Commissioner Of Income Tax, Bihar v. M/S. Anupam Udyog, Chopra

S.K Jha and Ashwini Kumar Sinha, JJ.:— On an application for reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’), a statement of the case has been submitted to this Court by the Income-tax Appellate Tribunal, Patna Bench, referring the following question of law for the opinion of this Court.

“Whether on the facts and in the circumstances of the case the Tribunal was correct in deleting the addition of Rs. 16,700/- from the assessment of the firm.”

2. The facts which are beyond the pale of controversy and as emerged out of the statement of the case submitted to this Court can be culled thus. The assessee is a firm which commenced its business from 14.2.1967 That was the first year of the firm's business. The assessee derives income from business in ghee and mustard oil. A return had been filed showing an income of Rs. 3,016.00 in the statute of a firm. The assessee, however, did not file any application for registration of the deed of partnership and, therefore, it was treated as an Association of persons by the Income Tax Officer, who was the Assessing authority. This fact is borne out from the assessment order of the Income Tax Officer, which has been appended as Annexure ‘A’ forming part of the statement of the case. The assessee started its business from 14.2.1967 On that date, four of the five partners brought a capital of Rs. 5,001-00 each, and this amount was credited in the books of the firm on the first day of its business. This fact is borne out, apart from the statement of the case as submitted to this Court by the Tribunal, by the appellate order of the Tribunal, which has been appended to the statement of the case as Annexure “C” thereto. The fifth partner did not subscribe anything, presumably because he was supposed to be a working partner.

3. The Income Tax Officer in his brief order held that the evidence in respect of Rs. 3,300/- was satisfactory, but not being satisfied with the balance of Rs. 16,700/- held that the balance of Rs. 16,700/- was the assessee's income from undisclosed sources. This was disputed by the assessee before the Appellate Assistant Commissioner, but the contention did not find favour with him. The Appellate Assistant Commissioner held that no evidence was forthcoming regarding the credits and there was no direct link between the agricultural income and the investments made as the assessee claimed the capital outlay from respective agricultural income of the partners which they asserted formed the nucleous from which the money was invested for the constitution of the firm. A copy of the order of the Appellate Assistant Commissioner has been marked Annexure “B” to the statement of the case (wrongly described in the statement of the case as Annexure “E”).

4. Before the Tribunal, it was submitted on behalf of the assessee that the amounts in question were introduced as capital by the partners on the first day of the business of the firm in the shape of agricultural income. It was also urged that the initial capitals of the firm on the day of the existence of the firm could not be treated as income of the firm. In this confection the assessee relied on a decision of the Bombay High Court in the case of Narain Das v. Kedar Nath . 22 I.T.R 18.. It was, however, contended on behalf of the Revenue that the amount had to be treated in the hands of the firm in view of the provision of Section 68 of the Act.

5. The Tribunal found that no definite evidence in support of the source of the agricultural income of the partners had been brought before it. It, however, considered that the firm had no business prior to the date of the credits in the entries of the books of account of the assessee and it was not possible to hold that the firm itself earned this income on the first day of its existence. The argument on behalf of the assessee was, therefore, accepted and in view of the fact that the receipt of the said amounts was on the first day of the business before any transaction had been made and also considering the fact that it was not entitled to treat it as the income of the firm, decided the point in favour of the assessee. In this connection the Tribunal relied upon a decision in the case of Mithoolal Tekchand v. C.I.T . 23 I.T.R 494. where it had been held that in the case of a cash deposit appearing on the first day of the accounting period, it was not possible to hold that it was that year's income, unless there was specific evidence for holding that. On this chain of reasoning, the Tribunal considered that the explanation of the firm was satisfactory explanation and the onus of the firm under Section 68 of the Act was discharged. In view of the aforementioned facts, the Tribunal deleted the amount of Rs. 16,700/-. The appellate order of the Tribunal has been marked Annexure “C”, forming part of the statements of the case.

6. It is in this background of admitted facts that we are called upon to record our opinion with regard to the correctness or otherwise of the decision of the Tribunal.

7. Section 68 of the Act reads thus:

“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.”

