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CASE NO.: Appeal (civil)  2540 of 2007

PETITIONER: Commissioner of Income Tax

RESPONDENT: P. Mohanakala

DATE OF JUDGMENT: 15/05/2007

BENCH: S.H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T  

CIVIL APPEAL NO. 2540 OF 2007 (Arising out of SLP(c) No.  17358 of 2006) WITH  CIVIL APPEAL NOs. 2541,2542,2543,2544,2545,2546  and 2547 OF 2007 (Arising out of SLP(C ) Nos. 17356,  17364,17365,19565,19563,21066 & 19566 of 2006

B.SUDERSHAN REDDY,J.

       Leave granted.          These appeals have been filed against the judgment of  Madras High Court  dated 29.3.2006 in TC (A) Nos.  74 to 76  and 78 to 82 of 2002 whereby the following questions have  been answered by the High Court in favour of the assessees  and against the revenue:  (a)     Whether in the facts and circumstances, the  Income Tax Appellate Tribunal was correct in  law to accept the principle of preponderance of  probabilities in holding that the claim of the  appellant that the sum of Rs. 15,62,500/-   received him by way of gifts through normal  Banking Channels was not genuine an that it  was liable to be assessed under Section 68 of  the Income Tax Act, 1961? (b)     Whether in the light of the law established and  based on the facts and in the circumstances of  the case, the learned Income Tax Appellant  Tribunal is legally justified in concluding that  burden of proof cast on the appellant under  Section 6B of the Income Tax Act, 1961 has not  been discharged and the ingredients for  invoking section 68 of the Income Tax Act are  present? (c)     Whether in the facts and circumstances of the  case, the conclusion of the Tribunal that the  claim of gift is not genuine is reasonable and  based on relevant material and not perverse?

These appeals relate to the assessment years 1995-96  and 1996-97.  The dispute in all these appeals essentially  relates to the addition made by the Assessing Officer in  respect of  several foreign gifts stated to have been  received by the assesses from one common donor namely

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Sampath Kumar.  The gifts received were from one  Ariavan Thotan  and  Suprotoman.  It is during the  enquiry by the Revenue it is asserted that they were the  aliases of  Sampathkumar.   These gifts were made to A.  Srinivasan and his wife, Smt. S. Kalavathy, his son, S.  Balaji Manikandan and to one of his brothers,  Rajendran  and Smt. Mohanakala.  Each one of them is an assessee  within the jurisdiction of the appellant.  The foreign gifts  are received by the assesses during the assessment years  1993-94 to 1996-97.   The detail of the gifts received by  each one of the assessees is as under:  Assessment years Shri/Smt.  93-94 94-95 95-96 96-97 A. Srinivasan  6,40,758 14,46,933 26,47,647 8,64,500 S. Kalavathy 1,47,797 16,19,679 21,82,847 1550,00 S.Balaji Manikandan    84,423  5,68,015 21,85,604  8,64,500 A. Rajendran  

15,62,500

R. Mohanakala

15,62,500

8,72,978 36,34,627 101,41,098 32,79,000

In all the aggregate gifts received by  the assessees   is to the extent of Rs. 1,79,27,703/-. The Assessing  Officer did not accept the explanation offered by the  respective assessees that the amount of credit is a gift  from NRI and proceeded to add it as the income of the  assessees from undisclosed sources.  The credit entries  have been made during the period from 8.7.1992 to  19.10.1995.  There is no dispute that the payments  were made by instruments issued by a foreign bank  and  credited into the respective assessee’s account by  negotiation through a bank in India. Most of the cheques  sent from abroad were drawn on Citibank, N.A.  Singapore.  The Assessing Officer dealt with the controversy as  regards the cash credit entries received from the foreign  donor. He noticed that the gifts have been sent in the

