1. This reference is made by the Income-tax Appellate Tribunal, Bombay (hereafter called the Tribunal), under section 66(2) of the Indian Income-tax Act, 1922, in accordance with the direction of this Court in Miscellaneous Civil Case No. 10 of 1953. The following questions of law have been submitted:

(1) Was there any material on record to find that the cash credit of Rs. 14,600 was the assessee's income from some undisclosed source ?

(2) Whether, in the absence of any material on record, indicating that the assessee had some other source of income than those disclosed by it, the Tribunal was legally justified in holding that the money in question was income from some undisclosed source ?

(3) Whether the amount of Rs. 14,600 is otherwise taxable ?

2. Miscellaneous Civil Case No. 10 of 1953, has been the subject of some observations by Rao and Tambe, JJ., in Munnalal Biharilal v. Commissioner of Income-tax1 (Miscellaneous Civil Case No. 218 of 1953, decided on 23rd September 1955). With the utmost respect, we would state that there was no occasion for any such comment as there was no decision in that case. The case is now being decided by this order. The assessee was R.S.P.S Sial, since deceased who is now represented by his widow, and his sons and daughters. In the account year 1947–48 there was a credit amount of Rs. 14,600 on 31st March, 1948, to his personal account in the books of his head office. This amount was held to be his business income by the Income-tax Officer. He wrote in brackets the words ‘No explanation offered’ and below that remark he observed:

“There are several sources from which the cash credits could have come but the actual source from which those particular items did in fact come, was only in the assessee's special knowledge. He refuses to disclose it as is evident from the explanation and statements furnished.

The natural inference is that the indication of the true source would make it liable to tax and on this ground it is treated as concealed income. It is well settled that by giving an incorrect source of any receipt an assessee cannot shift on the Department the onus of ‘finding out or proving the real source which he alone knows’”.

3. The Appellate Assistant Commissioner, who heard the assessee's appeal, observed as under:

“Rs. 14,900, cash credits consisting of 3 items, Rs. 100 plus Rs. 200, credited in the Imperial Bank account and Rs. 14,600, in the assessee's personal account in the head office books. It is stated that these amounts were credited out of spare funds existing with the assessee at his house, outside the cash book. It is urged that large sums totalling to Rs. 2,46,250, Rs. 1,90,000 and Rs. 98,325 were received on 10th September, 1943, 19th July, 1944, and 22nd December, 1945, from the assessee's partnership in the Chhindwara contract works and that it could be presumed that the assessee had spare money with him from this source which he brought in as above. There were no accounts of the contract works and there are no accounts of the home funds. The explanation, therefore, merely begs the question of the source of these credits.

4. No convincing explanation is given as to how the sum of Rs. 14,000 was credited on 31st March, 1948, the last date of the account year. Mr. Thakar attempted to explain that this sum was such as to make up the capital of the newly formed company of R.S.P.S Sial and Sons Limited. He, however, retracted this explanation and took the position that the amount was credited for payment of a draft for Rs. 14,317-14-0 regarding import of saltpetre for the gun powder factory. Differing explanations are merely an effort to explain away the amounts somehow.

5. I must, therefore, agree with the Income-tax Officer that the onus of proving the real source of the money which lay upon the assessee has not been discharged. The amount was rightly included as undisclosed income. This objection also stands rejected.”

6. In this view the Appellate Assistant Commissioner held that the amount of Rs. 14,600 represented an undisclosed income.

7. When the matter came up before the Tribunal, it observed as below:

“The fifth ground relates to cash credits amounting to Rs. 14,900. This amount is made up of three items, namely Rs. 100, Rs. 200, and Rs. 14,600. We would accept the assessee's explanation in regard to the sums of Rs. 100 and Rs. 200. As for the balance, we are unable to accept the assessee's explanation. The point has been considered by the Appellate Assistant Commissioner, In our opinion, he is right.”

8. It will thus be observed that the Tribunal has merely endorsed the reasons on which the Appellate Assistant Commissioner reached his decision.

