraham v. CIT, ILR [1975] (1) Ker 426 | Reaffirmed that when cash credits appear in accounts the assessee must give a satisfactory explanation; if inadequate, credits may be treated as income of that year; the burden of proof rests on the assessee. | The Court relied on Abraham v. CIT as binding authority for placing the burden of proof on the assessee; the decision was cited to decide Question No. 4 in favour of the revenue. |
| S. Kuppuswami Mudaliar v. CIT, [1964] 51 ITR 757 (Madras High Court) | Discussed in the opinion; certain observations in the decision were reviewed but not accepted as laying down any general principle shifting the burden to the department. | The Court considered the decision but declined to read it as imposing a general rule that intangible additions in an earlier year are to be presumed available in later years or that the department must prove non-availability. |
| B. Abdul Qadir v. CIT, [1964] 52 ITR 364 (Madras High Court) | Similarly discussed; some observations might appear supportive of the assessee but were held to be fact-specific and not authority for a general burden-shifting rule. | The Court reviewed the decision and concluded it does not establish a general principle shifting the burden of proof to the department; the Division Bench declined to adopt a broad reading of these Madras decisions. |
| Kerala Oil Mills' case, [1980] 121 ITR 254 (Ker) | Held that the period prescribed for reopening assessments is a period of limitation and not a jurisdictional condition; the longer period of limitation in force before March 31, 1959 was available to the revenue. | The Court applied Kerala Oil Mills' case to answer Question No. 1: it held reassessment under s. 147(a) in the circumstances to be legally valid and not barred by limitation. |
Court's Reasoning and Analysis
The Court observed that the four questions of law referred by the Tribunal were interrelated and that an answer to Question No. 4 (on burden of proof) would render the other questions largely academic. Consequently the Court concentrated on Question No. 4.
The Court reviewed prior Division Bench rulings of this Court — notably Abraham v. CIT and the earlier decision in M.I. Chakkoru — and extracted a clear legal principle: when unexplained cash credits appear in the assessee's accounts for a relevant accounting period, the onus is on the assessee to provide a satisfactory explanation and to prove that any such credits derive from amounts (including intangible additions) previously assessed in earlier years. If the assessee's explanation is unacceptable, the cash credits may be treated as income of that year.
The Court considered the Madras High Court decisions (S. Kuppuswami Mudaliar and B. Abdul Qadir) but refused to interpret them as laying down a universal rule that an amount added to income in an earlier year must be presumed to be available to the assessee in subsequent years for credit or set-off, or that the department must prove non-availability. Those Madras observations were described as fact-specific and not supporting a general burden shift.
Applying the established principle that the burden lies on the assessee, the Court examined the record and findings of the Tribunal and AAC. It noted specific findings that the assessee had not produced convincing evidence tracing the unledgerised credits to the earlier intangible additions, the AAC's finding that the assessee's representative could not produce evidence that the same intangible addition was available for being used twice, and the Tribunal's conclusion that no fund of the intangible additions (Rs. 55,210 for 1948–49 and 1949–50) could have been available for re-introduction in the relevant accounting year.
Having regard to that material, the Court concluded that the Tribunal was right to find against the assessee on the burden question and that the department had not been required to carry a burden to disprove the asserted set-offs. On this basis the Court answered the relevant parts of Question No. 4 in the negative (i.e., it is not the department's burden), and declined to consider the remaining questions where they became academic.
For Question No. 1 (reopening under s. 147(a) and the addition of Rs. 49,700) the Court relied on Kerala Oil Mills' case to hold that the period for reopening is a period of limitation (not a jurisdictional bar) and that the longer limitation period available to the revenue applied; therefore reassessment was legally valid. On the second part, the Court found no ground to interfere with the Tribunal's addition of Rs. 49,700 and upheld that addition.
Questions Nos. 2 and 3 were not answered because, in the Court's view, their consideration was unnecessary in light of the ruling on the burden of proof (Question No. 4).
Holding and Implications
Core Ruling: The Court held that the burden of proof to trace unexplained cash credits to earlier intangible additions rests on the assessee rather than on the department; the reassessment under section 147(a) was valid in the circumstances and the addition of Rs. 49,700 was upheld.
