Tax Case No. 17 of 1971 (Reference No. 16 of 1971)

Decided on July 27, 1976

The Judgment of the Court was delivered by

Ismail, J.:— The Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961, has referred the following questions of law for the opinion of this court:

“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law and justified in deleting the addition of Rs. 31,000 made by the Income-tax Officer under the head ‘other sources’ for 1963–64 assessment?

(2) Whether the conclusion of the Tribunal in deleting the addition of Rs. 31,000 is based on a reasonable view of the facts and circumstances of the case?”

2. The assessee is a dealer in crepe soles, raw rubber, etc. For the assessment year 1963–64, the relevant accounting year being the preceding financial year, he returned an income of Rs. 10,260 under “business”. At the time of hearing before the Income-tax Officer, it was submitted for the assessee that the proviso to section 145(1) of the Income-tax Act was applicable and that the assessee had no objection to the estimate of gross profit as in the preceding year. This resulted in an addition to Rs. 15,500 to the disclosed trading results. There were also some hundi transactions during the previous year and the assessee filed a peak credit statement showing a peak credit of Rs. 31,000. By his letter dated September 2, 1966, the assessee's representative admitted that a sum of Rs. 31,000 said to be hundi loans was not capable of verification and, therefore, may be treated as having been admitted under section “F” of the return of income. It was also claimed on behalf of the assessee that a sum of Rs. 8,500 out of the total amount of Rs. 31,000 pertained to the previous year and that it should be deducted. It was further claimed that the said sum of Rs. 31,000 should be set off against the intangible additions of the earlier years. The Income-tax Officer declined to comply with this request of the assessee. He held that the assessee had not linked the intangible additions of the past years with the appearance of the credits and unless the assessee proved that the hundi credits were introduced out of profits made in the trading account outside the books, it was not possible to telescope the two additions, with the result, he assessed a sum of Rs. 31,000 as income from other sources. Against the order of the Income-tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax and before that officer the assessee contended that the ruling of this court in S. Kuppuswamy Mudaliar v. Commissioner of Income-tax, [1964] 51 ITR 757 (Mad) enabled the assessee to claim a set-off of the gross profit additions of the past years against the unexplained credits in the year in question. The Appellate Assistant Commissioner declined to accept this argument and, in his view, the decision of this court in S. Kuppuswami Mudaliar v. Commissioner Of Income-Tax, Madras., [1964] 51 ITR 757 (Mad) must be taken to have been overruled by the subsequent decision of the Supreme Court in Commissioner Of Income Tax, U.P v. Devi Prasad Vishwanath Prasad, [1969] 72 ITR 194 (SC), with the result, he sustained the order of the Income-tax Officer. The assessee, thereafter, preferred a second appeal to the Income-tax Appellate Tribunal. The Tribunal held that the decision of this court in S. Kuppuswami Mudaliar v. Commissioner Of Income-Tax, Madras., [1964] 51 ITR 757 (Mad) applied to the facts of this case and that the decision cannot be said to have been overruled by the subsequent decision of the Supreme Court in Commissioner Of Income Tax, U.P v. Devi Prasad Vishwanath Prasad, [1969] 72 ITR 194 (SC), with the result, the Tribunal accepted the contention of the assessee and allowed the assessee what it called the benefit of set-off of gross profit additions of the past years against the unexplained cash credits in question and directed the deletion of Rs. 31,000 as income from “other sources”. It is the correctness of this conclusion of the Tribunal that is challenged before us in the form of the questions extracted already.

3. We may mention one thing immediately. Admittedly, for the assessment years 1960–61, 1961–62 and 1962–63, the Income-tax Officer made additions by way of estimation of the profits of the assessee in the sums of Rs. 11,040, Rs. 18,279 and Rs. 24,040, respectively, which totalled Rs. 53,359. It was the case of the assessee, relying on the decision of this court in S. Kuppuswami Mudaliar v. Commissioner Of Income-Tax, Madras., [1964] 51 ITR 757 (Mad) that the unexplained credit of Rs. 31,000 should be set off against this Rs. 53,359 and it was this case which was accepted by the Tribunal.

