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PETITIONER: COMMISSIONER OF INCOME-TAX, ORISSA

       Vs.

RESPONDENT: ORISSA CORPORATION (P) LTD.

DATE OF JUDGMENT19/03/1986

BENCH: MUKHARJI, SABYASACHI (J) BENCH: MUKHARJI, SABYASACHI (J) PATHAK, R.S.

CITATION:  1986 AIR 1849            1986 SCR  (1) 979  1986 SCC  Supl.  110     1986 SCALE  (1)446

ACT:      Income Tax  Act 1961-88.68 and 256(2) - Cash credits in books of assessee - Onus of proof about source of income.      High Court  refusing to  direct Tribunal  to state case When valid.      Interference with  findings of  fact  by  the  Tribunal Permissible under what circumstances.

HEADNOTE:      For the  accounting year  ending on  31st March,  1961, corresponding to the assessment year 1962-63, the Income-tax Officer did  not accept the assessee’s accounts showing cash credit of  Rs.1,50,000 said  to have been received by way of loans from  three individual  creditors. He  produced before the Income-tax  Officer, discharged hundies and confirmation letters from these creditors who were income-tax assessees. The assessee made attempts to bring the creditors before the Income-tax Officer  by issue  of notices  under s.131 of the Income-Tax Act, 1961 but failed, as these were returned with the  endorsement  ’left’.  The  assessee  thereafter  wanted further opportunity  to find  out  the  whereabouts  of  the lenders.   The    Income-tax   Officer    observed   certain inconsistencies in  the confirmation  letters which  did not inspire confidence,  and being  of the view that the alleged creditors were  not  genuine  bankers  but  were  mere  name lenders, treated  the entire  amount as unproved cash credit and added  the same  to the  income  of  the  assessee.  The assistant appellate Commissioner dismissed the appeal of the assessee.      In a  separate proceeding  under a.271(1)(c) of the Act on  the   basis  of  the  assessment  order  the  Inspecting Assistant  Commissioner imposed a penalty of Rs.50,000.      The Tribunal  came to  the conclusion  that the Revenue was 980 not justified  in  drawing  adverse  inference  against  the assessee. It  was of the view that if the assessee could not produce the  persons alleged to be the creditors, it did not lead automatically  to the adverse inference that the amount represented undisclosed  income of  the assessee.  It  found that the creditors were income-tax assessees and while being assessed they  had mate  statements  before  the  respective

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Income-tax Officers  admitting that they were allowing their names to be lent, without actually giving loans as creditors of different  assessees. The Tribunal also could not sustain the imposition  of penalty. The Revenue sought for statement of the  case to  the High Court on the aspect of addition of unproved cash  credit to  the total  income of the assessee, and also  on the  imposition of  penalty but  the  same  WAS refused. The  High Court  also  refused  to  accede  to  the prayers of  the Revenue in its application under 8.256(2) of the Act.      In the  appeals before  this Court  on  behalf  of  the Revenue it  was contented  that in view of the provisions of 8.68 of  the Act the onus in these types of cases was on the assessee, and  in this  case the assessee had not discharged that onus.      Dismissing the appeals, the Court, ^      HELD : 1.(i) The High Court has no power under 8.256(2) of the 1961 Act to call upon the Appellate Tribunal to state a case  if there  was some  evidence to  support the finding recorded by  the Tribunal,  even if  it appears  to the High Court that  on a  re-appreciation of  the evidence, it might arrive at  a conclusion different from that of the Tribunal. [987 D-E]      (ii) The  conclusion reached  by the  Tribunal  in  the instant case,  that the  assessee had  discharged the burden that lay  on him  could not  be said  to be unreasonable, or perverse or based on no evidence. If the conclusion is based on some  evidence on  which  it  could  be  arrived  at,  no question of law as such arises. [987 G-H]      (iii) The assessee had provided the names and addresses of the  alleged creditors.  It was  in the  knowledge of the Revenue that  they were  income-tax assessees.  Their  index numbers were  in the  files of  the department.  The Revenue apart 981 from issuing notices under 8. 131 of the Act at the instance of the  assessees, did not pursue the matter further. It did not examine the source of income of the alleged creditors to find out  whether they  were credit-worthy  or were such who could advance the alleged loans. There was no effort made to pursue  the   so-called  alleged  creditors.  The  assessee, therefore, could not do any further. [987 E-G]      2. Section  68 of 1961 Act was introduced for the first time in  the  Act.  There  was  no  provision  in  1922  Act corresponding  to   this   section.   It   gives   statutory recognition to the principle that cash credits which are not satisfactorily explained  might be  assessed as  income.  It enacts that  if a  sum is  found credited in the books of an assessee maintained  for any  previous year, the cash credit might, in  case where  it is assessed as undisclosed income, be treated  as the  income of  that previous  year, and  the financial year  may not  be taken  as the  previous year for such a  cash credit  even if  the undisclosed income was not found to  be from  the assessee’s regular business for which the books were maintained. The cash credit might be assessed either as  business profit  or as income from other sources. [984 G; 985 A-C]      Lalchand Bhagat  Ambica Ram  v. Commissioner of Income- tax, Bihar & Orissa, 37 I.T.R. 288; Homi Jehangir Gheesta v. Commissioner   of Income-tax,  Bombay City,  41 I.T.R.  135; Sreelekha Banerjee  & Ors.  v. Commissioner  of  Income-tax, Bihar &  Orissa, 49 IT.E. 112 and Commissioner of Income-tax (Central), Calcutta  v. Daulatram  Rawatmull, 53  I.T.R. 574 referred to.

