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Ratanchand Dipchand v. Commissioner Of Income-Tax

Madhya Pradesh High Court

Jul 2, 1959

Judgment

Subsequent
References

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Structured Summary of the Provided Opinion

Factual and Procedural Background

This Court directed the Income Tax Appellate Tribunal, Bombay to submit a statement of case under Section 66(2) of the Income-tax Act, 1922 on the specific question whether there was any material on record to hold that the assessee failed to explain excess credit in the anamat account to the extent of Rs. 10,230/-, given that the Department itself made an addition of that amount as estimated profits to his income.

The assessee is a Hindu undivided family engaged in money-lending and various trading businesses (kirana, gur, sugar, betel nuts, sweet oil). Accounts were kept according to the Diwali year; the relevant previous year ran from 22-10-1949 to 9-11-1950 for assessment year 1951-52.

The Income Tax Officer made four additions to the assessee's income: (a) Rs. 40,389 as income from undisclosed sources (distinct from 'business'); (b) Rs. 11,000 as profit in sweet oil business; (c) Rs. 5,530 as additional profit in kirana business; and (d) Rs. 5,000 as profit in other goods accounts.

On first appeal the Appellate Assistant Commissioner reduced and adjusted some additions: the sweet oil addition (b) was reduced from Rs. 11,000 to Rs. 6,400; additions (c) and (d) of Rs. 5,530 and Rs. 5,000 respectively were upheld in part or reduced as described; and in respect of the Rs. 40,389 addition the Assistant Commissioner accepted an agricultural income explanation for Rs. 9,937 and reduced that item to Rs. 30,452.

On second appeal to the Income Tax Appellate Tribunal, Bombay, the assessee did not contest the Rs. 6,400 estimated profit addition in respect of sweet oil; the Tribunal excluded Rs. 5,000 (other goods accounts) but otherwise maintained the Assistant Commissioner's additions. The Tribunal declined to delete the Rs. 30,452 item for income from undisclosed sources, noting that the assessee had not explained why that addition should be deleted.

After the Tribunal's decision it was accepted before this Court that the assessee had not previously contended before the tax authorities or the Tribunal that the excess credit of Rs. 30,452 in the anamat khata was connected with the business profits of Rs. 6,400 (or Rs. 3,830) totalling Rs. 10,230. The assessee's subsequent submission — prompting the reference — was that because the Income Tax Authorities had added Rs. 10,230 as estimated profits under 'business', that amount should be treated as explaining the excess credit in the anamat khata to that extent, and taxing it again would amount to double taxation.

Legal Issues Presented

Whether, on the facts and circumstances of the case, there was any material on record to hold that the assessee failed to explain the excess credit in the anamat account to the extent of Rs. 10,230/-, in view of the Department's addition of that amount as estimated profits to his income?

Arguments of the Parties

Appellant (Assessee) - Arguments

The assessee (before this Court) submitted that because the Income Tax Authorities had made an addition of Rs. 10,230 as estimated profits under the head 'business', that addition should be treated as explaining the excess credit in the anamat khata to the same extent.
On this basis, the assessee argued that taxing the amount of Rs. 10,230 again as undisclosed income would amount to double taxation.
At the Tribunal level counsel (Mr. Oza) stated that the anamat account is a fluctuating capital account and that it also records agricultural income; however, the Tribunal found no explanation sufficient to delete the Rs. 30,452 addition.