Direct Implications for the Parties
- The reassessment proceedings under s. 147(a) were held to be legally valid (the period for reopening is a period of limitation and the longer limitation period applied).
- The Tribunal's confirmation of the addition of Rs. 49,700 stands; the Court found no ground to interfere with that addition.
- The assessee's claims for set-off (including the claimed Rs. 48,000 and Rs. 7,150) were effectively rejected on the basis that the assessee failed to discharge the burden of proof; Questions Nos. 2 and 3 were not adjudicated further as they were rendered academic by the ruling on burden.
- No order as to costs was made by the Court.
Broader Legal Implications
The Court applied and affirmed existing precedents (Abraham v. CIT and M.I. Chakkoru) concerning allocation of the burden of proof in cases of unexplained cash credits. The opinion did not purport to announce a novel legal principle beyond affirming and applying those prior authorities and related rulings on limitation for reopening assessments.
Administrative action: A copy of the judgment is to be communicated to the Tribunal under the seal of the Court and the signature of the Registrar, as noted in the opinion.
Gopalan Nambiyar, C.J:— At the instance of the assessee, the Income-tax Appellate Tribunal, Cochin Bench, has forwarded the statement of the case and sent up the following questions of law for our opinion, namely:
“1. Whether, on the facts and in the circumstances of the case, the reassessment proceedings under section 147(a) of the Income-tax Act, 1961, are legal and valid? Was the Appellate Tribunal justified in sustaining the addition of Rs. 49,700 for all or any of the reasons stated in the appellate order?
2. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal to the effect that (in I.T.A No. 12037 of 1959–60) they (the Tribunal) have rejected the assessee's claim that intangible addition of Rs. 48,000 for the year 1948–49 was available for set-off in 1950–51 is justified in law? Is the interpretation placed on the earlier order of the Tribunal dated November 21, 1961, proper and valid?
3. Was the Appellate Tribunal justified in law in holding that the assessee is precluded from claiming a set-off of Rs. 48,000 or disabled from claiming set-off of Rs. 7,150 for all or any of the reasons stated in paragraph 16 of the order?
4. Was not the burden of proof on the department to show that the admitted intangible additions of the prior years was not available for setoff in the subsequent year? If so, has the burden been discharged by the department?”
2. The assessee is an individual and the accounting, year is the Malayalam year 1124 (1948–49). The assessee was doing business in arrack, medicines and also share of profits from two firms. The ITO completed the assessment on December 28, 1951. Subsequently, he came to know that there were certain items of income which had escaped assessment. One of them was certain credits to the capital account amounting to Rs. 65,000. The assessment was reopened and additions to the income were made. The matter was taken in appeal to the Income-tax Appellate Tribunal. The plea before the Tribunal was that the intangible additions which had been made in the assessment year 1948–49 and the assessment year 1950–51 should be held to be the source for these unexplained credits. This explanation was not accepted by the Tribunal. On the facts, the Tribunal allowed a set-off of Rs. 15,000 as the amount that could have been available out of the intangible addition of Rs. 17,000 for that year. The assessee had claimed that the intangible addition of Rs. 48,000 for 1948–49 was available for set-off. The Tribunal's order did not record any specific finding in regard to the claim. But the addition was confirmed. On the present occasion, the Tribunal, from whose order this reference arises, held that the earlier order of the Tribunal had rejected the claim for set-off. The ITO reopened the assessment for a second time. The second reopening was occasioned against the following background. The assessee was a partner in two firms. One of them was Paul Perincherry & M.I Chakkoru. In the books of accounts of the firm there were unledgerised cash credits in the name of the assessee. These were disclosed in the course of certain litigations between the assessee and Shri Chakkoru, the partner of the firm. The ITO held that the total of such unledgerised cash credits amounted to Rs. 1,29,700 and that the amount stood divided between two years as Rs. 68,200 for 1950–51 and Rs. 161,000 for 1951–52. By the time the officer had information about these credits, the time-limit of 8 years from the end of the assessment year for reopening the assessment under s. 147(a) had run out, and reopening could only be had with the approval of the Central Board of Direct Taxes. The said approval was obtained and assessment proceedings were