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JUDGMENT:      CIVIL  APPELLATE   JURISDICTION  :  Civil  Appeal  Nos. 13791380 (NT) of 1974.      From the Judgment and Order dated 31st October, 1973 of the Orissa High Court in S.J.C. Nos. 85 and 116 of 1972. G      S.C. Manchanda,  K.C. Dua  and Ms.  A. & Subhashini for the Appellants.      S.P. Mittal,  S.N. Aggarwal and B.P. Maheshwari for the Respondents.      The Judgment of the Court was delivered by 982      SABYASACHI MUKHARJI,  J. These appeals by special leave arise from  the decision of the Orissa High Court dated 31st October, 1973  refusing to  direct the  Tribunal to  state a case under section 256(2) of the Indian Income Tax Act, 1961 (hereinafter called  the Act) and to refer certain questions said to  be questions  of law  arising out  of the appellate order of the Income Tax Appellate Tribunal for determination of the High Court. The assessment year involved was 1962-63. There were  proceedings -  one  appeal  was  related  to  an assessment order  whereby additions were made to the quantum of income  disclosed by  the assessee  and the  other was in respect of  imposition of  penalty under  section  271(1)(c) read with section 274(2) of the said Act.      The questions involved respectively in two applications before the High Court were as follows :           "S.J.C. No. 116 of 1972           1. Whether  In the absence of proving confirmation           letters and  Hundis by  the assessee, the assessee           has  discharged  his  initial  onus  by  producing           merely the  confirmation  letters  and  Hundis  to           prove the nature of the transaction?           2. Whether  in the  facts and circumstances of the           case the  Tribunal was  right in ordering deletion           of  Rs.   1,50,000  as   assessee’s  income   from           undisclosed sources?           3. Whether  in the  facts and circumstances of the           case the cash credit is the assessee’s income from           undisclosed sources?           S.J.C. No. 85 of 1972.           Whether in the facts and circumstances of the case           the Tribunal  was right  in shifting the onus from           the  assessee  to  the  Revenue  in  deleting  the           penalty?"      The assessee at the relevant time was a private limited company and maintained accounts according to the calendar 983 year. For  the accounting year ending on 31st December, 1961 corresponding to the assessment year 1962-63, the Income-tax Officer did  nor accept the assessee’s accounts showing cash credit of  Rs. 1,50,000.  Three accounts  were shown to have been  received   by  way  of  loans  from  three  individual creditors of  Calcutta under  Hundis. The  assessee produced before the  Income- tax Officer letters of confirmation, the discharged Hundis and particulars of the different creditors general index  numbers were  with the Income-tax Department. Attempts bad  been made  to bring  those creditors therefore the Income-tax Officer by issue of notices under Section 131 of the  Act, but  the said  notices were  returned with  the endorsement  ’left’.   The  Income-tax  Officer,  therefore, treated the  entire amount  of R.  1,50,000 as unproved cash credit and added the same to the income of the assessee. The

