R.B.N.J. Naidu Cinema Exhibitor v. Commissioner Of Income-Tax

1. In pursuance of the direction of this Court under Section 66(2) of the Income-tax Act, 1922, in Misc. Civil Case No. 143 of 1950, the Income-tax Appellate Tribunal, Bombay, has submitted the statement of case on the following question of law:

“Whether on the material on record the Appellate Tribunal could reasonably come to a finding that the sum of Rs. 8500/- was an income from undisclosed sources.”

2. In the opinion of the Tribunal the question which arises is:

“Whether there was material on which the Appellate Tribunal could have rejected the assessee's explanation.”

3. The question as framed by the Tribunal does not, however, cover the entire controversy. The subject matter of the controversy is the finding of the Tribunal that the sum of Rs. 8500/- represents the assessee's income from undisclosed sources. The question that arises for our judgment, therefore, is the following:

“Whether there was material on which the Appellate Tribunal could come to a finding that the sum of Rs. 8,500/- was the assessee's income from undisclosed sources”.

4. This question arises from the same facts which the Tribunal has stated. It is not, therefore, necessary to refer the case back to the Tribunal under Section 66(4) of the Income-tax Act.

5. The assessee runs the business of exhibiting pictures at various cinema houses in Nagpur. During the assessment year 1946–1947 there were two credits, one of Rs. 10,000/- on 30-4-1945 and the other of Rs. 8,500/- on 1-5-1945, in his wife's account with the Bank of India Ltd., Nagpur. We are not concerned with the amount of Rs. 10,000/- in respect of which the explanation of the assessee was accepted by the Income-tax Authorities. As regards the amount of Rs. 8,500/- he submitted the following explanation:

“As regards the sum of Rs. 8,500/-, I may point out that for the last so many years I drew from the Company various sums of money from time to time and paid the same to my wife to enable her to defray the household and other expenses of the family.

6. My withdrawals for the years ending 31-3-1943, 31-3-1944, 31-3-1945 and 31-3-1946 were Rs. 26,147/15/9, Rs. 20,100/2/9, Rs. 31,036/12/3 and Rs. 47,106/4/6 (this ought to be Rs. 37,106/4/6) respectively. My wife made some savings out of the said amounts and when the savings amounted to the above, she asked me to credit the same amount to her account in the Bank of India Ltd., Nagpur, on 1-5-1945.”

7. The above explanation was not accepted by the Income-tax Officer who observed:

“It is difficult to believe that the assessee was withdrawing funds for construction of his bungalow and household expenses indiscriminately without ascertaining from his wife as to whether the money previously drawn and handed over to her was fully spent or not.

Besides the savings of Rs. 8,500/- could not have been effected on one day. The assessee has not proved as to whether (?) the amount was lying all these days when Mrs. Naidu had a regular Bank Account. In short the explanation offered is not at all convincing and cannot be accepted.”

8. The explanation was, however, accepted by the Appellate Commissioner on these grounds:

“It is clear that the petitioner derives substantial income from business and he has withdrawn about Rs. 26,000/- every year for personal expenses. The petitioner is not carrying on any other business and the receipts from the picture houses have been properly shown.

It is also clear that the petitioner has withdrawn substantial amounts every year. It may be a fact that the petitioner's wife was able to save the amount and that she was in possession of the funds for crediting the same in her account from funds given to her by her husband.

Apparently there is no reason to disbelieve the explanation offered and there are no materials on file to hold that the petitioner carried on some other business or that the income from the cinema business was not properly returned.

Records do not go to show that the petitioner did not credit the receipts properly or that he had any other business activity not disclosed by him. The addition of Rs. 8,500/- was not warranted and it shall be deleted.”

9. The Department went up in appeal to the Tribunal mainly for the reason that in its opinion the Appellate Assistant Commissioner had wrongly thrown on it the burden of finding out the source of income. The appeal was allowed by the Tribunal which observed:

“It is not for the Income-tax Department to find out what other business the assessee was doing. It may be that he was carrying on some business unknown to the Income-tax Department. It is for an assessee to explain satisfactorily the source of a credit to his own account.”

10. The explanation of the assessee was rejected by the Tribunal on the following short ground:

“If such a large amount was lying at home it is obvious that the assessee would not be borrowing capital on interest for the purpose of his business.”

11. 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.

