Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: MANSFIELD & SONS VS Respondent: COMMISSIONER OF INCOME-TAX, CALCUTTAHonorable Justice RAY
1968 P T D 855
1968 P T D 855
[Calcutta (India)]
Before G. K. Mitter and A. N. Ray, JJ
MANSFIELD & SONS
Versus
COMMISSIONER OF INCOME‑TAX, CALCUTTA
I. T. Reference No. 44 of 1956, decided on 22nd February 1962.
Income‑Income from undisclosed source ‑ Credit entries not explained‑Whether income can be presumed to be business income for purposes of excess profits tax.
Where a credit entry is found in the business accounts of an assessee and the explanation as to how the amount came to be received is rejected by the income‑tax authorities and the amount is taken to be income from an undisclosed source such income can be treated as business income if the assessee has no other source of income, and taken into account as business income for pur poses of excess profits tax.
Lakhmichand Baijnath v. Commissioner of Income‑tax (1959) 35 I T R 416 ref.
STATEMENT OF CASE
In compliance with the order under section 66(2) of the High Court in the matter of Income‑tax Reference No. 44 of 1956 we draw up a statement of case and refer it to the High Court.
2. The assessee is an unregistered firm. The assessment year is 1945‑46 and the corresponding accounting year is from 1st April 1944 to 31st January 1945.
3. In the month of September 1944, the account books disclosed a credit entry in the name of one Iswari Prosad Gupta, the amount being Rs. 1,31,957. Against this entry, there was purchase of timber of the same value. The assessee alleged that it purchased timber from the said Iswari Prosad Gupta and pay ment to the said person was made by instalments during the period of about two years. For the reasons given by the Appellate Tribunal in its order in I. T. A. No. 7227 of 1954‑55 for the Income‑tax assessment relevant for the assessment year 1945‑46 it held that the assessee failed to prove the genuine ness of this account and also failed to prove that this amount came from the partners. The amount was introduced several months after the commencement of the business and the Tribunal inferred from the circumstances that this amount was produced by some undisclosed activities of the firm and, as such must be brought to tax as an undisclosed income of the firm. It there fore held that this amount was an income from some undisclosed sources. A copy of the order of the Tribunal in I. T. A. No. 7227 of 1954‑55 is made a part of the case and is Annexure "A".
4. The corresponding E. P. T. appeal for the corresponding accounting period ending 31st January 1945, was decided in in re E. P. T. A. No‑ 123 of 1954‑55 in which was stated that the appeal was merely consequently to the result of the Income‑tax Appeal No. 7227 of 1954‑55. Since the Tribunal dismissed the Income‑tax Appeal, the E. P. T. appeal was also dismissed.
In the E. P. T. appeal before the‑ Tribunal, the only' point taken by the assessee was that "consequential relief may kindly be given on the basis of the Tribunal's order passed in original appeal". The assessee did not raise any ground that if the Tribunal found that the income was from an undisclosed source, it should not treat the income as from business and, therefore, must exclude the same from the levy of excess profits tax. Nor was any such argument addressed to the Tribunal.
1. The question as desired by their Lordships is referred:
"The finding of the Tribunal in the income‑tax appeal Clearly being that the sum of Rs. 1,31,957 was income from some undisclosed source, could such income be considered for taxa tion under the Excess Profits Tax Act and could the relief con sequential to the finding in the income‑tax appeal be refused?"
6. The draft statement of case was sent to the parties concerned. The assessee suggested the incorporation of certain materials in the statement. In our opinion, these matters are either not relevant for the purpose of this reference or are argu mentative, in nature. We, therefore, refuse to incorporate the same. The draft statement is finalised.
Dr. R. B. Pal with Dr. Debi Pal for the Assessee.
E. R., Meyer with Balai Lal Pal for the Commissioner.
JUDGMENT
G. K. MITTER, J.‑In this reference under section 66(2) of the Indian Income‑tax Act, the only question involved is whether the sum of Rs. 1,31,957 .which was found by the Appellate Tribunal to be an income of the firm could be computed as the business income for the purpose of the Excess Profits Tax Act. The question is as follows:
"The finding of the Tribunal in the income‑tax appeal clearly being that the sum of Rs. 1,31,957 was income from some undisclosed source, could such income be considered for taxa tion under the Excess Profits Tax Act and could the relief conse quential to the finding in the income‑tax appeal be refused?"
The assessee is an unregistered firm. The assessment year in question is 1945‑46 and the corresponding accounting year is from April 1, 1944, to January 31, 1945. The account books of the assessee disclosed a credit entry in the month of September 1944, in the name of one Iswari Prosad Gupta for the amount mentioned. Against this entry was recorded a purchase of timber of the same value and it was alleged by the assessee that it had purchased timber from the said Iswari Prosad Gupta and payment had been made to him by instalments during a period of about two years. The Income‑tax Officer and the Appel late Assistant Commissioner held that the assessee had failed to prove the genuineness of this account and had also failed to prove that this amount came from the partners. According to the statement of the case the amount was introduced several months after the commencement of the business and in the circumstances the Tribunal inferred that this amount was pro duced by some undisclosed activities of the firm.