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appeal  of   the  assessee   to  the   Assistant   Appellate Commissioner was  dismissed. Thereafter  there  was  further appeal to the Tribunal.      In the  meantime  on  the  basis  of  assessment  order proceeding was  taken under section 271(1)(c) of the Act and the Inspecting  Assistant Commissioner  imposed a penalty of Rs. 50,000.  An appeal against the imposition of penalty was also filed  before  the  Tribunal.  Both  the  appeals  were disposed of by the Tribunal.      The Tribunal noted that the credit entries stood in the name of third parties in the account books of the assessee. The explanation  was that  the amounts  represented loans to the assessee  from the  concerned persons.  The assessee had produced discharged  Hundis and  confirmation  letters  from these alleged  lenders. The Tribunal was of the view that if the assessee  could not  produce these persons alleged to be the creditors,  it did  not follow  automatically  that  the adverse  inference   should  be  drawn  that  these  amounts represented undisclosed  income  of  the  assessee.  It  was further noted  that the  creditors were income-tax assessees and while being assessed they had made statements before the respective Income-tax  Officers  admitting  that  they  were allowing their  names to be lent without really giving loans as creditors  of different assessee. A list of the assessees had also been given but the name of the present assessee did not figure  in that list. me Tribunal came to the conclusion that the  Revenue  was  not  justified  in  drawing  adverse inference against the assessee and adding 984 these  amounts  to  the  assessment  of  the  assessee.  The Tribunal also, in those circumstances, could not sustain the imposition of  the penalty  and deleted such imposition. The Revenue sought  for statement  of case on both these aspects i.e. On  the aspect  of the  addition of Rs. 1,50,000 to the total income  of the  assessee and also on the imposition of penalty. The questions sought for by the Revenue were to the effect noted  before. The  Tribunal  refused  to  refer  any statement of  case to the High Court on those questions. The Revenue went  up in  an application  under section 256(2) of the Act  before the  High Court. The High Court also refused to accede  to  the  prayers  of  the  Revenue.  Hence  these appeals.      Our attention  was  drawn  to  the  statements  in  the assessment order  where the  Income-tax Officer had observed certain inconsistencies  in  the  confirmation  letters  and observed further  that  the  confirmation  letters  did  not inspire confidence.  It also  observed that the assessee had stated that  after making all possible attempts in their own wag,  had  failed  to  produce  the  parties  and  thereupon requested the  Income-tax Officer  to  issue  summons  under section 131  to all  the alleged  creditors and  the notices under section  131 of  the Act  which had come back unserved with the remarks ’left’. The  assessee   thereafter   wanted further opportunity  to find  out the present whereabouts of the alleged lenders. The Income-tax Officer observed further that the  wide prevalence of Hundi racket was well-known and it had  been established  beyond doubt  that most of the so- called Hundiwallas  are not  genuine bankers  but mere  name lenders.      It was argued that in view of the provisions of section 68 of  the Act,  the onus in these types of cases was on the assessee and  in this  case the  assessee had not discharged that onus  and in the premises questions of law as indicated above arose.  Section 68  of 1961 Act was introduced for the first time  in the  Act. There  was no provision in 1922 Act

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corresponding to this section. The section states that where any sum  is found  credited in  the  books  of  an  assessee maintained for any previous year, and the assessee offers no explanation about  the nature  and  source  thereof  or  the explanation offered  by him  is not,  in the  opinion of the Income-tax Officer, satisfactory, the sum so credited may be charged to  Income-tax as the income of the assessee of that previous year. The 985 section only  gives statutory  recognition to  the principle that cash  credits which  are not  satisfactorily  explained might be  assessed as  income. The  section enacts that if a sum is found credited in the books of an assessee maintained for any  previous year  (which might  be different  from the financial year),  the cash credit might, in case where it is assessed as  undisclosed income, be treated as the income of that previous  year, and the financial year may not be taken as the  previous year  for such  a cash  credit even  if the undisclosed income  was not  found to be from the assessee’s regular business  for which  the books  were maintained. The cash credit  might be assessed either as business profits or as income from other sources.      Under the  1922 Act  where a  large amount  of cash was found credited on the very first day of the accounting year, and considering  the extent  of the  business,  it  was  not possible that the assessee earned a profit of that amount in one day,  the amount  could not be assessed as the income of the year from that business on the first day of which it was credited in  the books.  Under this  section, even in such a case the  unexplained cash  credit might  be assessed as the income of  the accounting  year  for  which  the  books  are maintained. See in this connection the observations of Kanga and Palkhiwala’s  Income Tax,  Seventh Edition, Vol. I pages 609 and 610.      To what extent the assessee has obligation to discharge the burden  of proving  that these  were genuine incomes has been considered  by this Court in Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax, Bihar and Orissa, 37 ITR 288. This Court  was concerned  there with the encashment of high denomination notes.  In  that  case  some  unexplained  high denomination notes were treated as the undisclosed income of the assessee.  This Court  held that  when a  court of  fact arrives at  its decision  by considering  material which  is irrelevant to  the  enquiry,  or  act  on  material,  partly relevant and  partly irrelevant, and it is impossible to say to what  extent the  mind of  the court  was affected by the irrelevant material  used by it in arriving at its decision, a question  of law  arises, whether the finding of the court is  not  vitiated  by  reason  of  its  having  relied  upon conjectures, surmises  and suspicions  not supported  by any evidence on  record or  partly upon evidence and partly upon inadmissible material.  On no  account whatever  should  the Tribunal base its findings on H 986 suspicions, conjectures or surmises, nor should it act on no evidence at  all or  on improper  rejection of  material and relevant evidence  or  partly  on  evidence  and  partly  on suspicions, conjectures  and surmises.  In that case the so- called hundi  racket in  which the  assessee was  alleged to have been involved was not proved. That was only a suspicion of the Revenue.      The question was again considered by this Court in Homi Jehangir Gheesta v. Commissioner Income-tax, Bombay City, 41 ITR 135,  when this  Court reiterated that it was not in all cases that  by mere  reject on  of the  explanation  of  the