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name of Ariavan Thottan and received by A. Srinivasan   and others who are all his family members.   Each one  of them is an individual assessee.  That all the assessees were summoned and their  statements have been recorded by the Assessing Officer.  Srinivasan who is the key person in his statement said  that he knew Sampathkumar for the last 20 years and  he had been helping Sampathkumar  prior to 1985 by  paying Rs. 100/- to 200/- every month as he had no  source of income  to get himself educated.  There are material inconsistencies in the  statements made by other assessees which we are not  required to notice in detail.  Sampathkumar in his own  statement stated that he was in Indonesia up to the  year 1992 and employed as an Engineer. Thereafter, he  shifted to England and started consultancy profession  there.  Later in the end of the year 1994-95, he joined  New Century Machinery Ltd. Cheshire, SK 16 4xS and  became its director in 1996.  It is in his statement that  he is paying taxes in England from his income earned in  England.  As far as his Indian income is concerned, he  stated  that he filed the returns for the assessment  years 1996-97 & 1997-98 before the Income Tax  Officer, Ward 1(4), CBE only on 23rd October, 1997.  His  investment in Indian companies  according to him will be  around for Rs. 5 crores and made out of his income  earned in the foreign countries.  He did not reveal the  details of his bank account in India and stated that he  would be submitting the details through his auditor  which he did not.  Except the self serving statement  there is no material evidence as regards his financial  status. He stated from 1972-73 he knew  Srinivasan,   Rajendran and their families.  His father was a taxi  driver, and was very poor.  Srinivasan and his family  members were supporting him when he was in India.  To  a pointed query as to whether there is any evidence to  show that he was also known  by any  other name  other  than Sampathkumar,  he stated that "no evidence. Only  Mr. Srinivasan used to call me as Suprotoman." The Assessing Officer after an elaborate  consideration of the material available on record and the  statements of the assessees and as well as that of  Smapathkumar noted that all the gifts were received  from Ariavan Thotan and Suprotoman.  It is only after the  enquiries  by the department, it was informed by letter  dated 25.4.1996 that Ariavan Thotan and Suprotoman are  one and the same person. Even at that time, no mention  was made about Sampathkumar.  For the first time  Sampathkumar’s name figured  in the letter dated  30.08.1996 and thereafter it was stated that the names of  Ariavan Thotan and Suprotoman are the other names of  Sampathkumar.   The Assessing Officer while appreciating  the contents of the letters brought on record came to the  conclusion that Smpathkumar had obliged in giving ’gifts’ to  Srinivasan and his family members.  It is further held that in  all probabilities Sampathkumar may have received  compensatory payments in lieu of the gifts made by him.   The letters according to the Assessing Officer suggest that  Sampathkumar reserved his right to receive suitable  compensation from the respondents-assessees.  The  Assessing Officer in the circumstances came to the  conclusion that the gifts though apparent are not real and  accordingly treated all those amounts credited in the books  of assessees  as the income of the assessees.  On appeal the Commissioner of Income Tax concluded  

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that  the story set up by the assessees  is unacceptable and  hard to believe and the "preponderance of probabilities, the  common course of human livings point to the contrary". The  appeals were accordingly dismissed.  There was difference of opinion between two members  of the Tribunal and the matter has been referred by the  President, Income Tax Appellate Tribunal  under Section 255  (4) of the Income Tax Act, 1961 ( for short ’the Act’) to the  Senior Vice President to resolve the difference of opinion.  In  order to resolve the difference of opinion the Tribunal  (through its Sr. Vice President)  re-appreciated the entire  material available on record and reheard the matter. The  Senior Vice President concurred with the findings and  conclusions arrived at by the Assessing Officer and the  Commissioner of Income Tax. The Tribunal noticed that the  letters exchanged "by the person who had sent foreign  exchange to the assessees only indicate that there is no love  and affection between them and that he is clearly  materialistic and his statement of accepting a reciprocation  is also an indication to the fact that he is not doing anything  free but clearly the compensation was a round about manner  of showing of he having been compensated either in India or  abroad."   The Tribunal also took note of the various other  attending circumstances and  found it difficult to accept the  explanation offered by the assesses.  We may at this stage profitably note that the Assessing  Officer, the Commissioner of Appeals and the Tribunal in one  voice held that the explanation offered by the assessees  as  regards cash credit entries is not acceptable.   The material  and the evidence available on record according to each one  of the authorities lead to one and only possible inference  that the so-called gifts received  by the assessees  in reality  are no gifts.  The High Court vide the impugned judgment in exercise  of its jurisdiction conferred upon it under Section 260(A) of  the Act reversed the finding of fact  and allowed the appeals.   The High Court virtually re-appreciated the evidence  available on record and substituted its own findings for that  of the Tribunal and the other authorities. The High Court  came to the conclusion that the reasons assigned by the  Tribunal and other authorities "are in the realm of surmises,  conjectures and suspicions \005\005\005the authorities under the Act  have failed to draw the only conclusion  that is possible  legally and logically."  The judgment of the High Court is  assailed in these appeals.  The learned Solicitor General strenuously contended  that the approach adopted by the High Court is totally  erroneous.  The High Court in exercise of its jurisdiction   under Section 260(A) of the Act may interfere with the order  of the Tribunal  provided substantial question of law arises  for its consideration. Re-appreciation of evidence and  substitution of the findings  by the High Court  is  impermissible. The High Court exceeded its jurisdiction in  disturbing concurrent findings of facts.  The learned Solicitor  General  further contended that once explanation offered by  the assessees is found unsatisfactory, the sums credited in  the books  are to be charged to income-tax as the income of  the assessees. Duty is heavily cast upon the assessees to  offer reasonable explanation as regards  the nature and  source of the amounts found credited in the books  maintained by the assessees.  Shri T.L.V. Iyer, learned Senior Counsel  appearing on  behalf of the respondents-assessees submitted that the High  Court did not exceed its jurisdiction in any manner  whatsoever nor committed any error in arriving at proper

