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Commissioner Of Income Tax, Kerala, Ernakulam v. K.S Kannan Kunhi, Killara House, Kattoor .
Factual and Procedural Background
Sankunni, karta of a Hindu Undivided Family (H.U.F.) belonging to the Ezhava community of South Malabar, had five sons. The eldest, Kannan Kunhi, had been residing in Ceylon since 1942 and conducting a toddy business there. On 17 August 1950 a toddy business was started in Kerala in Kannan Kunhi’s name, and the business books recorded an initial credit of ₹46,563 on the same day. The H.U.F. also purchased immovable properties for ₹14,250 on 19 May 1950 and ₹3,000 on 16 February 1951.
The Income-tax Officer (ITO) treated the aggregate amount of ₹60,813 (₹46,563 + ₹14,250 + ₹3,000) as income from undisclosed sources for Assessment Year 1951-52. The assessee explained that the funds came from (a) remittances sent by Kannan Kunhi from Ceylon and (b) agricultural income of the H.U.F. The ITO rejected the explanation as “not at all satisfactory,” a view later affirmed by the Appellate Assistant Commissioner and by the Income-tax Appellate Tribunal (ITAT).
The assessee’s application under Section 66(1) of the Indian Income-tax Act, 1922, for reference to the High Court was refused by the ITAT. On a further application under Section 66(2), the Kerala High Court directed the Tribunal to refer the following question: whether the addition of ₹60,813 as income from undisclosed sources for A.Y. 1951-52 was valid in law. The High Court answered in the negative, favouring the assessee. The Commissioner of Income-tax, Kerala, obtained special leave to appeal to the Supreme Court of India.
Legal Issues Presented
- Whether the question of law directed to be referred by the High Court in its Section 66(2) order in fact arose out of the Tribunal’s order.
- Whether the question as framed empowered the High Court to revisit and disturb the Tribunal’s findings of fact.
- Whether the High Court correctly applied the governing legal principles in holding that the addition of ₹60,813 was unjustified.
Arguments of the Parties
Appellant (Commissioner of Income-tax)
- The question of law mandated by the High Court did not emanate from the ITAT’s order, and hence no reference lay.
- The formulation of the question did not authorise the High Court to interfere with factual findings.
- The High Court misapplied the principles laid down in earlier decisions while accepting the assessee’s explanation.
The opinion does not contain a detailed account of the assessee’s legal arguments.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Supreme Court first considered whether, in exercise of its discretionary power under Article 136 of the Constitution, it should interfere with the High Court’s judgment. The Court noted:
- The assessee’s explanations—that part of the initial capital originated from agricultural income and part from remittances sent by Kannan Kunhi—were not facially implausible.
- The ITO had means to verify the size and yield of the H.U.F.’s agricultural holdings and the existence of remittances from Ceylon, yet undertook no such enquiry.
- The ITO and succeeding appellate authorities had summarily rejected the explanations as “not satisfactory” without any factual investigation, and the Tribunal merely echoed that rejection in a single sentence.
Characterising this treatment as “arbitrary,” the Court concluded that the revenue authorities and the Tribunal had failed to discharge their duty of fact-finding. Given that failure, the Court found no compelling reason to scrutinise the “niceties of the law” concerning the High Court’s jurisdiction. In essence, the inadequacy of the underlying factual enquiry rendered the Department’s technical objections insufficient to warrant Supreme Court intervention.
Holding and Implications
Appeal Dismissed with Costs.
The dismissal leaves intact the Kerala High Court’s ruling that the addition of ₹60,813 to the assessee’s income was invalid. The immediate consequence is relief to the assessee from tax on that sum. The judgment is confined to the peculiar factual matrix and exercise of Article 136 discretion; it sets no new precedent on substantive income-tax law or on the scope of Section 66 references.
K.S Hegde, J.— This is an appeal by special leave against the judgment of the High Court of Kerala in a Reference under Section 66(2) of the Indian Income Tax Act, 1922 (to be hereinafter referred to as “the Act”).