Respondent (Revenue / Income-tax Authorities) - Arguments

The Income-tax Officer treated certain entries and cash/credit items as indicating undisclosed income and made additions on that basis (including estimating profits for the business and treating other sums as income from undisclosed sources).
The record, as explained by the Tribunal's reasoning included in the statement of case, reflects that the assessee did not establish that the figures relied upon by the Appellate Assistant Commissioner were incorrect or that the addition should be deleted.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Messrs. Srinivas Ramkumar v. Commissioner of Income-tax, 1948-16 ITR 254; AIR 1949 Pat 211	Where Income-tax authorities applied flat rates to cover suppressed income, they could include a sum entered in a suspense account as secreted/undisclosed profits (e.g., speculative transactions) and such addition does not amount to double taxation when it is treated as undisclosed profit distinct from trading profits.	The opinion cites this as the first case of the kind and as authority that undisclosed profits attributable to a source (here speculation) distinct from trading activity may be taxed without constituting double taxation.
Kalekhan Mahomed Hanif v. Commissioner of Income-Tax, 1958-34 ITR 669; AIR 1958 Madh-Pra 271	Where an assessee's explanation for cash credits is discarded by the Income-tax Officer as worthless or unsupported, the officer is justified in treating books showing cash deposits as conclusive that some income was made and related to an undisclosed source; the officer need not indicate what that source was.	The Court approved this decision and used it to support the proposition that a finding by the Income-tax Authorities that certain income is from undisclosed sources does not oblige them to identify the precise other source.
Ramcharitar Ram Harihar Prasad v. Commissioner of Income-Tax, 1953-23 ITR 301; AIR 1954 Pat 143	Where there is no material to support that cash credits were income from undisclosed sources unconnected with the business, additional estimated profits relating to trading cannot be taxed again as undisclosed income; factual findings about the existence or absence of other sources are distinct from legal rules.	The opinion cites this case to illustrate that if the statement of case shows the assessee had no other sources (a factual finding), a re-taxation may be impermissible; the Court treats that as a finding of fact rather than a legal rule and contrasts it with other authorities.
D. C. Auddy and Brothers v. Commissioner of Income-Tax, West Bengal, 1955-28 ITR 713; AIR 1956 Cal 295	The Calcutta High Court articulated the distinction between (a) income from an undisclosed item of a known line of activities (i.e., undisclosed item within the known business) and (b) income from a source altogether unknown and unconnected with known lines of profit-earning activity. If two additions are traceable to distinct heads (one known business profits, another from an unknown source), both can be sustained; but it is not permissible to estimate gross business profits and again add cash credits relating to the same business.	The opinion expressly adopts and states respectful agreement with this view as the correct legal position to distinguish permissible multiple additions from double taxation.
G. M. Chenna Basappa v. Commissioner of Income-Tax, Hyderabad, 1958-34 ITR 576; AIR 1959 Andh-Pra 368	Reiterates that if two additions are traceable to two distinct heads — one to business activities (undisclosed profit from known source) and the other to an undisclosed source (altogether unknown) — both additions are legally sustainable; but the position differs if the cash credits were treated as part of the undisclosed profits of the same business (which would amount to double assessment of the same business income).	The opinion cites this case and states agreement with the principle that distinct heads may justify separate additions but the same business income may not be taxed twice.

Court's Reasoning and Analysis

The Court proceeded through the following analytical steps, based exclusively on the materials and reasoning recited in the statement of case:

The Court reviewed the procedural and factual record: the original additions by the Income Tax Officer, modifications by the Appellate Assistant Commissioner, and the Tribunal's subsequent rulings (including the Tribunal's observation that the assessee had not adequately explained why the Appellate Assistant Commissioner's figures were incorrect).
The Court recognized the captive legal issue: whether the addition of Rs. 10,230 as estimated business profits by the Department could be taken as explaining the excess credit of Rs. 30,452 in the anamat khata to the extent of Rs. 10,230 and thus prevent double taxation.
The Court surveyed relevant authorities addressing the legal distinction between (a) undisclosed income from a known source (i.e., an undisclosed item within the assessee's known business activities) and (b) income from an undisclosed source (i.e., profits from a source altogether unknown and unconnected with known business lines). The cited authorities include decisions of Patna, Calcutta, Madhya Pradesh and Andhra Pradesh High Courts and this Court's approval of some of those decisions.
From those authorities the Court extracted the governing principle: if the secreted or undisclosed income can be related to a source that is unknown and unconnected with the assessee's business, the imposition of an addition as income from undisclosed sources does not amount to double taxation even if the authorities also estimate profits of the business; conversely, double taxation occurs if both additions are effectively taxing the same business income twice.
Applying that principle to the facts before it, the Court found that the Tribunal had made a specific finding that Rs. 30,452 represented income from undisclosed sources. The Court construed that finding to mean the undisclosed income was unconnected with the assessee's business.
Given that finding — that Rs. 30,452 was income from undisclosed sources and thus unconnected with the business — the Court concluded that the assessee had failed to explain the excess credit in the anamat khata to the extent of Rs. 10,230. In short, the Court held that the Department's addition of Rs. 10,230 as estimated business profits did not operate to explain or exhaust the Rs. 30,452 undisclosed income entry.

Holding and Implications

Holding: The Court answered the referred question in the affirmative: it held that, on the facts and circumstances of the case and in view of the Tribunal's finding that Rs. 30,452 was income from undisclosed sources (therefore unconnected with the business), the assessee failed to explain the excess credit in the anamat khata to the extent of Rs. 10,230.

Direct Effects and Orders:

The assessee shall bear the costs of the reference.
The counsel's fee was fixed by the Court at Rs. 100/-. (As stated in the opinion.)