reopened. Meanwhile, the assessee, Mr. Paul, died, and notices were issued to the legal representative, namely, his wife, Annamma. When the ITO took up the case for hearing, the argument before him was that the unledgerised credits came out of the intangible addition of a larger amount made in the assessment of that year as well as in the earlier years. This was rejected. The officer also rejected the objection to his jurisdiction. He took only the peak amount which fell in the accounting year, namely, Rs. 49,700. This was added to the income. The ITO's order was dated March 26, 1969. An appeal to the AAC failed. The matter came up before the Income-tax Appellate Tribunal. The Tribunal rejected the objection of jurisdiction to reopen the assessment. On the merits, the Tribunal relied on the unreported decision of a Division Bench of this court in M.I Chakkoru v. Commissioner Of Income-Tax, Kerala. No. 61 of 1965—since reported in [1980] 121 ITR 440 (Ker) (Appendix) infra]. That decision laid down that it is for the assessee to explain the cash credits and to trace their: source, and if the explanation was with respect to certain intangible additions made in the earlier years, it is for the assessee to prove the same. It was ruled that no onus was cast on the department. In the light of the decision, the Tribunal found that part of the intangible additions of the earlier years had already been used up in explanation for the credit of Rs. 65,080 considered in the first reopened assessment. The intangible addition of Rs. 48,000 could not be set off against the credit of Rs. 65,000 in the same year. It was noticed that the assessee must have explained before the Tribunal in the earlier proceedings that as regards the addition of Rs. 68,060 for the year 1948–49 it was re-introduced as a credit in the books, and ledgerised as against the present credits, unledgerised. In view of these facts, the Tribunal took the view that the assessee could not be allowed to set off Rs. 48,000 for the assessment year 1948–49. With regard to Rs. 7,150 added in the year 1949–50 it held that if it had been available for re-introduction at all, the assessee would have claimed that also against the ledgerised credit of Rs. 65,000 brought in in the earlier reopened proceedings. The omission of the assessee to claim any such set-off was regarded as giving rise to a presumption that the amount was not available for set-off. On these grounds, the Tribunal rejected the claim of the assessee and dismissed the appeals.
3. The questions of law noticed earlier were compelled to be referred by this court at the instance of the assessee. On an examination of the questions of law it would be seen that on the answer to be given to the 4th question the other questions would really become academic and insignificant. We, therefore, concentrate on the 4th question as to the burden of proof. It has been ruled by a Division Bench of this court in Abraham v. CIT, ILR [1975] (1) Ker 426, after examining the relevant decisions, that it was for the assessee to give a satisfactory explanation in regard to the cash credit entries; and if the explanation furnished by the assessee is found to be not acceptable, the entries may be taken to represent income that had accrued to the assessee during the year of account. This is what this court observed:
“It is well established that when cash credits are found in the account books of the assessee for the relevant period of account it is the assessee who should give a satisfactory explanation in regard to those entries and if the explanation furnished by the assessee is found to be not acceptable those cash credit entries may be taken to represent the income that had accrued to the assessee during that year of account. This principle is in no way rendered inapplicable merely because it is found that the assessee had earned some undisclosed income in some year anterior to the period of account in respect of which an admission had been made in the course of his assessment for that year. If the assessee has a case that the cash credits noticed during the relevant accounting period have come out of the amount which had been added to his income for the earlier year it is undoubtedly open to him to put forward such a plea while furnishing his explanation about the source of the cash credits and in the event of any such plea being raised by the assessee the same will fall to be carefully considered by the assessing authority. While the fact of such an amount having accrued to the assessee as his income during the earlier year is undoubtedly a matter to be taken note of by the Income-tax Officer in considering the question whether the source of the cash credits has been satisfactorily explained by the assessee, the burden of proof rests squarely on the shoulders of the assessee to establish the truth and tenability of the explanation furnished by him.”
