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Petitioner: L. R. BROTHERS VS Respondent: COMMISSIONER OF INCOME-TAX, ALLAHABADHonorable Justice Bhargava and UpadhyaBHARGAVA
1968 P T D 156
1968 P T D 156
[Allahabad (India)]
Before Bhargava and Upadhya, JJ
L. R. BROTHERS
Versus
COMMISSIONER OF INCOME‑TAX, ALLAHABAD
Miscellaneous Case No. 209 of 1947, decided on 4th Feb ruary 1957.
Accounts‑Unexplained deposits by assessee‑Whether assess able as undisclosed profits‑Burden of proof‑Failure of assessee to give satisfactory explanation‑Duty of Income‑tax Authorities to consider all the facts‑Amounts added back to assessee's income as suppressed profits, and losses disallowed, must be taken into account to avoid double taxation.
When the explanation given by an assessee as to the source and nature of certain deposits made by the assessee which appear in the accounts is unsatisfactory the revenue authorities are entitled to take into consideration the fact that the explanation was not acceptable and then to consider whether that circumstance alone, or the other materials available along with that circumstance, would entitle them to hold that the amounts so deposited represented undisclosed income of the assessee for the year, in question.
The real question in such cases is not whether the assessee has been able to prove that it is not taxable income. The entire burden of proof is not upon the assessee.
It is for the taxing authorities to first discover the materials on the basis of which it could be held that the receipts were revenue income taxable in the relevant year and though the assessee had the burden of giving an explanation, the mere fact that the explanation was not found to be correct does not neces sarily in every case lead to the inference that it was revenue income liable to be taxed, The Income‑tax authorities must apply their mind to the question whether there is any material in addition to the fact that the explanation is unsatisfactory which has a bearing on the question and if there is such material, whether on all the facts of the case including such material they can come to the conclusion that the deposit represented undisclosed taxable income.
The assessee was not able to give any satisfactory explanation of a deposit of Rs. 68,958 by the assessee which appeared in his accounts. The Income‑tax Officer assessed the whole amount to tax as undisclosed profits. It appeared from the findings of the Income‑tax Officer that two sums of Rs. 26,397 and Rs. 403 had been added back as profits not shown in the accounts, and that a loss of Rs. 12,782 which had been claimed by the assessee had been disallowed:
Held, that the Income‑tax Authorities acted wrongly in treating the whole amount of Rs. 68,958 as taxable income of the previous year merely because the assessee failed to explain its source satisfactorily. They ought to have applied their mind to the other facts of the case also, and, as the sums of Rs. 26,397, Rs. 403 and Rs. 12,782 had already been taxed by being added back, the whole amount of Rs. 68,958 could not be treated as undisclosed taxable income of the previous year.
Mothoo Lal Tek Chand v. Commissioner of Income‑tax, United Provinces. (1953) 23 I T R 494 ref.
STATEMENT OF CASE
In compliance with an order of the High Court of Judicature at Allahabad under section 66(2) of the Indian Income‑tax Act (in Miscellaneous Case No. 209 of 1949), we draw a statement of the case and refer it to the High Court.
2. The assessee, M/s. L. R. Brothers, Station Road, Saharanpur, was assessed for the assessment year 19,45‑46 in the status of an individual on an income of Rs. 1,81,516. The assessee was dealing in vegetable and flower seeds, seedlings and in plants. While examining the accounts of the assessee, the Income‑tax Officer noticed numerous cash deposits and withdrawals in the assessee's personal account and loan account. The assessee's loan account showed deposit in the previous year amounting to Rs. 89,847. His withdrawals in that account were Rs. 47,223. But these withdrawals were in the month of March, after the deposits had been made. The withdrawals prior to the accounting period amounted to Rs. 2,210. The Income‑tax Officer therefore excluded withdrawals of Rs. 2,210 which were prior to the accounting period and which could be available to the assessee for introduction as cash deposits. The Income‑tax Officer also excluded Rs. 50 for adjustment entries and held the deposits in this account amounting to Rs. 87,586 were unaccounted for. In the personal account of the assessee there were deposits amounting to Rs. 95,536 and withdrawals of Rs. 2,910 giving a net balance of Rs. 92,626. Thus the total cash deposits in the assessee's personal account and loan account amounted to (Rs. 87,586 plus Rs. 92,626), Rs 1,80,212. The extracts of the assessee's personal and loan accounts are enclo sures "A" and "B" and form part of the case. By a notice under section 23(3) dated 31st August, 1946, the assessee was called upon to explain the nature and source of these deposits and also to explain the purpose for which the numerous withdrawals were made by him in those accounts during the previous year. By a letter dated 6th September, 1946, the assessee tendered his explanation stating that he had the following sums with him:
Rs. a. p.