9. There can be no doubt that the remark of the Income-tax Officer ‘No explanation offered’ is evidently incorrect. He has himself referred to the assessee's explanation and statements in his order. The explanation has also been referred to and considered by the Appellate Assistant Commissioner. The explanation, however, has not been filed along with the statement of case and forms part of the connected Miscellaneous Civil Case No. 190 of 1951. We have, therefore, noticed that explanation which has not been disputed by the learned counsel for the Department.

10. The assessee's explantion is as under:

“The assessee was a partner with his son Shri I.S Sial for doing usiness of Chhindwara Military Works. He had huge funds of this partnership. He had several times withdrawn cash from the partnership by cashing the cheques issued to the partnership and cashed as under:

Rs. 2,46,250 cashed on 10th September, 1943.

Rs. 1,90,000 cashed on or about 19th July, 1944.

Rs. 98,435 cashed on 22nd December, 1945.

These sums were partly used for reinvestment in the firm's business and partly withdrawn by both the partners. Over and above this the assessee had his funds on account of accumulation of profits from his individual contract works, out of which he carried on Sonegaon contract works and received the bills. He had cash with him for this purpose also. Apart from this the assessee used to receive several times salary in cash from the limited company. Instances of such cash receipts are as below:

On 2nd April, 1947, Rs. 2,000.

On 5th May, 1947, Rs. 2,000.

On 6th June, 1947, Rs. 2,000.

Further the assessee had withdrawn Rs. 5,000 by cheque No. 020055 dated 23rd February, 1948, to self and Rs. 3,200 by cheque No. 020058 dated 20th March, 1948, to self from the Punjab National Bank Ltd., Nagpur, as there were excess credit balance in the current account with the said bank. Further there are withdrawals as per entries in the books of account produced by the assessee. All these conclusively establish that the assessee was in possession of funds of several thousands out of which he could have made deposits in the business whenever required by it. Further the assessee has disclosed and returned income from all his sources of income, There is no evidence even to suggest that assessee's income from any undisclosed source was not shown. Thus the amount of Rs. 14,600 cannot be treated as assessee's income.”

11. The order of the Income-tax Officer shows that the sources disclosed by the assessee were not disputed by him. What he thought was that it was necessary for the assessee to connect the disputed amount with a defined source before it can be exempted from assessment. The Appellate Assistant Commissioner, on the other hand, upheld the order of the Income-tax Officer, on the following grounds:

(1) There are no accounts of the contract works and of the home funds, and, therefore, the explanation merely begs the question of the source of the credits.

(2) No convincing explanation is given as to how the sum of Rs. 14,600 was credited on 31st March, 1948, the last date of the account year.

(3) The explanation that the sum was such as to make up the capital of the newly formed company of R.S.P.S Sial and Sons Ltd., was retracted by the assessee's counsel who later took the position that the amount was credited for payment of a draft for Rs. 14,317-14-0 regarding import of saltpetre for the gun powder factory. Differing explanations were merely an effort to explain away the amounts somehow.

12. So far as the Tribunal is concerned, it accepted the assessee's explanation for Rs. 100 and Rs. 200 but not for Rs. 14,600 although the explanation was the same for all the items. The reason for treating these items differently is not explicit in the order. To urge, as was done before us, that the Tribunal acted on the basis that the large sums stated by the assessee were likely to be invested during the long course of time and could not, therefore, be available except for small amounts is only to embark on a conjecture. This contention also ignored the sums amounting to Rs. 14,200 which, as the explanation shows, were received in close time relationship with the date of the credit entry in question.

(9) It appears from the order of the Tribunal that it did not disbelieve the existence of the sources alleged by the assessee. In fact, these sources could be easily verified from the assessment cases and other documents referred to in the explanations. If, however, the Tribunal should be deemed to have rejected the connection of the credit entry with these sources, the reasons could only be those mentioned by the Appellate Assistant Commissioner in his order. We shall, therefore, take up for consideration those reasons.

