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Raja Sharda Narain Singh v. Commissioner Of Income Tax, U.P .
Factual and Procedural Background
The appellant’s father, Raja Major Durga Narain Singh, was a large zamindar who derived substantial income from zamindari, money-lending, flour and oil mills, and rent. He died on 2 September 1944. During the assessment proceedings for Assessment Year 1949-50, the Income-tax Officer noticed a credit entry dated 3 November 1947 for Rs 2,00,000 in the estate treasury, recorded as money deposited by the appellant’s mother from the private funds of the deceased Raja.
The Income-tax Officer treated the amount as the appellant’s undisclosed income for the relevant previous year (28 September 1947 – 30 September 1948). The Appellate Assistant Commissioner initially deleted this addition after remand, but the Income-tax Appellate Tribunal, on a further remand report, restored the addition.
The assessee’s application under Section 66(1) of the Indian Income-tax Act, 1922 seeking a reference was rejected by the Tribunal on the ground that the findings were purely factual. A subsequent application under Section 66(2) before the Allahabad High Court met the same fate. The present appeal, by special leave, challenges the High Court’s refusal to direct the Tribunal to state a case.
Legal Issues Presented
- Whether the Tribunal ought to have referred the question whether Rs 2,00,000, treated as income from an undisclosed source, was assessable in Assessment Year 1949-50 (based on the assessee’s accounting year 1 October 1947 – 30 September 1948) or in Assessment Year 1948-49 (based on the financial year 1 April 1947 – 31 March 1948).
- Whether, in refusing to direct a reference, the High Court erred in treating the above as a pure question of fact.
Arguments of the Parties
Appellant’s Arguments
- The Tribunal should have referred four specific questions, particularly the one relating to the correct “previous year” for unexplained income.
- Reliance was placed on decisions such as CIT v. P. Darolia & Sons, CIT v. Sheolal Ramlal, and Sushil Chandra Ghose v. ITO to contend that when income is from an undisclosed source outside the assessee’s regular business, the financial year – not the assessee’s own accounting year – is the relevant previous year.
- These authorities demonstrated that a substantial question of law arose out of the Tribunal’s order.
Respondent’s Arguments
- No such question regarding the correct previous year was argued before the Tribunal; hence it could not form the subject-matter of a reference.
- The Tribunal’s findings on the nature and timing of the income were factual and therefore not referable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. P. Darolia & Sons | If undisclosed income arises from sources unconnected with the assessee’s regular business, the financial year is treated as the “previous year”. | Cited by the appellant to show that a serious question of law exists; the Supreme Court did not adjudicate on its correctness at this stage. |
| CIT v. Sheolal Ramlal | Same principle: unexplained income from an unknown source is referable to the financial year. | Relied on by the appellant for establishing that the reference sought involved a legal issue; Court reserved opinion on its correctness. |
| Sushil Chandra Ghose v. Income-tax Officer | Reiterates that income from an undisclosed, non-business source is linked to the financial year. | Advanced by the appellant to reinforce the existence of a debatable legal question; Court made no determination on its merits at this stage. |
Court's Reasoning and Analysis
The Supreme Court examined whether the refusal to state a case was justified. It noted that the Tribunal had, in fact, addressed the broader question of whether the sum represented income of the relevant accounting period, thereby encompassing the aspect now emphasised by the appellant. The Court rejected the respondent’s contention that a reference cannot include an aspect not expressly discussed by the Tribunal.
On the second issue pressed before the High Court—whether there was material to support the finding that the amount constituted undisclosed income—the Court agreed with the High Court that ample material existed, and therefore no reference was necessary on that point.
Consequently, the Court concluded that at least one substantial question of law did arise, namely, the correct previous year applicable to the unexplained income. The Tribunal was therefore directed to frame and refer that question to the High Court.
Holding and Implications
Appeal Allowed. The Income-tax Appellate Tribunal is directed to prepare a statement of the case and refer the following question to the Allahabad High Court:
“Whether the sum of Rs 2,00,000 included in the total income of the assessee as income from some undisclosed source was not assessable in Assessment Year 1949-50 on the basis of the accounting year 1 October 1947 – 30 September 1948, but was assessable only in Assessment Year 1948-49 with reference to the financial year 1 April 1947 – 31 March 1948?”
Costs in the Supreme Court will be costs in the cause. The decision’s immediate effect is to reopen the matter before the High Court on a formulated legal question; it sets no broader precedent beyond clarifying that an aspect of a question, even if not separately argued before the Tribunal, can warrant a reference under Section 66(2).
Sikri, J.— This appeal by special leave is directed against the judgment of the Allahabad High Court in Miscellaneous IT Case No. 176 of 1957, refusing to direct the Income Tax Appellate Tribunal to state a case under Section 66(2) of the Indian Income Tax Act, 1922.
2. In order to appreciate the points raised before us it is necessary to set out the relevant facts. The appellant's father, Raja Major Durga Narain Singh, had two sons, the appellant and his younger brother, Kanwar Devendra Narain Singh. The appellant was born in 1929 and attained the age of majority in 1947. Up to 1952 he was a student. The appellant's father was a big Zamindar of the District and was paying a land revenue of about Rs 2 lakhs a year. He enjoyed income from property, flour mill, hire of Kothies, oil mill, money lending and other sources. He died on September 2, 1944. The Income Tax Officer, for the year of assessment 1949-50, noticed that on November 3, 1947, Rs 2,00,000 had been credited in the estate treasury and the entry stated that Smt Rani Bahadur Sahiba had given Rs 2 lakhs from the private money of the deceased Raja Saheb for deposit. The Income Tax Officer was not satisfied with the explanation given on behalf of the assessee and included the sum of Rs 2 lakhs in the total income of the appellant-assessee. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner remanded the case to the Income Tax Officer with the direction that he should cross-examine the Manager and the Raj Mata. After the remand report, the Appellate Assistant Commissioner accepted the version of the assessee and excluded the item of Rs 2 lakhs from the assessment. The Income Tax Officer appealed to the Income Tax Appellate Tribunal. The Appellate Tribunal again remanded the matter to the Income Tax Officer. The Income Tax Officer gave a detailed report and after the receipt of the report the Appellate Tribunal reversed the order of the Appellate Assistant Commissioner and restored the order of the Income Tax Officer.