Bank balance on the opening day credited to the capital account
47,087 10 2
Realisations made in respect of the sales effected from the financial year 1943‑44 credited to the capital account
37,167 6 0
Outstanding of the financial year 1943‑44 realised and credited to the capital account but not shown in the adjustment
7,883 10 9
Profit for the financial year 1943‑44
10,310 13 3
Amount advanced by the assessee
30,591 11 5
1,33,041 3 7
The assessee thus tendered an explanation in respect of Rs. 1,33,041‑3‑7 but did not tender any explanation in respect of the balance. The Income‑tax Officer found that the deposits amounting to Rs. 10,310‑1 1‑3 could not be traced to the profits of the preceding year. He also found that the item of Rs. 7,884 had been wrongly claimed. He, however, accepted the assessee's explanation in respect of the sum of Rs. 84,254 and held that the assessee could not offer any explanation in respect of the cash deposits amounting to Rs. 93,958 and added that amount as the suppressed income of the assessee. The notice dated 31st August, 1946, and the letter of the assessee dated 6th September, 1946, along with the explanation which he had submitted form part of the case and are Annexures `C' and `D' while the order of the Income‑tax Officer forms part of the case and is Annexure B'.
3. When the assessee went in appeal the Appellate Assistant Commissioner noticed that the Income‑tax Officer had committed a mistake in totalling the cash deposits appearing in the personal and loan accounts of the assessee. The Income‑tax Officer had calculated the aggregate of these deposits to be Rs. 1,78,210. Whereas the aggregate total should have been Rs. 1,80,212. The figure of the amount of income from an undisclosed source was thus calculated by the Appellate Assistant Commissioner to be Rs. 95,958.
4. Before the Appellate Assistant Commissioner the assessee submitted an affidavit dated 16th April, 1947, stating that he did not carry on business except those disclosed by him in the return and that he had carried on agriculture including horticulture on all the plots owned by him. He also submitted a schedule stating his income in each year from the year 1931‑32 (when he was assessed for the first time) up to the assessment year 1944‑45. The affidavit of the assessee and the schedule of income filed by him form part of the case and are enclosures `F' and `G' respectively. The Appellate Assistant Commissioner held that Rs. 50,000 were available to the assessee out of his agricultural income and further held that the assessee had also realised a sum of Rs. 5,000 from Volkart Bros. and Rs. 2,000 from Shah Iqbal. He there fore held that the assessee had Rs. 57,000 with him. Out of this amount Rs. 30,000 were found to have been invested by the assessee in the purchase of land, shares and buildings and Rs. 27,000 were available to him for introduction as cash deposits. He therefore held that the assessee had succeeded in proving the nature and source of the amount of Rs. 27,000 in addition to the amount already held to have been satisfactorily explained by him and directed that it should be knocked off from the computation of the total income of the assessee. The amount which was then assessed as the assessee's suppressed income came to (Rs. 95,958 minus Rs. 27,C00) Rs.68,958. The order of the Appellate Assistant Commissioner forms part of the case and is Annex ure `H'.