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conclusion based on the evidence available on record.  The  conclusions drawn by the authorities below including the  Tribunal were based on surmises, conjectures and suspicion  which cannot be equated to that of findings based on  evidence.  Improper inference drawn from proven facts  definitely gives rise to substantial question of law. It was  also contended that even if the explanation offered by the  assessees is not acceptable the amounts credited  automatically cannot be treated as an income in the hands  of the assessees unless such a question is framed and  answered that unexplained cash credit was the income of  the assessees.  In order to appreciate the contentions urged before us  it would be appropriate to notice Section 68 of the Act which  is re-produced:  Cash credits.

68.  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 Assessing  Officer, satisfactory, the sum so credited may be charged to  income-tax as the income of the assessee of that previous year.           

The question is what is the true nature and scope of  Section 68 of the Act?  When and in what circumstances  Section 68 of the Act would come into play? That a bare  reading of Section 68 suggests that there has to be  credit of amounts in the books maintained by an  assessees; such credit   has to be of a sum during the  previous year; and the assessees offer no explanation  about the nature and source of such credit found in the  books; or  the explanation offered by the assessees in  the opinion of the Assessing Officer is not satisfactory,   it is only then the sum so credited may be charged to  income-tax as the income of the assessees  of that  previous year.  The expression "the assessees offer no  explanation" means where the assessees offer no  proper, reasonable and acceptable explanation as  regards the sums found credited in the books   maintained by the assessees. It is true the opinion of  the Assessing Officer for not accepting the explanation  offered by the assessees as not satisfactory is required  to be based on proper appreciation of material and other  attending circumstances available on record.  The  opinion of the Assessing Officer is required to be formed  objectively with reference to the material available on  record. Application of mind is the sine qua non for  forming the opinion.   In Sumati Dayal Vs. Commissioner o Income  Tax, Bangalore [1995 Supp.(2) SCC 453)  this Court  held:   "In all cases in which a receipt is sought to  be taxed income, the burden lies on the  Department to prove that it is within the  taxing provision and if a receipt is in the  nature of income, "the burden of proving  that it is not taxable because it falls within  exemption provided by the Act lies upon the  assessee.  But, in view of Section 68 of the  Act, where any sum is found credited in the  books of the assessee for any previous year  the same may be charged to income tax as  the income of the assessee of that previous

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year if the explanation offered by the  assessee about the nature and source  thereof is, in the opinion of the Assessing  Officer, not satisfactory.  IN such a case  there is, prima facie,  evidence against the  assessee, viz., the receipt of money, and if  he fails to rebut, the said evidence being  unrebutted, can be used against him by  holding that it was a receipt of an income  nature." (emphasis supplied)