The opinion's reasoning rests on the factual finding that the impugned sum was income from undisclosed sources, and on the legal distinction (repeatedly endorsed in the cited authorities) between undisclosed income traceable to a known business and undisclosed income attributable to an altogether different and unknown source. The opinion does not elaborate further policy consequences beyond the direct effect on the parties stated above.

Show all summary ...

1. The Income Tax Appellate Tribunal, Bombay was directed by this Court to submit a statement of case under Section 66(2) of the Income-tax Act, 1922 on the following question:

"Whether in the facts and circumstances of the case there was any material on record to hold that the assessee failed to explain the excess credit in the anamat account to the extent of Rs. 10,230/-in view of the addition made by the Department itself to the extent of that amount as the estimated profits to his income?"

The above question has accordingly been referred to this Court for judgment.

2. The assesses is a Hindu undivided family carrying on money-lending business and business in Kirana, gur, sugar, betel nuts, sweet oil, etc. The accounts are maintained by him according to the Diwali year, the material previous year for the purpose of assessment year 1951-52 being 22-10-1949 to 9-11-1950. The Income Tax Officer made the following four additions to his income viz.

(a) Income from undisclosed sources as distinguished from 'business' Rs. 40,389-0-0

(b) Profit in sweet oil business Rs, 11,000-0-0

(d) Profit in other goods accounts Rs. 5,000-0-0 In appeal the Appellate Assistant Commissioner up held the additions of Rs. 5,530/- and Rs. 5,000/-

but reduced the amount of Rs. 11,000/- to Rs.

6,400/-. In regard to the addition of Rs. 40,389/-

the Appellate Assistant Commissioner accepted the explanation of the assessee in respect of Rs. 9,937/-

which was said to be the income from agricultural sources and reduced the amount to Rs. 30,452/-.

3. The assessee then came up in second appeal to the Income Tax Appellate Tribunal, Rom-bay, where he did not contest the addition of Rs. 6,400/- on account of the estimated profits of sweet-oil business. The Tribunal, however, excluded the addition of Rs. 5,000/- on account of profits in other goods accounts. In other respects the additions made by the Appellate Assistant Commissioner were maintained. As regards the amount of Rs. 30,452/- on account of income from undisclosed, sources as distinguished from 'business' the Tribunal observed as follows:

"4. Before us it was stated by Mr. Oza that the anamat account is a fluctuating capital account; it also records agricultural income. Mr. Oza has not explained to us as to why we should delete the-addition of Rs. 30,452/- finally directed by the Appellate Assistant Commissioner and in what manner any of the figures considered by the Appellate Assistant Commissioner which were the figures given to him by assessee himself, were incorrect. There being no further explanation with regard to this item, we see no reason to delete this addition."

It would thus appear and Shri Thakkar for the petitioner accepts before us that it was not the case of the assessee before the Income Tax Authorities or before the Tribunal that the excess credit of Rs. 30,452/- in the anamat khata was connected with the business from which the income of Rs. 6,400/-or of Rs. 3,830/- total Rs. 10,230/- was made. However, the submission of the assessee on the point was that since the Income Tax Authorities added to his income the amount of Rs. 10,230/- on account of estimated profits under the head 'business', excess credit in the anamat khata stood explained to that extent. On this basis it was urged that to tax the amount of Rs. 10,230/- on account of estimated profits would amount to double taxation.

4. The first case of this kind arose in Messrs.. Srinivas Ramkumar v. Commissioner of Income-tax., 1948-16 ITR 254: (AIR 1949 Pat 211). In that case the Income Tax Authorities assessed profits of the business of the assesses at a flat rate. In ascertaining the net amount of losses they treated a sum of Rs. 33500/- entered in the suspense account in the books of the assessee's head office as undisclosed profit of the speculative transactions. On those facts it was held by their Lordships of the Patna High Court that although the Income-tax authorities applied flat rates to cover suppressed income, they were entitled to include the sum of Rs. 3,500/- as secreted profits, of the firm and the addition of the sum did not amount to double taxation inasmuch as it was brought into account not as profit of the trading transactions but as undisclosed profit of business in speculation.

This decision was approved by this Court in Kalekhan Mahomed Hanif v. Commissioner of Income-Tax, M. P. and Bhopal, Nagpur, 1958-34 ITR 669: (AIR 1958 Madh-Pra 271), in which it was held that where the assessee explained the cash credit deposits in a particular way but the Income-tax Officer discarded the evidence tendered by the assessee as worthless, or where no evidence was tendered be would be justified in taking the evidence of the books showing the cash deposits as conclusive of the fact that some income was made and related to an undisclosed source and he was not bound to indicate what that source was.