5. The assessee then went in appeal to the Tribunal. The Tribunal by its order dated 14th June, 1948, confirmed the finding of the Appellate Assistant Commissioner and held that Rs. 68,958 out of the deposits appearing in the personal account of the assessee represented the assessee's suppressed income. The Tribunal further held that the amount represented the income of the assessee during the accounting period of the assessment year. In dealing with this point the Tribunal observed as under:
"The appellant's counsel relied on the case Ram Datta Sita Ram of Basti, In re ((1947) 15 I T R 61 at 85), and argued that there was no material on the record to show that the cash credits represented the assessable income of the appellant of the year of account. But his own accounts established that such cash deposits were brought into the account during the year in appeal and the only question was whether they were proved to be investment from the accumulations of agriculture and business income of the appellant of the past years or they were income of the appellant of the year of account. As, in our opinion, the appellant has failed to prove that the source of cash deposits was past accumulated income of the appellant, it follows that the cash deposits being deposits of the year of account must be taken to be the income of the appellant of that year."
The order of the Tribunal forms part of and is Annexure `I.' the case:
6. On these facts the only question of law that arises is:
"Whether there was any material on which the Tribunal could come to the conclusion that the amount of Rs. 68,958 out of the cash deposits appearing in the assessee's personal accounts represented his concealed income of the previous year of the assessment year 1945‑46?"
7. The statement of the case was placed before the parties. The Commissioner of Income‑tax, U. P. and V. P., has no suggestion to make. The assessee has filed a list of documents, which he wants to be enclosed as annexures of the statement of the case. Of these the only two documents which are relevant for the purpose of this case, namely, notice given by the Income‑tax Officer, Saharanpur, under section 23 (3) dated 31st August, 1946, and the reply given by the assessee to the notice under sec tion 23(3) dated 6th September, 1946, have already been enclosed as Annexures 'C' and `D' and form part of the case. The state ment is therefore finalised.
Gopi Nath Kunzru for the Assessees.
J. Sarup for the Commissioner.
JUDGMENT
BHARGAVA, J.‑The following question has been referred by the Income‑tax Appellate Tribunal for opinion to this Court in compliance with the orders passed by this Court under sec tion 66(2) of the Income‑tax Act:
"Whether there was any material on which the Tribunal could come to the conclusion that the amount of Rs. 68,958 out of the cash deposits appearing in the assessee's personal accounts represented his concealed income of the previous year of the assessment year 1945‑46?"
It appears from the statement of the case submitted by the Tribunal that in the accounts submitted by the assessee there were two accounts in the name of the sole proprietor Sri M. L. Garg. One was the personal account of the proprietor and the other was a loan account. These two accounts showed various deposits as well as some withdrawals during the previous year in question. In the loan account there were withdrawals to the extent of Rs. 47,222‑8‑0, which were made in the month of March just before the previous year closed. It was held by the Tribunal that the sums received by the proprietor by these withdrawals in the month of March could not have been available to him for making the deposits which were made earlier. The Tribunal, however, accepted the view that all other withdrawals which had been made' earlier by the proprietor could have been availed of by him in order to make the various deposits. Consequently, for the purpose of calculating the amount of deposit which the proprietor had to explain, those withdrawals were deducted out of the deposits. On this basis it was found that the assessee was required to account for deposits amounting to Rs. 1,80,212. The assessxe on being called upon to submit his explanation pre sented a statement showing the sources from which he had drawn the money in order to make these deposits. There were various sources amongst which were bank balance available on the first day of the opening of the previous year, realisations made in respect of sales effected during the preceding year and profits for the preceding year. Another source disclosed was agricultural income earned by the assessee by carrying on an horticultural farm during a number of years preceding the previous year in question. The explanation given by the assessee was scrutinized by the Income‑tax authorities. The explanation of some of the sources was accepted whereas for others it was rejected. Ultimately it was held that the assessee had failed to give any adequate explanation for the deposits amounting to Rs.68,958. This amount was then held to be concealed income of the previous year in question and was therefore added to the, taxable income. In this reference, the assessee has challenged the correctness of this view taken by the Income‑tax Appellate Tribunal.