3. The Income Tax Officer rejected the assessee's contention that the sum of Rs 2 lakhs was out of the private purse of the late Raja Durga Narain Singh and was not the revenue income of the assessee for the year under consideration. It is not necessary to set out the reasoning of the Appellate Tribunal. We have gone through the order and it is sufficient to state that there was material on which the Tribunal could come to the conclusion that the sum of Rs 2 lakhs was the revenue income from undisclosed sources.
4. The Tribunal then considered the question whether the revenue income was the income of. the accounting year relevant to Assessment Year 1949-50. It observed on this point:
“There can hardly be any doubt that the sum represented the revenue income of the year under consideration. The account year of the assessee started from 28th of September, 1947 and extended upto the 30th of September 1948. The deposit appears on 3rd of November, 1947. The assessee is a man of great status. He is the Raja of an estate and owns considerable income from Zamindari Sayar, money lending etc. He has been assessed in the past on considerably large amounts and his potential capacity to earn income is certainly great. The deposit appears in the account books of the assessee during the accounting period. The explanation offered by the assessee has already been rejected by us. The amount is undoubtedly big but the assessee with his potential capacity to earn income could not have found it difficult to earn a sum of Rs 2 lakhs from sources known to him but undisclosed to the department. On these facts, the only inference that can be drawn is that the sum of Rs 2 lakhs represents not only the income of the assessee but also the income of the previous year under consideration.”
5. The assessee then filed an application under Section 66(1) of the Income Tax Act before the Appellate Tribunal. The Appellate Tribunal, however, rejected the application on the ground that the findings recorded by the Tribunal were purely of fact.
The assessee had suggested the following question of law to be referred:
(1) Whether in the circumstances of the case the Department succeeded in proving that the sum of Rupees two lakhs was the income of the year commencing from 1st October, 1947 to 30th September, 1948;
(2) Whether on the facts of the case the Tribunal was justified indrawing an inference that the sum of Rupees two lakhs represented not only the income of the assessee but also his income for the year in question was justified;
(3) Whether considering that the previous year commenced on 1st October, 1947 it could be said that the assessee had made an income of Rupees two lakhs within a short period of one month and three days;
(4) Whether there was any evidence on the record to justify a finding that Rupees two lakhs was the income from Nazrana, etc. or from other undisclosed sources.”
6. The assessee then applied to the High Court under Section 66(2) of the Income Tax Act, asking the same questions to be referred. The counsel pressed two points in support of the application before the High Court:
(1) Whether an amount of Rupees two lakhs included in the total income of the assessee as income from some undisclosed source was not assessable in Assessment Year 1949-50 on the basis of the accounting year of the assessee from 1st October, 1947 to 30th September, 1948 but was assessable only in Assessment Year 1948-49 with reference to the financial year 1st April, 1947 to 31st March, 1948;
(2) Whether there was material for the finding that the said amount of rupees two lakhs was the income of the assessee from some undisclosed source.
7. The High Court, as already stated, rejected the application. The assessee having obtained special leave, the appeal is now before us.
8. The learned counsel for the assessee, Mr S.T Desai, urges that the four questions set out above should have been referred. In our view, the only questions that should have been referred by the Appellate Tribunal are Questions 1 and 2 which are similar to the first question which was pressed before the High Court.
9. We may mention that Mr Desai referred to CIT v. P. Darolia & Sons, CIT v. Sheolal Ramlal, Sushil Chandra Ghose v. Income Tax Officer in support of the proposition that if 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. At this stage we are not called upon to decide whether these cases were correctly decided, but Mr Desai is certainly entitled to rely on them to show that a serious question of law arose out of the order of the Appellate Tribunal.
10. The learned counsel for the respondent says that no such question was argued before the Appellate Tribunal. We have already extracted the relevant para from the order of the Appellate Tribunal. It appears, from the order of the Appellate Tribunal that they considered the question whether the income could be held to be the income of the relevant accounting year. This question was a wide question and included the aspect which is now being put in the forefront. It is true that the cases relied upon by Mr Desai were not mentioned by the Appellate Tribunal but we are unable to agree with the learned counsel for the respondent that an aspect of a question cannot be the subject-matter of a reference, if that aspect is not considered by the Appellate Tribunal.
11. We agree with the High Court that the second question pressed before it, namely, whether there was material for the finding that the said amount of rupees two lakhs was income of the assessee from some undisclosed source need not be stated by the Tribunal as there is material on the record in support of the finding of the Appellate Tribunal.
12. In the result the appeal succeeds and we direct the Appellate Tribunal to draw up a statement of the case and refer the following question to the High Court:
“Whether the sum of Rupees two lakhs included in the total income of the assessee as income from some undisclosed source was not assessable in Assessment Year 1949-50 on the basis of the accounting year of the assessee from 1st October, 1947 to 30th September, 1948, but was assessable only in Assessment Year 1948-49 with reference to the financial year 1st April, 1947 to 31st March, 1948?”
13. The costs incurred in this Court will be costs in the cause.
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