4. We may immediately explain the facts of this case and whether it has got a bearing on the decision of this court in S. Kuppuswami Mudaliar v. Commissioner Of Income-Tax, Madras., [1964] 51 ITR 757 (Mad). As we pointed out already, admittedly in the books of the assessee there were the peak credits of Rs. 31,000 and they were said to be the result of hundi transactions with various persons. It was admitted by the assessee himself that he could not satisfactorily explain the persons with reference to whom the credits were entered and it is only on that ground he requested the Income-tax Officer to treat the said amount as having been included in Section “F” of the return. Section “F” of the return, as it then was, relevant for the assessment year in question, provided for these particulars:

Sources of income Particulars of items Amount Rs. Section F 1. In this section should be shown any amount which is not included in sections A, B and C and which the assessee claims to be not taxable for any reason such as that the receipt is of a casual nature not arising from any business or profession or occupation, or that it is exempt under any provision of the Income-tax Act, 1961. 2. 3. 4. 5. 6. 7. 8. Total of Section F.

5. The request to the officer to treat the sum as having been included in section “F” of the return will itself show that the assessee admitted the amount as income of the year in question, though it might have been open to the assessee to show that the same was not liable to tax under the provisions of the. Act. At the same time, the assessee claimed that he was not able to explain the source of the credit. However, the assessee also contended that the unexplained credit should be set off against the “intangible additions” made in the previous years of assessment amounting to Rs. 53,359 as referred to above. It is only in this context reliance was placed on the decision of this court in S. Kuppuswami Mudaliar v. Commissioner Of Income-Tax, Madras., [1964] 51 ITR 757 (Mad).

6. We are of the opinion that the decision of this court in S. Kuppuswami Mudaliar v. Commissioner Of Income-Tax, Madras., [1964] 51 ITR 757 (Mad) has no bearing whatever on the present case and the facts of the present case are totally different. In S. Kuppuswami Mudaliar's case, [1964] 51 ITR 757 (Mad), what happened was this. The assessee was a tanner carrying on business at Ambur. For the assessment year 1947–48, the income from the business was estimated by addition of Rs. 28,500. For the assessment year 1948–49, the income was again estimated by addition of Rs. 23,730. For these two years together there was an addition of Rs. 52,230. The assessments for the years 1949–50 and 1950–51 were made by the officer on March 29, 1950, and March 21, 1951, respectively. In the assessment of the latter year, he included the sum of Rs. 27,625 as income from other sources not explained by the assessee and which income was kept outside his books of account. Subsequently, the Income-tax Officer received information that the assessee had lent a sum of Rs. 40,000 on a mortgage in the name of his brother, Murugesa Mudaliar, on August 29, 1948, which was within the “previous year” for the assessment year 1949-50. The officer also came to know that the assessee's wife and married daughter had advanced sums of Rs. 15,000 and Rs. 10,000, respectively, as and for their share capital in the firm of S. Kuppuswami Mudaliar and Co. on February 10, 1950, which came within the “previous year” for the assessment year 1950-51. With this information in his possession, the Income-tax Officer initiated proceedings under section 34 of the Act and issued appropriate notices to the assessee for reopening the assessment of the years 1949–50 and 1950-51. The contention of the assessee was that the mortgage loan and other investments made in the name of his wife and daughter came out of Rs. 52,230 which had been found to have been earned by the assessee by the Income-tax Officer himself in the assessment proceedings relating to the years 1947–48 and 1948-49. However, the Income-tax Officer rejected this contention, because he was of the opinion that the assessee could not have got these amounts from the additions made, which additions, according to him, were “intangible additions”. The assessee filed appeals before the Appellate Assistant Commissioner and the said officer found that the department was not justified in making the addition of Rs. 40,000 in the reassessment for the year 1949–50, as there was no reason to disbelieve the assessee's version that this sum came out of Rs. 52,230, the addition made by the department in the previous years. He also found that the excess amount of Rs. 12,230 which remained unabsorbed out of the total of Rs. 52,230 after deducting the mortgage loan advanced would still be available with the assessee for investment. The department preferred appeals to the Income-tax Appellate Tribunal. The Tribunal held that the assessee had failed to disclose the sources for the mortgage loan and other advances and that the order of the appellate authority deleting the addition of Rs. 52,230 in all was erroneous and unsustainable. It was the correctness of that order which was challenged before this court in a reference under section 66(1) of the Income-tax Act. This court held that the addition of Rs. 52,230 made in the earlier two years was not an “intangible addition”; it represented the real estimate of the profits earned by the assessee and, therefore, that amount was available with the assessee. This court also pointed out that the only question the Tribunal had to decide was whether the assessee could have derived the amount of Rs. 52,230 from the prior years which, according to the department, the assessee did earn and the Tribunal did not say, nor would the materials on record enable it to say, that the sum was not available to the assessee either to advance the mortgage loan in the name of Murugesa Mudaliar or for other advances. This court observed— See [1964] 51 ITR 757, 761, 762 (Mad):