Learned counsel for the assessee, while arguing this reference before us, wanted to urge that the order of the Income tax Appellate Tribunal rejecting the various explanations given by the assessee for the sources from which he had drawn the money in order to make those deposits was incorrect and was without material, so that that portion of the order of the Appellate Tribunal should be scrutinized by us and corrected. It is to be noticed that the question whether the explanation given by the assessee was or was riot correct was a question of fact. Neither in the application under section 66 (1) of the Income‑tax Act before the Appellate Tribunal nor in the application under section 66 (2) of the Income‑tax Act before this Court did the assessee seek any reference to this Court of the question whether the findings given by the Appellate Tribunal holding that the explanation was not correct were without material and vitiated in law. That question therefore is not before us in this reference. For the purpose of this reference we have to accept the findings of fact given by the Appellate Tribunal on this point. Consequ ently, this reference has to be decided on the basis that, with regard to the deposits amounting to Rs. 68,958 by the proprietor in the accounts of the assessee either the assessee has failed to give an explanation or gave explanations which were not accepted us correct. The whole of this sum of Rs. 68,958 is shown as receipts during the previous year in question. The question arose whether in these circumstances a reasonable inference could be drawn that this amount represented the concealed income of the previous year in question. On this point, our attention was drawn to a deci sion of a Bench of this Court in Mithoo Lal Tek Chand v. Commis sioner of Income‑tax, United Provinces ((1953) 23 I T R 494), where the law on the question of drawing inferences under such circumstance was explained after a discussion of the cases decided by various High Courts. The view expressed was as follows:
"An examination of these cases would, therefore, go to show that, if from the books of account of the assessee it appears that during the relevant account period he had received certain sums of money, it is for him to explain from where he got the same, and if his explanation is accepted there is an end of the matter: The question then might arise, which would be in most cases a question of law, whether the assessee's claim that the receipt its true source being known is not taxable income is justified or not. Where, however, his explanation is rejected, the Tribunal has to record a finding on such materials as may be available, whether the money represents revenue receipt taxable as income of the relevant account period. The burden, in the first instance, must be on the assessee to show the true nature of the receipt and why he claims that it is not taxable income. When the assessee furni shes an explanation, if that explanation is unsatisfactory, that may in itself be a circumstance which the Income‑tax Officer may be entitled to take into consideration but it need not necessarily, in every case, lead to the conclusion that the receipt is a revenue receipt taxable as income received in a particular year. The ques tion must always remain a question of fact which has to be decid ed on the materials available. In each case the revenue authorities are entitled to take into consideration the fact that the explanation given by the assessee is either unreasonable or is false and then to consider whether that circumstance alone or the other materials available along with that circumstance would entitle them to hold that the amount so deposited represented the undisclosed income of the assesssee in the year in question:"
In the instant case, so far as the sums of money deposited in the name of the proprietor, in respect of which explanation has been accepted by the Income‑tax authorities, is concerned that ends the matter. With regard to the remaining amount it appears from the facts found that the exact sources of the receipts by the assessee could not be ascertained. The assessee had given his explanation for the sources from which he had drawn this money in order to make the deposit but that explanation was rejected. When an explanation is found unsatisfactory that in itself could be a circumstance which the Income‑tax Officer was entitled to take into consideration but it did not necessarily lead to the con clusion that the receipt was a revenue receipt taxable as income received during the previous year in question. As held in the case cited above, the revenue authorities were entitled to take into consideration the fact that the explanation was not acceptable and then to consider whether that circumstance alone or the other materials available along with that circumstance would entitle them to hold that the amount so deposited' represented the undisclosed income of the assessee for the year in question. In deciding this question, it appears that the Appellate Tribunal committed a serious mistake by placing the entire burden of proof on the assessee when formulating the question which came up for decision before it. The Tribunal said that the simple point for determination as regards the cash credits before them was whether appellant had been able to prove that the cash deposits represented his accumulated income from the years 1930 to 1944 from his agricultural farm and from his business of seeds, etc., and was as alleged by him brought in the year of account as capital investment for increasing the volume of business as and when necessity arose. This was not the real question that arose in the appeal. It was for the taxing authorities to first discover the materials on the basis of which it could be held that the receipts were revenue income taxable in the relevant year. The assesses no doubt had the burden of giving an explanation but as held above the mere fact that the explanation was not found to be correct does not necessarily in every case lead to the inference that it was revenue income liable to be taxed. In some cases, the fact that the explanation given was either unreasonable or false could be treated as a circumstance which might alone justify an inference that the income was revenue income taxable as income of that very year. The Tribunal did not pay any attention at all to this aspect of the case. What the Tribunal did was to reject the explanation given by the assessee and thereupon, without examin ing the reasonableness of the inference, it laid it down as an inevitable consequence that the receipts were taxable income or the previous year. The Tribunal did not apply its mind at all to the question whether there was any material in addition to the fact that the explanation had been rejected and whether, if there was such material, in the particular circumstances of the case the inference drawn by the Tribunal was or was not justified. The consequence is that the order of the Appellate Tribunal has not been of much assistance to us in answering the question referred for our opinion.