2. The material facts of the case as could be gathered from the statement of the case may now be stated: One Sankunni belonging to the Ezhava community of South Malabar had five sons by name Kannan Kunhi, Chathunni, Velayudhan, Pappu and Ramakrishan. Kannan Kunhi is the eldest son. He was a permanent resident of Ceylon. He had a business in toddy in Ceylon in partnership with others. On August 17, 1950, a business in toddy was started in Kerala. The licence for this business was in the name of Kannan Kunhi. On the same day there was a credit entry in the books of account for the toddy business for a sum of Rs 46,563. This business was managed by Chathunni. The assessee was a H.U.F The assessee purchased an item of property on May 19, 1950, for a sum of Rupees 14,250 and another item of property for Rs 3000 on February 16, 1951. The Income Tax Officer brought these amounts namely Rs 46,563, Rupees 14,250 and Rs 3,000 to tax as income from undisclosed sources during Assessment Year 1951-52, the relevant accounting year ending on March 31, 1951. The assessee's case was that the initial capital of Rs 46.563 for the toddy business was supplied partly by the remittances made by Kannan Kunhi from Ceylon and partly from the income of the agricultural property owned by H.U.F The case for the assessee was that it owned immovable property which was yielding a yearly income of about Rs 6000. The ITO rejected the explanation offered by the assessee by saying that the explanation furnished is not at all satisfactory. The Appellate Assistant Commissioner affirmed the decision of the ITO excepting as regards the price paid for the acquisition of the property on February 16, 1951. The further appeal taken to the Income Tax Appellate Tribunal was unsuccessful. Thereafter the assessee moved the Tribunal under Section 66(1) of the Act to submit certain questions of law arising from the order of the Tribunal to the High Court for ascertaining its opinion. That application was rejected by the Tribunal. Subsequently the assessee moved the High Court under Section 66(2) of the Act and the High Court was pleased to direct the Tribunal to state a case and submit the question “whether on the facts and in the circumstances of the case, the addition of Rupees 60,813 or any portion thereof as the income of the assessee family from undisclosed sources during the previous year ended March 31, 1951, relevant for Assessment Year 1951-52 is valid and justified in law”. The Tribunal accordingly stated the case and submitted the aforementioned question to the High Court. The High Court has answered that question in the negative and in favour of the assessee. Aggrieved by that decision, the Commissioner of Income tax, Kerala has brought this appeal.
3. Mr B. Sen, learned Counsel for the Department, formulated before us three questions of law for decision. They are—
“(1) The question of law ordered to be referred by the High Court did not arise from the order of the Tribunal;
(2) The question as framed did not give jurisdiction to the High Court to go into the findings of fact; and
(3) The High Court has not correctly applied the principles of law in arriving at its conclusion.”
4. Dealing with the facts of the case, the High Court observed:
“Let us now examine the facts of the instant case in the light of the above principles (principles enunciated in the decided cases referred to by the High Court). Sankunny, the karta of the assessee family carried on business in Ceylon for about 20 years until he returned to India and settled down in his village in 1940. Kannan Kunhi, the eldest son of Sankunny and the present karta of the family has been carrying on business in Ceylon from 1942 onwards in partnership with others. The licence of the toddy business started in Kerala on August 17, 1950, was taken in the name of Kannan Kunhi. Out of the sum of Rs 60,813 assessed as income from undisclosed sources, Rs 46,563 is the amount credited in the books of account of this business on August 17, 1950. The assessee's explanation, as we have already stated was that this amount, as well as the amounts invested for paying immovable properties came from past remittances from Ceylon and savings from agricultural property. This explanation did not receive any consideration by the Appellate Tribunal. All that it stated about the matter is contained in one sentence appearing in para 37 of its order and it reads:
“The assessee had no proper and satisfactory explanation for the source of these amounts.”
The Income Tax Officer dealt with this matter as follows:
“Other sources: Income from undisclosed sources. An amount of Rupees 46,563 has been brought into the books for the new toddy business. The assessee was asked to explain the nature and source of these funds. The explanation furnished is not at all satisfactory, and so I will treat this amount as income from undisclosed sources.”
5. Before going into the questions formulated by Mr B. Sen, it is necessary to examine whether the justice of the case requires our interference with the judgment of the High Court in exercise of discretionary jurisdiction under Article 136 of the Constitution. It may be noted that the assessee had explained that Rupees 46,563 invested for the purposes of toddy business in Kerala was partly made up from the income from the immovable property possessed by the assessee and partly from the remittances made by Kannan Kunhi from Ceylon. The ITO did not examine the merits of those explanations. He rejected them by merely observing that they were not satisfactory. The explanations offered by the assessee are not prima facie absurd. They were capable of being examined by the ITO. It was possible for the ITO to go into the extent of the immovable property owned by the H.U.F and its income. He did not care to do so. It was also possible for the ITO to go into the question of remittances made by Kannan Kunhi from Ceylon. Here again the ITO did not choose to do so. It was not even suggested by the ITO that the assessee was having any business activity in India prior to August 17, 1950, or any other source of income taxable under the Act. If the explanation given by the assessee that part of the initial business capital was supplied by Kannan Kunhi is correct then the same is a good explanation. That explanation has not been examined at all. Similarly the assessee's explanation that he was having income from the agricultural property has not been examined. The Appellate Assistant Commissioner also did not choose to examine the explanation given nor did the Tribunal care to go into that explanation. It just brushed aside that explanation with the observation: “that the assessee had no proper or satisfactory explanation for the source of these amounts”. In our opinion the departmental authorities as well as the Tribunal had arbitrarily rejected the explanation given by the assessee. Under these circumstances we do not think that we will be justified in going into the niceties of the law whether the High Court was justified in going into the merits of the findings reached by the Tribunal. All that we need say is that this is not a fit and proper case where we should exercise our discretionary jurisdiction.
6. In the result this appeal fails and the same is dismissed with costs.
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