12. In ‘Ganga Ram Balmokand v. Commissioner of Income Tax, Punjab,’ AIR 1937 Lah 721 (A), 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 in judicial.

13. 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 in judicial.

14. The facts of the instant case are that the assessee has maintained his accounts properly and made a correct return of the income of his cinema business. That he withdrew from time to time from his business the amounts stated by him and gave them to his wife for household expenses, is also not in dispute.

15. Presumably, therefore, the amount in dispute credited to her account with the Bank has its source in the funds which she used to receive from her husband, as no other source is indicated.

16. The Tribunal rejected the assessee's explanation on the ground that he would not be borrowing capital on interest for the purpose of business if the amount in dispute was lying at home. This reasoning is based on the assumption that the total amount was always available-at home to the knowledge of the assessee. This assumption ignores that the amount was likely to be made up gradually out of the small savings made from time to time, of which the assessee was not aware until it was deposited in the Bank.

17. It is common knowledge that the ladies of the house do manage to make small savings, which are not deposited in a Bank until they accumulate into an appreciable sum and are not expected to be required for any immediate emergency. We are, therefore, of the opinion that the rejection of the assessee's explanation by the Tribunal, which was ‘prima facie’ reasonable, was arbitrary and cannot be accepted as final.

18. In this connection we may also notice the reason adduced by the Income-tax Officer for rejecting the assessee's explanation. It seems to have discarded the existence of the savings on the ground that the assessee was not likely to have advanced any sums to his wife until he was satisfied that the money previously given to her was fully expended.

19. In our opinion there was no basis for him to assume such a rigid businesslike dealing between persons who do not stand in the relationship of a master and servant or principal and agent.

20. It cannot be postulated as an axiom that no burden ever lies on the Department in cases arising under the Indian Income-tax Act. For instance, where an assessee should deny that he is in receipt of income from a particular source, it is for the Income-tax Officer to prove that he made the income, for the assessee cannot prove the negative: ‘In re, Bishnu Priya Chowdhurani’, AIR 1924 Cal 337 (B).

21. So also where an assessee ‘prima facie’ establishes a partnership, the burden is on the taxing authorities to prove that it is fictitious: ‘Suwalal Chhogalal v. Commissioner of Income Tax, U.P and C.P and Berar’, AIR 1949 Nag 249 (C). In ‘Sovaram Jokhiram v. Commissioner of Income Tax, B. and O.’, AIR 1945 Pat 79 (D), it was held that where property stands in the name of the assessee's wife, it is for the Income-tax Officer to prove that she is only the ‘benamidar’ and not the real owner.

22. Where, therefore, an assessee makes out a ‘prima facie’ case, the burden rests on the Department to disprove or avoid it. It is obviously for this reason that Section 23(3) of the Income-tax Act, requires the Income-tax Officer to hold an enquiry before making an assessment and under the proviso to S. 13 ‘ibid’ he has to determine the basis and the manner of computing the assessment.

23. In cases where the explanation of the assessee regarding the source of a disputed amount is not accepted, the question still remains whether it is a revenue income. It is not in all cases that by mere rejection of the explanation the character of the disputed item as revenue income can be deemed to be established.

24. Each case has to be judged on its own merits for this purpose. In ‘Mahabir Prasad v. Income Tax Officer, Cawnpore’, AIR 1947 All 414 (E), there was a credit entry in the assessee's account books in the name of Hari Kishan who was found to be a fictitious person. The question arose whether there was anything in law to prevent the Income-tax Officer or the appellate authority from presuming or inferring that the receipt evidenced by the credit entry was a revenue receipt. This question was answered by their Lordships as below:

“If an assessee gives an explanation which is false or unbelievable, there is nothing in law to prevent the Income-tax Officer or the appellate authority from inferring that the receipt evidenced by a credit entry is a revenue receipt.

In each case it would be a question of fact and the answer must, in every case, depend on the finding whether the inference is a reasonable inference from the assessee's failure to prove his case.

There is nothing in law to prevent an inference that a particular receipt is a revenue receipt, provided that is a reasonable inference and the assessee fails to satisfy the Income-tax Officer or the appellate authority the source from which the money came.”

25. It would thus appear that in order legally to draw an inference that a receipt is a revenue receipt, the circumstances of the rejection should be of the kind from which such an inference can reasonably be drawn.