“It is a hard fact that for the two years 1947–48 and 1948–49 a total addition of Rs. 52,230 was made by the department in computing the assessable income. This was, therefore, treated as the real income of the assessee for the years in question. There was nothing notional or fictional about it. However convenient it might be to describe the addition as ‘intangible’ as has been done by the department and the Tribunal, the fact is that it was found to have accrued to the assessee and was not merely supposed to have been earned by him. Once the addition is made the department is fixed to the position that the assessee earned the amount in the relevant year ……If there had been any evidence to show that the assessee devoted that amount for other purposes it may well be that the mortgage loan and other advances were made from an unexplained or undisclosed source. But that it is not so in the present case. The Tribunal's conception of ‘intangible additions’ is somewhat queer and we confess our inability to appreciate it. The Tribunal observes in its order:

‘Intangible additions, as the name itself suggests, are purely matters of estimate which may err on the wrong side for the department. For want of proper evidence, additions on account of deficiency of gross profit or other defects may be made but this would not mean putting in possession of the assessee their equivalent in hard cash available for expenditure or investment. It may be said that having suffered a harsh assessment in a particular year, the assessee's case should be considered sympathetically in the subsequent year when an investment of the nature we are discussing is brought to light.’

Additions are no doubt made very often on estimate basis. But it can never be said, or at any rate the department cannot contend, that the amount of the addition is not the real income but something which the assessee may not have earned. It is wholly illogical for the department to contend that the addition was only for purposes of taxation and that it should never be taken as true income of the assessee.”

7. We are of the opinion that that decision is wholly inapplicable to the facts of the present case. In that case, (1) there were additions to the income of the assessee in a sum of Rs. 52,230 in the previous assessment years 1947–48 and 1948-49; (2) during the assessment years 1949–50 and 1950–51, the assessee had invested a sum of Rs. 40,000 on a mortgage in the name of his brother, Murugesa Mudaliar, and certain other amounts in the names of his wife and daughter; (3) when the Income-tax Officer called upon the assessee to explain the source of those advances, the assessee straightaway stated that it came out of the sum of Rs. 52,230 which had been added to his income in the two previous years. In such a situation, the only question that came to be considered by this court was whether the assessee had established that the advances made by him during the years 1949–50 and 1950–51 came out of the additions made in the previous years, namely, 1947–48 and 1948–49, and this court on the evidence held that there being no evidence to show that the assessee had spent away that amount for other purposes, there was no justification for rejecting his case that these advances were made out of that sum of Rs. 52,230. In the present case, there was no question of any advances made in the name of the assessee or in the name of other close relations of the assessee over whom the assessee had control. Secondly, in the present case, it was one of the credit entries finding a place in the books of accounts of the assessee in the names of third parties. Thirdly, the assessee admittedly was not able to explain or verify those credits with reference to the persons in whose names they stood in his accounts. Under such circumstances, the question for consideration is whether it was open to the assessee to contend that he was entitled to claim that the unexplained credit of Rs. 31,000 must be deemed to have come out of the additions made in the previous three years' assessments amounting to Rs. 53,359.