Two appeals were preferred to the Appellate Tribunal, one in respect of income‑tax and the other in respect of the excess profits tax. No separate argument was advanced in respect of the excess profits tax appeal and the assessee prayed for relief consequential to the result of the income‑tax appeal.
The Appellate Tribunal went into the question as to how this amount of Rs. 1,31,957 should be treated. It observed that if the amount had come from the partners it was for them to explain the source of the same. It negatived the assessee's con tention that the item could not be one of cash credit as no money came to the firm and as there was no attempt by the firm or its partners to explain the source from which the amount was received. The finding of the Appellate Tribunal on this por tion of the case is as follows:
"Initially the assessee posted the amount in a fictitious account and only when it was confronted with the actual circumstances of the case that it came out with this disclosure that there was no person in the name of Iswari Prosad Gupta who was a credi tor to the firm but that the amount was introduced as capital. Having failed to prove the genuineness of the account, the asses see cannot now be allowed to raise a question that the amount came only from one of the partners. The amount was introduced several months after the commencement of the business and we can infer from the circumstances that this amount was produced by some undisclosed activities of the firm and as such it must be brought to tax as an undisclosed‑ income of the firm . . . We find no reason to interfere with the decision of the depart ment in bringing this amount to tax holding at the same time that the amount was an income from some undisclosed source."
The argument of the assessee is that the net result of the above finding is that although the amount has got to be treated as income, it must be ' treated as income from "other sources" which would fall under section 12 of the Income‑tax Act and as such not to be reckoned for the purpose of the Excess Profits Tax Act. In this connection it should be. noted that it was never the case of the firm that it had any income other than business income. It should also be noted that the entry relating to that amount finds a place in the books of account of, the firm. The Income‑tax Officer after examining the facts of the case recorded that Iswari frosad Gupta was a fictitious person and the transactions shown with him as recorded in the account books of the assessee were spurious. Accordingly, the assessee firm's purchase of timber represented by this entry was an undisclosed profit, He also recorded that the cash credits represented the assessee's undisclosed business income which had to be introduced into business at the time of necessity and was withdrawn subsequently when no more required. In appeal from this order the Appellate Assistant Commissioner endorsed the above finding of the Income‑tax Officer. The appeal relating to the income‑tax was heard by the Appellate Tribunal on November 9, 1955, in which the judgment appearing at pages 5 to 8 of the paper‑book was delivered. No separate judgment was delivered in the excess profits tax appeal, the order recorded being "This appeal is consequential to the result of Income‑tax Appeal No. 7227 of 1954‑55. We have dismissed the said appeal and, therefore, this appeal is also dismissed."
We were referred to two grounds of appeal before tote Tribunal, which read as follows:
"That as no cash credit was found in the books of your petitioner's firm the addition of Rs. 1,31,957 as business income of your petitioners of the year of account is un warranted and arbitrary in the absence of definite proof that this sum was paid in the year of account from your petitioners' undisclosed business income.
For that there is no evidence that your petitioners' firm had any other business activities or transactions in the account year besides those shown."
It was urged by Dr. Pal appearing on behalf of the assessee that when it was stated by the learned Advocate for the assessee that in the excess profits tax appeal relief could only be had consequential on the result of the income‑tax appeal, not only did the appellant pray for relief on‑the ground as to the quantification of the income but also as to the quality of the income to be found by the Income‑tax Appellate Tribunal. If that was the attitude of the assessee then it should have deferred its argument on the excess profits tax appeal till after delivery of the judgment in the income‑tax appeal. It seems to me that the assessee was only concerned to get relief in the excess profits tax appeal depending on the quantification of the income in the income‑tax appeal.
Mr. Meyer appearing for the revenue drew our attention to an observation of the Supreme Court in the case of Lakhmichand Baijnath v. Commissioner of Income‑tax. ((1959) 35 I T R 416). In this case the appellant was a Hindu undivided family carrying on business as piece goods merchant. In the course of the assessment pro ceedings relating to its accounting year, June 12, 1944 to April 24, 1945, a petition under section 25‑A of the Income‑tax Act was filed claiming that there had been a partition in the family on April 24, 1945. In the proceedings for assessment of the income of the family under section 23 in regard to six sums aggregating to Rs. 2,30,346 shown in the accounts as sale proceeds of ornaments, the explanation given was that at the partition the jewels of the family were sold in six lots and the amounts realised were invested in the business. This was not accepted and the Supreme Court came to the conclusion that as the credits were found in the business accounts of the appellant and the explanation as to how the amounts came to be received was rejected by the income‑tax authorities, they were entitled to treat the credits as business receipts chargeable to tax. The following observation of Venkatarama Aiyar, J., who delivered the judgment of the, Supreme Court. relied on by Mr. Meyer, appears at page 24: "When an amount is credited in business books, it is not an unreasonable inference to draw that it is a receipt from business." It must be added that their Lordships did not think it necessary to pursue the matter further as this was not one of the questions referred, under section 66(2). However that may be, the observation is there, and no reason has been shown as to why we should not accept the above dictum. In my opinion the answer to the question should be against the assessee and the finding that the amount of Rs. 1,31,957 was business income from some undisclosed activities is not unwarranted. The assessee must pay the costs of this reference.
RAY, J.‑I agree.
Order accordingly.