26. There is no doubt that in ‘G.M. Madappa v. Commissioner Of Income-Tax, Madras, Madras’, AIR 1949 Mad 246 (F), the law appears to be much widely stated, but the answer was obviously given by their Lordships in relation to the facts of that case, which pointed reasonably to the inference that the receipts were income receipts.

27. The other cases that have come to our notice do not appear to lay down a law different from what has been stated in ‘Mahabir Prasad v. Commissioner of Income Tax’, (E) ‘(Supra)’.

28. In ‘Lal Mohon Krishna Lal Paul…Assessee; v. Commissioner Of Income-Tax, Bengal, Bengal’, AIR 1945 Cal 62 (G) the question was whether the Income-tax Officer or the appellate authority was legally bound to prove by ‘positive evidence’ that a sum credited in the assessee's books as capital, in respect of which his explanation was found to be false and unreliable, represented income assessable to tax.

29. Answering this question in the negative, their Lordships added that the Income-tax Officer was not prevented from basing his conclusion on circumstantial evidence. So far as the facts of the case were concerned, their Lordships found that there was considerable material on which the Income-tax authorities could come to the conclusion that the sum in question was income.

30. The facts also admitted the application of illustration (g) of Section 114 of the Evidence Act, in that, on account of the failure of the assessee to adduce evidence which could be produced the Income-tax Officer was competent to presume that the reason for his failure to offer the available evidence was that it would not assist his contention. This decision does not differ from ‘Mahabir Prasad v. Commissioner of Income tax’, (E) ‘(supra)’.

31. In ‘Re: J.A Shellim… v. The Commissioner Of Income-Tax, Bengal….*, Bengal’, AIR 1947 Cal 338 (H) the assessee's bank accounts showed considerable credits for a period of one year for which he did not give any information as to their source, and it was for this reason that it was held that the question whether the assessment, which was made under the provisions of Section 13 of the Income-tax Act, was proper or not was one of fact.

32. That was however, a decision which was peculiar to the facts of the case and did not answer the question whether when the explanation of the assessee is rejected, it inevitably follows that the receipt is income assessable to tax.

33. In ‘Udayram Jagannath, In re’, 1951-19 ITR 222 (All) (I), their Lordships did not decide this question and only referred to the decision in “Mahabir Prasad v. Commissioner of Income Tax’, (E) (‘supra’) on the one hand and ‘G.M. Madappa v. Commissioner Of Income-Tax, Madras, Madras’, (F) (‘supra’) on the other.

34. In ‘Anraj Narain Dass v. Commissioner Of Income-Tax, Delhi’, AIR 1952 Punj 46 (J), it was held that the initial onus of explaining cash credits in the accounts lies on the assessee. While this is true, it does not answer the question whether, if the explanation is rejected, the credit should necessarily be liable to be treated as income. That will, in our opinion, depend upon the facts of each case. We are, therefore, in respectful agreement with the decision in ‘Mahabir Prasad v. Commissioner of Income Tax’, (E) (‘supra’).

35. In the instant case, the rejection of the assessee's explanation has been the sole basis for the inference that the amount was a revenue receipt from undisclosed sources. There are no circumstances in the case from which the receipt in question can reasonably be held to be in the nature of income.

36. The amount was not credited in the assessee's account books and was presumably advanced by his wife to be deposited in her own account with the Bank. In these circumstances, even if the contention may be negatived that the amount came out of the savings as alleged, it cannot ‘ipso facto’ be traced to the assessee as his income.

37. The broad fact, however, is that the assessee has ‘prima facie’ made out a case which the taxing authorities have no material or information to rebut. In these circumstances, the source of the receipt should be deemed to be established, and consequently the money was not liable to be treated as the assessee's income merely because he could not explain satisfactorily how his wife made the saving and why she did not deposit it in the Bank at any earlier date.

38. In ‘Narayandas Kedarnath, Firm v. Commissioner of Income Tax, Central’, AIR 1952 Bom 459 (K), the assessee firm was held to have discharged its burden when it proved the source of the moneys even though it was unable to explain how the partners got them in their native place. The same reasoning is applicable to the instant case. Our answer to the question is, therefore, in the negative. The reference is answered accordingly with costs on the Department. Hearing fee Rs. 100/-.

39. Reference answered accordingly.