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assessee, the  character of  a particular  receipt as income could be  said to  have  been  established;  but  where  the circumstances of  the rejection  were  such  that  the  only proper inference  was that  the receipt  must be  treated as income in the hands of the assessee, there was no reason why the assessing  authority should  not draw such an inference. Such an  inference was  an inference of fact and not of law. It was further observed that in determining whether an order of the  Appellate Tribunal  would give rise to a question of law the court must read the order of the Tribunal as a whole to determine  whether every  material fact,  for and against the assessee,  had been considered fairly and with due care; ; whether  the evidence  pro and  con had been considered in reaching the  final conclusion;  and whether  the conclusion reached by  the Tribunal  had been  coloured  by  irrelevant considerations or  matters  of  prejudice.  It  was  further reiterated that the previous decisions of this Court did not require that  the order  of the  Tribunal must  be  examined sentence by  sentence through a microscope as it were, so as to discover  a minor  lapse here  or an  incautious  opinion there to  be used as a peg on which to hang an issue of law. In considering probabilities properly arising from the facts alleged  or   proved,  the   Tribunal  did  not  indulge  in conjectures, surmises or suspicions.      In Sreelekha  Banerjee and  others v.  Commissioner  of Income-tax, Bihar  and Orissa,  49 ITR  112, this Court held that if  there was  an entry  in the  account books  of  the assessee which  showed the receipt of a sum on conversion of high denomination  notes  tendered  for  conversion  by  the assessee himself.  it  is  necessary  for  the  assessee  to establish, if 987 asked, what  the source  of that money was and to prove that it A  was not  income. The  department was not at that stage required to  prove anything.  It could  ask the  assessee to produce any  books of account or other documents or evidence pertinent to  the explanation  if  one  was  furnished,  and examine the evidence and the explanation. If the explanation showed that  the receipt  was not  of an  income nature, the department  could  not  act  unreasonably  and  reject  that explanation to  hold that  it was  income. If,  however, the evidence was unconvincing then such rejection could be made. The department  cannot by  merely rejecting  unreasonably  a good explanation, convert good proof into no proof.      In Commissioner of Income-tax (Central), Calcutta v. Daulatram Rawatmull,  53 ITR  574, the  principles governing reference under  section 66  of 1922  Act similar to section 256 of 1961 Act were discussed and it was held that the High Court has no power under section 66(2) of the Indian Income- tax Act,  1922 which  is in pari-materia with section 256(2) of the  Act, to  call upon the Appellate Tribunal to state a case if  there was  some evidence  to  support  the  finding recorded by  the Tribunal,  even if  it appears  to the High Court that  on a  re-appreciation of  the evidence, it might arrive at a conclusion different from that of the Tribunal.      In this  case the  assessee had  given  the  names  and addresses of  the alleged creditors. It was in the knowledge of the  Revenue that  the  said  creditors  were  income-tax assessees. Their  index  number  was  in  the  file  of  the Revenue. The  Revenue,  apart  from  issuing  notices  under section 131  at the instance of the assessee, did not pursue the matter  further. The  Revenue did not examine the source of income  of the said alleged creditors to find out whether they were  credit-worthy or  were such who could advance the alleged loans.  There was  no effort  made to  pursue the so

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called  alleged   creditors.  In  those  circumstances,  the assessee could  not do  any further. In the premises, if the Tribunal came  to  the  conclusion  that  the  assessee  had discharged the  burden that  lay on him then it could not be said that  such a conclusion was unreasonable or perverse or based on  no evidence.  If the  conclusion is  based on some evidence on  which a  conclusion could  be  arrived  at,  no question of law as such arises. 988      It is  common ground  that the  question on the penalty aspect depended on the quantum aspect.      In the  premises it cannot be said that any question of law arose  in these  cases. The  High Court  was, therefore, right in  refusing to  refer the  questions sought  for. The appeals, therefore, fail and are dismissed with costs. P.S.S.                               Appeals dismissed. 989