8. In the first place, we are of the opinion that once the assessee has originally shown the credits as having emanated from certain named individuals and when he failed to establish the same, it was not open to him to fall back on a claim that these unexplained credits must be taken to have come out of the additions made in the earlier years. Even if it was open to him to put forward such a case, it was for him to prove positively that though the credits stood in the names of third parties, still it was his money which was brought into account in the names of third parties and the money itself came from the additions made to his assessments in the previous years. Incidentally, this will involve his explaining why he brought his own money into the accounts in the names of third parties. The assessee in the present case has not proved any such thing. It is exactly this position which the Income-tax Officer in his order pointed out while making the additions. The Tribunal without considering any of these facts proceeded as if the decision of this court in S. Kuppuswami Mudaliar v. Commissioner Of Income-Tax, Madras., [1964] 51 ITR 757 (Mad) laid down a universal proposition of law that whenever an assessee failed to explain the credits found in his books of account, it was open to him to claim a set-off of those credits as against the additions made to his income in the previous years' assessments. As we pointed out already, no such proposition has been laid down by this court in the decision referred to above. As a matter of fact, apart from removing the misconception arising from the inaccurate and misleading use of the expression “intangible additions”, this court did not lay down any such general proposition of law, as if the additions made to the income returned by an assessee, by the department, constitute his last refuge whenever he finds himself in a tight corner not being able to explain the credits found in his accounts. The truth is that such additions are as real an income, at any rate as far as the department is concerned, as the income returned by the assessee, and one can as much as the other constitute the source to explain the credits in the accounts in the subsequent years. Therefore, the decision of this court does not invest such additions with any special significance as a source to explain the credits in the subsequent years. In any case, it will be a question of fact whether there was evidence to find that such additions were the source of the subsequent credits and in this behalf there is no difference between this source and any other source, apart from the position that with regard to the income assessed in the earlier years, its existence as a possible source of the credits will be a matter of record with the department while with regard to other sources, their existence may be a matter to be proved.

9. The learned counsel for the assessee brought to our notice a decision of the Bench of the Punjab and Haryana High Court in Commissioner of Income-tax v. Ram Sanehi Gian Chand, [1972] 86 ITR 724 (Punj). In that case, the assessee was a Hindu undivided family and was carrying on business with headquarters at Ladwa with a branch at Yamuna Nagar. A partial partition in the family was effected on March 31, 1964, whereby the capital of both the shops was pooled together and divided equally amongst the members of the family. During the assessment proceedings for the assessment year 1964–65, it was found on an examination of the account books of the Yamuna Nagar branch that the capital of that branch on March 31, 1964, was only Rs. 31,459.10, whereas, according to the partition document, the amount pooled from this branch was Rs. 51,463.45 making a difference of Rs. 20,004.35. The Income-tax Officer not being satisfied with the assessee's explanation added the difference of Rs. 20,004.35 as income from undisclosed sources. The case of the assessee both before the Income-tax Officer and the Appellate Assistant Commissioner was that the real capital in the branch at Yamuna Nagar was only Rs. 31,459.10 and it was mistakenly shown in the partition deed as Rs. 51,463.45. This case was rejected by the Income-tax Officer as well as the Appellate Assistant Commissioner. When the assessee filed further appeal before the Income-tax Appellate Tribunal, the Tribunal held that the assessee's explanation that there had been a mistake in the partition deed in stating the amount of capital contributed by the Yamuna Nagar branch as Rs. 51,463.45 instead of Rs. 31,459.10 was an after-thought and that the discrepancy of Rs. 20,004.35 between the two figures had to be explained. Once the Tribunal came to that conclusion, the assessee raised a new contention before the Tribunal, that is, the difference between the capital at the Yamuna Nagar branch as per its books and the capital transferred to the head office at the time of the partial partition represented the intangible additions made to the assessee's income not only in the present assessment year but also in the earlier assessment years. The department's representative objected to the Tribunal allowing such a new contention at that stage. The Tribunal, however, held that the contention sought to be raised by the assessee was legal in nature and should be allowed to be raised. In view of this conclusion, the Tribunal allowed the assessee to raise this contention and set aside the orders of the Appellate Assistant Commissioner and directed him to consider the assessee's case on the basis of the new contention raised before him. This conclusion of the Tribunal was challenged in the form of a reference to the High Court and the High Court stated— See [1972] 86 ITR 724, 729 (Punj):