4. This court considered the decisions of the Madras High Court, in Kuppuswami's case, [1964] 51 ITR 757 and Abdul Qadir's case, [1964] 52 ITR 364 and stated that although some of the observations in the decisions would appear to support the contention urged by the assessee in those cases, those observations have to be understood against the background of the facts and circumstances disclosed. The Division Bench was unable to regard the Madras decisions as laying down any general principle that in all cases where an addition had been made to the income of the assessee in making the assessment for an earlier year, the amount so added should be presumed to be available to the assessee during the subsequent years. The Division Bench then referred with approval to the previous ruling of this court in M.I Chakkoru v. Commissioner Of Income-Tax, Kerala. No. 61 of 1965—since reported in [1980] 121 ITR 440 (Ker) (Appendix) infra] and recorded complete agreement with the principle of that decision. The principle approved was stated thus:
“We have been referred to two decisions of the Madras High Court in S. Kuppuswami Mudaliar v. CIT reported in [1964] 51 ITR 757 and B. Abdul Qadir v. CIT reported in [1964] 52 ITR 364. We do not understand these decisions as laying down a principle that whenever an estimate had been made of income for any particular year the amount added by that estimate as income from the business disclosed and additions to income from undisclosed sources because of unexplained credits must be taken to be available with the assessee for being credited in a subsequent year of account. And that in all such cases it is for the department to establish that that amount was not available with the assessee. If these decisions imply the casting of any such burden on the department, with great respect we are unable to agree with that view.”
5. It is clear from the above Division Bench rulings of this court in ITR No. 61 of 1965 (M.I Chakkoru v. CIT) [since reported in [1980] 121 ITR 440 (Ker) (Appendix) infra] and Abraham v. CIT, ILR [1975] (1) Ker 426 that the burden of proof to trace the unexplained credits to the intangible additions is on the assessee and not on the department.
6. Counsel for the revenue drew our attention to the various aspects of the statement of the case. For instance, it was stressed that the assessee had not offered any convincing explanation regarding the source of un-ledgerised credits given at pages 6 and 7 of the statement of the case and that the assessee's position that these credits might have come out of the intangible additions of the past years or the assessment year was a vague conjecture. Attention was also called to the finding of the AAC regarding the intangible additions to the extent of Rs. 17,000 and the comment raised by that authority that the assessee's representative was not able to produce any evidence to show that the same intangible addition was available to the assessee for being considered once against the credits in the capital account, and then again against unledgerised cash credits in the cash books. Attention was also called to the Tribunal's finding at page 22 of the statement of the case that on the material on record no such fund of the intangible additions of Rs. 55,210 (for the years 1948–49 and 1949–50) could have been available to the assessee for re-introduction in the accounting year relevant for the assessment year 1950–51. On these materials on the record we think the Tribunal was right in holding against the assessee. We answer the first part of question No. 4 in the negative; and, therefore, the second part of that question would not arise for consideration.
Question No. 1:
7. This question is directly covered in favour of the revenue and against the assessee by the decision of the Division Bench ruling of this court in Kerala Oil Mills' case, [1980] 121 ITR 254 (Ker). It was there ruled that the period prescribed for taking action for reopening assessments was a period of limitation and not a jurisdictional condition. Being so, the longer period of limitation which came into force before March 31, 1959, and before the proceedings of reassessment were initiated was available to the revenue. Therefore, the contention of the assessee that the proceedings are barred by limitation cannot hold good. We answer the first part of question No. 1 in the affirmative, that is, against the assessee, and in favour of the revenue. On the second part of question No. 1 we find no ground or material for interfering with the order of the Appellate Tribunal and in holding that the addition of Rs. 49,700 was unwarranted and illegal. We answer the second part of question No. 1 in the affirmative, that is, in favour of the revenue and against the assessee.
Question No. 2:
8. In view of our finding on question No. 4, question No. 2 does not arise for consideration and we give no answer to the said question.
Question No. 3:
9. Again, in view of our finding on question No. 4, question No. 3 does not arise for consideration and we decline to answer the said question. In the result, the questions are answered as indicated above. We make no order as to costs.
10. A copy of this judgment under the seal of the court and the signature of the Registrar will be communicated to the Tribunal as required by law.
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