In that case  the amount was credited in the capital  account in the books and the  assessee offered her  explanation about the said receipt being her winnings  from horse races.  The explanation was not accepted.   There was no dispute  that the amount was received by  the assessee from various race Clubs on the basis of  winning tickets presented by her. This Court based on  the material available on record found that an inference  about such a purchase has to be drawn on the basis of  the circumstances available on record inasmuch as no  direct evidence about such purchase be rarely available.    This Court accordingly upheld the majority opinion of the  Settlement Commission based on surrounding  circumstances and applying the test of human  probabilities.   This authoritative pronouncement in our  considered opinion is the complete answer to reject the  submissions made by the learned senior counsel on  behalf of the respondents.  In Commissioner of Income-Tax Vs.  Smt. P.K.  Noorjahan [1999] 237 IT 570,  this Court while  construing Section 69 of the Act observed that the  intention of Parliament in enacting Section 69 was to  confer a discretion on the Income Tax Officer  in the  matter of treating the source of investment which has  not been satisfactorily explained by the assessee as the  income of the assessee and the Income Tax Officer is  not obliged to treat such source of investment as income  in every case where the explanation offered by the  assessee  is found to be not satisfactory. "The question  whether the source of the investment should be treated  as income or not under Section 69 has to be considered  in the light of the facts of each case.  The contention of  Shri Iyer was that the ratio of the decision would equally   be applicable to interpret Section 68 of the Act.  There is  no dispute  about the same but the assessees in no  manner raised any plea that even if their explanation is  not acceptable the same cannot be treated as an income  in their hands.  In cases where the explanation offered  by the assessee about the nature and source of sums  found credited in the books is not satisfactory there is,  prima facie, evidence against the assessee, viz; the  receipt of money, the burden is on the assessee to rebut  the same, and if he fails to rebut it can be held against  the assessee that it was a receipt of an income nature.   The alternative submission made by Shri Iyer before us  would not help the assessees  in this case in hand.    In  K.S. Kannan Kunhi Vs. Commissioner of  Income Tax, Kerala [1969] 72 ITR 757, the High Court  came to the conclusion that the Income Tax Officer and  the Appellate Assistant Commissioner have not  considered the acceptability otherwise of  the assessee’s  explanation about the credit nature, except making an  assertion  that it was not acceptable.  On the facts it  was held that whether it should be inferred that the

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amounts constituted income of the previous year,  though the explanation offered by the assessee was not  acceptable, did not receive the consideration of the  authorities. On the facts the findings of the Tribunal  were held not valid.  The decision does not show that it  is the duty of the Assessing Officer to suo motu make an  enquiry even in the absence of any plea and rebuttal by  the assessee.  This decision is required to be understood  in the light of the ratio of the judgment in Sumati  Dayal (supra).  In Commissioner of Income Tax, U.P Bharat  Engineering & Construction Co. [1972] 83 ITR 187,  the facts are that the Tribunal itself found that the cash  credit entries could not represent the income or profit of  the assessee  as they were all made very soon after the  assessee commenced its activities.  This Court observed  in the circumstances it would be reasonable to assume  that those cash credit entries were capital receipts.  It is  held that in the absence of satisfactory explanation of  the assessee the Income Tax Officer may assume that  cash credit entries in its books represent income from  undisclosed sources. But what inference should be  drawn from the facts proved is a question of fact and the  Tribunal’s finding on that question is final.  We are  unable to appreciate as to how the said judgment  renders any assistance and supports the contention  urged by the learned counsel for the assessees.  In Commissioner of Income Tax, Orissa Vs.   Orissa Corporation P. Ltd. [1986] 159 ITR 78, the  Income tax Officer did not accept the assessee’s  accounts  showing cash credits which were shown to  have been received by way of loans from three  individual creditors.  The Income Tax Officer treated the  entire amount as unproved cash credit and added the  same to the income of the assessee.  On appeal  the  Tribunal took the view that the assessee could not  produce those persons alleged to be creditors, but  it did  not follow automatically and an adverse inference should  be drawn that the amount represented undisclosed  income of the assessee.  The creditors were themselves  income tax assesses and while being assessed, they had  made statements before the respective Income Tax  Officer admitting that they were allowing their names to  be lent without giving loans as creditors of different  assessees.  In those circumstances, the Tribunal came  to the conclusion that the assessee had discharged the  burden that lay on him.  This Court held that the  Tribunal’s conclusion was not unreasonable or perverse  or based on no evidence and accordingly further held  that no question of law as such had arisen for  consideration.  In  Commissioner of Income tax, Bombay City  II Vs.  Deviprasad Khandelwal & Co. Ltd. [1971] 81  ITR 460,  the Bombay High Court took the view that in  every case where the Income Tax Officer rejects the  explanation  submitted by an assessee in respect of  unexplained cash credits in his books of accounts, a  finding  against the assessee must be made that the  cash credit entry represents the assessee’s income from  undisclosed sources. After the Tax Authorities reject the  explanation submitted by the assessee the further  question that must always arise for decision  would be,  "whether it could justly, in the facts and circumstances  of the case, be held that the unexplained cash credit  was the income of the assessee."  The Tribunal   in that