Having gone through the order of the Appellate Tribunal as well as the assessment order and the order of the Appellate Assistant Commissioner we have found that in this case there was no suggestion on the part of the Income‑tax authorities that during the previous year in question the assessee was carrying on any other business besides those shown by him in his books of accounts. The only other source of income disclosed by the assessee was agricultural income derived from the horticultural farm worked by him. If this amount of Rs. 68,958 is held to be concealed income of the previous year in question, it can, in these circumstances, be taxed only as income derived from the business in respect of which the accounts were submitted by the assessee. The Appellate Assistant Commissioner has dealt with this question of various business carried on by the assessee. The order of the Appellate Assistant Commissioner was noticed by the Appellate Tribunal and it appears that the explanation accepted by the Appellate Assistant Commissioner with respect to the speculative business and celery business was cited with some disapproval by the Appellate Tribunal. Even thereafter, the Appellate Tribunal did not differ from the Appellate Assistant Commissioner. The Tribunal relied on the facts that even the appellant had not been able to meet the point raised by the Income‑tax Officer relating to the appellant's having a contract for packing and about the appellant's doing business in the supply of seeds in the previous year in question. Thereafter, the Appellate Tribunal went on to hold that the manner in which the appellant kept the accounts of his business left much room for leakage of profits and it could be safely presumed that the accounts of the appellant did not reflect his full income, and profits from these sources. This view expressed by the Appellate Tribunal would indicate that, according to it, this concealed income of Rs. 68,958 was derived from the business in supply of seeds and contract for packing which the assessee had been carrying on during the previous year in question and the income was concealed by improper maintenance of accounts. Our opinion has to be given on the basis that this sum of Rs. 68,958 has been taxed as concealed income derived from those very business in respect of which accounts were submitted. Examining this aspect, we have discovered that the findings of fact given by the Income‑tax authorities go to show that some instances of concealment of the profits were proved. A sum of Rs. 26,397 had to be added back for sales of seeds and sum of Rs. 403 for sales of plants. In addition the assessee had shown a` loss of Rs. 12,782 in vegetable contract account and the finding given was that no such loss was incurred. It can very reasonably be inferred that a part of this sum of Rs. 68,958, which was deposited by the proprietor, must consist of the amounts which he was able to retain in his hands by such manipulation of accounts and suppression of these items of income. These three items of Rs. 26,397, Rs. 403 and Rs. 12,782 which were either suppressed from the turnover or which were wrongly shown as loss in the account must have remained in the hands of the proprietor and they must have been utilized by him for the purpose of making at least a part of the deposits in question. When there are clear findings indicating that profits were suppressed or losses were wrongly shown in the accounts, in our opinion, the Income‑tax authorities were justified in inferring that this sum of Rs. 68,958 represented suppressed income which had been earned in the previous year in question. This sum can be divided into two parts. One part consists of those items of concealed income which have already been added back such as the sum of Rs. 26,397, added for sales of seeds, the sum of Rs. 403 added for sales of plants and the sum of Rs. 12,782 added for wrongly showing…
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