13. As regards the first point, the law does not cast any obligation on an assessee to maintain accounts. An adverse inference, therefore, cannot be drawn against him unless he maintains accounts, but suppresses them. In Nilkantha v. Commissioner Of Income-Tax* where the assessee had encashed high denomination notes and the question was whether the amount of Rs. 84,000 so encashed represented an income from an undisclosed source, the assessee's explanation was that it was a saving from the amounts he had withdrawn for his personal expenses. This explanation was rejected by the Revenue Authorities inter alia on the ground that the assessee maintained home chest account which he failed to produce, and, therefore, an adverse presumption must be raised against him. Repelling this contention, Ramaswami, J., observed:

“On behalf of the assessee it was argued that no home chest account was maintained by the assessee and the Tribunal had no warrant for drawing an adverse inference. In my opinion the contention of the assessee is correct. There was no material before the Tribunal to suggest that a home chest account was maintained and the Appellate Tribunal ought not to have drawn an adverse inference because no such account was produced.” With this view, Sarjoo Prasad, J., also agreed (see page 25). It will thus appear that the rejection of the assessee's explanation on the ground that he did not maintain accounts was unjustified.

14. As regards the second and third points, it is difficult to see how the failure of the assessee to disclose the necessity or purpose of crediting the amount on the last day of the account year was co-related with the question of determining the source of the money. The question in hand was whether there was proof in support of the assessee's contention that he had received money from the sources alleged by him and whether the credit amount was available from that fund. This matter was independent of the question as to why and for what purpose he invested the money on the last day of the account year. An assessee is not bound to give any reason for his dealings, unless it is relevant for purposes of the enquiry. These points also did not, therefore, justify rejection of the explanation of the assessee.

15. The question that arises in this case is whether the Revenue Authorities are entitled to reject an assessee's explanation, which prima facie discloses a genuine source of the receipt, on grounds which are not relevant to the enquiry. This question did not arise in Hargovindas Karsandas Thakkar v. Commissioner of Income-tax, Madhya Pradesh & Bhopal, Nagpur Misc. Civil Case No. 256 of 1951., and Sarafali v. Commissioner of Income-tax (Miscellaneous Civil Case No. 114 of 1951, decided on 13th April, 1953) nor indeed in Munnalal Biharilal v. Commissioner of Income-tax Misc. Civil Case No. 218 of 1953. in which these cases were approved and followed. This question arose in N.J Naidu v. Commissioner of Income-tax to which we were parties. On this point we held as below:

“There is no doubt that the Department is not bound to prove by direct evidence the source of income before an assessee's explanation is rejected. Nevertheless if the explanation is prima facie reasonable, it cannot be rejected on capricious or arbitrary grounds. In Ganga Ram Balmokand v. Commissioner of Income-tax, Punjab, it was held that the Income-tax Authorities are not bound to prove by positive evidence that the accounts are unreliable and their finding cannot be disturbed unless it is altogether capricious and injudicial. What applies to accounts also applies to all other evidence tendered by an assessee including his explanation on the source of income. Therefore, while it is true that the rejection of the assessee's explanation cannot be disturbed if it is based on reasonable grounds, it can be challenged if it is capricious, arbitrary or injudicial.”

16. We see no reason to depart from the view that we had then taken. Where, therefore, the assessee offers a reasonable explanation as to the source of a receipt, it cannot be rejected on grounds which are imaginary or irrelevant.

17. In this view, the assessee's explanation could not be rejected on the grounds mentioned by the Appellate Assistant Commissioner, either severally or jointly. Nor was the Income-tax Officer justified in insisting on a rigid proof of the connection of the receipt with any particular source. When an assessee discloses certain sources from which the money could be drawn, it ceases to be referable to an undisclosed source. The same considerations would govern the order of the Tribunal which has not relied upon any reasons of its own in rejecting the assessee's explanation. We accordingly answer each of the questions in the negative. Costs shall be borne by the Department. Hearing fee Rs. 100.

18. Reference answered in the negative.