“It is true that before the Income-tax Officer and the Appellate Assistant Commissioner this plea was not taken. It may be that the assessee was not aware of the legal position, that is, that it was entitled to take advantage of the intangible additions made in the previous years and it is quite evident from the facts of this case that this point was urged before the Tribunal by the learned counsel for the assessee. Since this was a point of law, the assessee was not supposed to know it and it will be wholly unfair not to allow him to raise that plea simply because he did not urge it before the Income-tax Officer or the Appellate Assistant Commissioner. On the intangible additions made in the previous years the assessee had paid the income-tax and possibly penalty for not disclosing it, and if the law permits the assessee to take advantage of those intangible additions for explaining the capital in the subsequent assessment years, the opportunity should be allowed to it in the interest of equity and fair play.

Nothing has been said by the learned counsel for the petitioner as to why it was not open to the Tribunal to allow the assessee to raise the plea and substantiate it. There is no question of investigation on facts because the intangible additions made in that year or in the previous years were on the record of the Income-tax Officer and only a reference had to be made to the previous assessment orders. No new fact had to be investigated or proved.”

10. With respect to the learned judges, we are unable to agree with the above reasonings and conclusions. In the first place, there was no question of there being any legal position or any point of law, because it was simply a question of fact by way of explaining as to where the sum of Rs. 20,004.35 came from. For this purpose, no knowledge of the legal position on the part of the assessee was necessary and if the sum of Rs. 20,004.35 came from the additions made to the previous years, he was the only person who could have knowledge of the same and nothing could have been easier for him than to have stated so at the earliest possible opportunity. As a matter of fact, before the Income-tax Officer as well as the Appellate Assistant Commissioner, the assessee took an entirely different stand, namely, that the figure mentioned in the partition deed was a mistake, thereby implying that the sum of Rs. 20,004.35 was not there at all. To allow such a person to go back on his stand and urge for the first time before the Tribunal that the said sum of Rs. 20,004.35 was there and came from the additions made to his income during the previous assessment years will be neither equity nor justice. Apart from this, we are unable to share the view of the learned judges that the entire thing was a pure question of law and there was no question of investigation on facts, because even if the assessee could be allowed to raise such a point, still it had to be verified whether the additions made to the assessee's income in the previous years' assessments' remained intact without being spent away for other purposes to explain the additional capital in the Yamuna Nagar branch. Whether that amount remained intact or the whole of it or any part of it was spent away will be a question of fact to be investigated into and established. Only if it was established that an amount to the extent of Rs. 20,004.35 out of the previous years' additions was available, then there will be the possible question of the assessee explaining that this sum of Rs. 20,004.35 came out of those previous years' additions. Therefore, that was again a question of fact to be ascertained and established and it is not possible to hold that the point raised for the first time by the assessee before the Tribunal was a simple question of law. Under these circumstances, we are of the opinion that the decision of the Punjab and Haryana High Court referred to above cannot be relied upon in support of the order of the Tribunal in the present case. For these reasons, we are of the opinion that the Tribunal completely erred in relying upon the decision of this court in S. Kuppuswami Mudaliar v. Commissioner Of Income-Tax, Madras., [1964] 51 ITR 757 (Mad) as an authority for deleting the addition of Rs. 31,000 made by the Income-tax Officer and affirmed by the Appellate Assistant Commissioner in the present case. Con sequently, we answer the first question extracted above in the negative and against the assessee. In view of our answer to the first question, it is not necessary for us to answer the second question.

11. There will be no order as to costs.