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case on the basis of evidence and surrounding  circumstances even after disbelieving  the explanation of  the assessee still held that it cannot be held to be the  income of the assessee.  The said finding was held to be  a finding of fact not to be interfered with by the High  Court.  It is true that even after rejecting the explanation  given by the assessees if found unacceptable, the crucial  aspect whether on the facts and circumstances of the  case it should be inferred the sums credited in the books  of the assessees constituted income of the previous year  must receive the consideration of the authorities  provided the assessees rebut the evidence and the  inference drawn to reject the explanation offered as  unsatisfactory.  We are required to notice that Section  68 of the Act itself provides, where any sum is found  credited in the books of the assessees for any previous  year the same may be charged to income tax as the  income of the assessees of the previous year if the  explanation offered by the assessees about the nature  and source of such sums found credited in the books of  the assessees  is in the opinion of the Assessing Officer  not satisfactory.  Such opinion found itself constitutes a  prima facie evidence against the assessees, viz., the  receipt of money, and if the assessees fail to rebut the  said evidence the same can be used against the  assessees by holding that it was a receipt of an income  nature.  In the case in hand the authorities concurrently  found the explanation offered by the assessees   unacceptable.  The authorities upheld the opinion  formed by the Assessing Officer  that the explanation  offered was not satisfactory.  The assessees  did not  take the plea that even if the explanation is not  acceptable the material and attending circumstances  available on record do not justify the sum found credited  in the books to be treated as a receipt of an income  nature.  The burden in this regard was on the assessees.   No such attempt has been made before any authority.   All the decisions cited and referred to hereinabove are  required  to be appreciated and understood in the light  of the law declared by this Court in Sumati Dayal  (supra).  Whether the High Court was justified in interfering  with the concurrent finding of fact arrived at by all the  authorities including the Tribunal? The Assessing Officer  found that all the so-called gifts came from Ariavan  Thotan  and  Suprotoman.  The assessees did not declare  that they are the alias of Sampathkumar.  It is only an  afterthought they have come forward with the said plea.   The Assessing Officer also found that the gifts were not real  in nature.  Various surroundings circumstances have been  relied upon by the Assessing Officer to reject the explanation  offered by the assessees.  The Commissioner of Appeals  confirmed the findings and conclusion drawn by the  Assessing Officer.  The Tribunal speaking though its Senior  Vice President concurred with the findings of fact.  The  findings in our considered opinion are based on the material  available on record and not on any conjectures and  surmises. They are not imaginary as sought to be  contended.  Relying on the decisions of this Court in Bejoy Gopal  Mukherji Vs. Pratul Chandra Ghose [AIR 1953 SC 153] &  M/s Orient Distributors Vs. Bank of India Ltd. & Ors. [  AIR 1979 SC 867], Shri Iyer, learned senior counsel  contended that issue relating to the propriety of legal

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conclusion that could be drawn on basis of proved facts  gives rise to a question of law and, therefore,  the High  Court is justified in interfering in the matter since the  authorities below failed to draw a proper and logical  inference from the proved facts.  We are unable to persuade  ourselves to accept the submission.  The findings of fact  arrived at by the authorities below are based on proper  appreciation of the facts and the material available on record  and surrounding circumstances.  The doubtful nature of the  transaction and the manner in which the sums were found  credited in the books of accounts maintained by the  assessee have been duly taken into consideration by the  authorities below.  The transactions though apparent were  held to be not real one. May be the money came by way of  bank cheques and paid through the process of banking  transaction but that itself is of no consequence.    No question of law much less any substantial question  of law had arisen for consideration of the High Court.  The  High Court misdirected itself and committed error in  disturbing the concurrent findings of facts.  No other point is urged.  The appeals preferred by the Revenue Department  deserve to be allowed and they are accordingly allowed.  No costs.