5. The next case is again of the Patna High Court viz. Ramcharitar Ram Harihar Prasad v. Commissioner of Income-Tax, Bihar and Orissa, 1953-23 ITR 301: (AIR 1954 Pat 143). In this case the income Tax Authorities held that the trading ac-

count maintained by the assessee did not show his true profits and estimated that a sum of Rs. 15,644 should be added as profit to the amount shown in the books of account. They also held that a sum of Rs. 85,000 shown as cash credits in the personal accounts of the partners should be added to the income from business. Although in the question that was referred to the High Court the amount of Rs. 85,000 was described as income from undisclosed sources, it was found by their Lordships that there was no material whatever in the statement of the case to support the argument that the amount of Rs. 85,000 was income derived not from the business of the assessee but from some undisclosed sources.

It was on this basis that it was held that Rs. 15,644 could not be taxed over again. It would thus appear that the distinctive feature of these cases is that where the secreted income can be related to some source although unknown which is unconnected with the assessee's business, the case would not be of double taxation; whereas it would he of that kind if the assessee had no other source of income. This distinction was noticed by the Calcutta High Court in D. C. Auddy and Brothers v. Commissioner of Income-Tax, West Bengal, 1955-28 ITR 713: (AIR 1956 Cal 295) and also by the Andhra High Court in G.M. Chenna Basappa v. Commissioner of Income-Tax, Hyderabad. 1958-34 ITR 576: (AIR 1959 Andh-Pra 368). In the latter case it was observed as below:

The correct legal position seems to be that if the two additions are traceable to two distinct heads, namely, one attributable to the business activities of the assessee and is thus an undisclosed profit from the known source, and other to profits from an undisclosed source, i.e. some profit earning activity of the assessee which is altogether unknown, they are legally sustainable. The position will be different if the cash credits also were treated as part of the undisclosed profits of the same business. It will not be permissible for him to estimate the gross profits from the business and again to add to it the cash credits shown in the books in some disguise, as part of the income of the same business.

We are in respectful agreement with this view.

6. In the case of 1955-28 ITR 713: (AIR 1956 Cal 295) (Supra) what is meant by income from undisclosed source was considered in these terms:

"Taking up the question on its merits, it is pertinent to enquire what income from undisclosed sources means. Popularly speaking, it may mean income from an undisclosed item of a known line of activities or it may mean income from some source which was unconnected with any of the known sources or lines of profit-earning activity followed by the assessee and altogether unknown. If, for example, in the present case, the Income-tax Officer had added the amount of the cash credits to the profits of the business as a part of the undisclosed profits, it would not be profit or income from an undisclosed source. The reason is obvious. Since the Income-tax Officer found himself in a position to attribute this income to the business activities of the assessee, it would be undisclosed income from the known source, that is the business and in the terminology of the Income-tax Act, income from an undisclosed source or undisclosed income from other sources must necessarily mean income from some source which is altogether unknown, taking the word 'source' in the larger sense and not income from some undisclosed item or transaction in a known source of income which is exploited by the assessee."

When the Income-tax Officer comes to the finding that the income shown in the books of account is related to an undisclosed source, he is not bound to indicate, as held by this Court in the case of 1958-34 ITR 669: (AIR 1958 Madh-Pra 271) (Supra), what other sources the assessee has got. Accordingly where other sources are not indicated by the Income-tax Authorities it does not follow that an assessee has no other source of income and the income which is found to be related to an undisclosed source must be the income from the assessee's business.

It is true that their Lordships of the Patna High Court in the case of 1953-23 ITR 301: (AIR 1954 Pat 143) (Supra) inferred from the statement of case that the assessee had no other sources, but that is only a finding of fact and not a statement of law. In our opinion, where the Income-tax Authorities find as a fact that certain income is from undisclosed sources, that is not a finding that, in the absence of any statement that the assessee has got other sources of income, he has no other source of income. For, if it was known that an assessee has other sources of income, there would be no finding that a certain income is from undisclosed sources which must from their very nature remain unknown to the Income-Tax Authorities,

7. In this view the finding that the amount of Rs. 30,452/- was an income from undisclosed sources implies that it is unconnected with the business of the assessee. Consequently it must be held that on the facts and circumstances of the case the assessee failed to explain the excess credit in the anamat khata to the extent of Rs. 10,230/-.

8. Our answer to the question, in the view that we have taken, is in the affirmative. The assessee shall bear the costs. Counsel's fee Rs. 100/-.