8. It is now well settled that there was no provision in the Income Tax Act, 1922 (hereinafter to be referred to as the ‘1922 Act’) corresponding to this section. The section merely gives statutory recognition to the nature and source of cash credits where they stand in the assessee's account or in the account of a third party. The question of burden of proof cannot be made to depend exclusively upon the fact of a credit entry in the name of the assessee or in the name of a third party. In either case, the burden lies upon the assessee to explain the credit entry, though the onus might shift to the I.T.O under certain circumstances. Where, for instance, the assessee shows that entries regarding cash credits in a third party's account are genuine and the sums were in fact received from third party as loans or deposits, he has discharged the onus; and in that case it is for the third party to explain the source of the moneys, and they cannot be charged as the assessee's income in the absence of any material to indicate that they belong to the assessee. These principles, which were well recognised by law under the 1922 Act, have not been altered by the introduction and insertion of Section 68 of the Act. Nonetheless, there are two important departures from the law as it stood in the 1922 Act and that which stands after the insertion of Section 68 of the Act.

9. And they are these: If there are cash credits in the books of a firm in the accounts of the individual partners and it is found as a fact that cash was received by the firm from its partners, then in the absence of any material to indicate that they are the profits of the firm, they cannot be assessed in the hands of the firm, though they may be assessed in the individual accounts of members of a joint family with a third party cannot be assessed as the income of the family unless the Department discharges the burden of proof to the contrary. After the lapse of ten years the assessee should not be placed upon the rack and called upon to explain not merely the origin and source of his capital contribution but the origin of origin and the source of source as well in this connection two important features of the new statutory provisions have to be kept in view upper most. Under the 1922 Act, it was held that if the undisclosed income, e.g, cash credits or high denomination notes encashed was found to represent secreted profits from the assessee's regular business, the previous year chosen by the assessee as the previous year of the business had ordinarily to be taken as the previous year for such income. On the other hand, if the undisclosed income was found to be from some unknown source other than the regular business of the assessee, the financial year had to be taken as the previous year for such income. Section 68 of the Act enacts that if a sum is found credited in the books of an assessee maintained for any previous year (which may be different from the financial year), the cash credits may, in cases where it is assessed as undisclosed income, be treated as the income of the previous year, and the financial year may not be taken as the previous year for such a cash credit even if the undisclosed income is not found to be from the assessee's regular business for which the books are maintained. Although Section 68 of the Act provides that the previous year for which the books are maintained may be taken as the previous year for assessing the cash credits, it does not further provide that the cash credits should necessarily be deemed to be the profits of the business for which the books are maintained; the cash credits may be assessed either as business profits or as income from other sources.

10. The other distinction of paramount importance is this. Under the 1922 Act, it was held that where large amount of cash is credited on the very first day of the accounting years and considering the extent of the business it is not possible that the assessee earned a profit of the amount in one day the amount could not be assessed as the income of the year on the first day on which it is credited in the books. Under Section 68 of the Act, even in such a case the unexplained cash credit may be assessed as the income of the accounting year for which the books are maintained.

11. It will thus be seen that if a sum is found credited in the books of account of an assessee maintained for any previous year, the cash credit may be treated as the income of that previous year and the financial year may not be taken as the previous year for such a cash credit if the income is not found to be from the assessee's regular business for which the books are maintained, and that under Section 61 of the Act, whatever may have been the position under the 1922 Act, even in such a case, the unexplained cash credit may be assessed as the income of the accounting year for which the books are maintained. Once we are not oblivious of this question of law, the matter on a pure statutory construction of Section 68 of the Act presents no difficulty for the determination of the question at hand.

12. In this connection, although a number of decisions were cited at the Bar, we think only three decisions throwing light upon the subject or rather deciding the question at hand are the decisions in the case of Hardwarmal Onkarmal v. Commissioner Of Income-Tax. . 102 I.T.R 779. a decision of our own High Court, to which one of us (S.K Jha, J.) was a party, which decision has since been followed subsequently by the Allahabad High Court in the case of Commissioner of Income-Tax, Lucknow v. Kapur Brother . 118 I.T.R 741. and without making a reference to that decision, by another decision of the Calcutta High Court in the case of Commissioner of Income-Tax, West Bengal v. Ashok Timber Industries.5

13. We feel tempted in taking an extract in Hardwarmal Onkarmal's case (supra) from the decision of this Court where Untwalia, J. speaking for the Bench said thus:

“There was no provision in the Indian Income-tax Act, 1922, corresponding to Section 68 of the Act. Section 68, however, was enacted as it appears, mainly to give statutory recognition to the principles of law laid down by the various authorities making a departure in regard to two matters only, as pointed out by the learned authors Kanga and Palkhivala in the Law and Practice of Income Tax, 6th Edition, Volume I, page 537. Previously, a dispute had arisen as to whether a cash credit found in a particular accounting year of the assessee could be taken to be the income of that accounting year or whether it should be taken to be of a separate previous year according to the financial year. This matter has been set at rest by Section 68 which says that in all events the income of the assessee has to be treated of that previous year in which the cash credit has been found. Another dispute which had cropped up in various cases was as to whether the amounts found deposited on the very first day of the accounting year could be treated as the secreted income of the assessee of that accounting year. That matter has also been set at rest by Section 68. But on the main question the argument advanced on behalf of the assessee before us that the section has not brought about any change in law seems to be correct.”

14. Thereafter the law as it stood before insertion of Section 68 of the Act and as it stood after its being incorporated in the 1961 Act has also been highlighted.

15. So far as the question of principle is concerned, the other two decisions referred to above, namely, those of the Allahabad High Court and the Calcutta High Court, however, have taken an identical view of the matter.

16. From a perusal of paragraph 4 of the appellate judgment of the Tribunal, it seems that what has weighed with the Tribunal is that:—

“Here we are dealing with a case where the receipts in question appeared in the books on the first day of the existence of the business. The amounts have been brought in as capital by the partners. The partners have made statement showing that the amounts in question have been brought by them. In these circumstance it is not possible to hold that the amount in question represented the income of the firm.”

17. But before coming to the above conclusion the Tribunal has held in that very paragraph of the appellate order that:

“We have considered the facts of the case and the arguments of the learned representatives of both the sides. Before us the learned counsel for the assessee has merely reiterated that all the parties had agricultural income from which they had brought these credits. No definite evidence in support of that has been brought before us.”

18. How anomalous? On the one hand, the Tribunal does not seem to be satisfied with regard to the explanation given by the partners that they had invested the so-called capital from out of their agricultural income, and yet in the next breach, the Tribunal goes on to hold that since the partners had owned that these sums had been advanced by them as capital outlay for the formation of the firm, they entered them as cash credits in the previous year. The Tribunal has gone on rather more on the basis of surmises that this explanation may be true. Assuming, therefore, that it could be a discharge of onus only, but on the Tribunal's own showing, such an onus had not been discharged. All the same, it is for the firm to explain to the satisfaction of the Income-tax Officer with regard to the nature and source of the cash credits entries in the books of account of the previous year. The question as to whether the partners' explanation is at all warranted or for that matter, the partners that explained the source of their capital, in our view, shall make little difference in law after the insertion of Section 68 of the Act. But this is merely of academic interest as we have already pointed out above that even if the Tribunal has categorically held that the partners' agricultural income from which they had brought these cash credits was not supported by any evidence in support of that which had been brought before the Tribunal, that clinches the issue.

19. For the aforesaid reasons we are constrained to hold in favour of the Revenue and against the assessee and answer the question of law referred to us in the negative. We, accordingly, hold that on the facts and in the circumstances of the case, the Tribunal was not correct in deleting the above sum of Rs. 16,700/- from the assessment of the firm.

20. Before parting with this case, we will be falling in our duty if we do not make mention of a number of decisions filed at the Bar, to wit, 49 I.T.R 112 at 120 (S.C) : 81 I.T.R 460 Bombay : 50 I.T.R page 1 page 4 (S.C) 87 I.T.R 395 at 399. None of these cases relate to Section 68 of the Act and have no bearing upon the point with which we are seised. It is, therefore, futile to refer to them.

21. In the circumstances of the case, however, we shall make no order as to costs.