1964 PLP 317 (PTD)

(a) Income‑tax Act (XI of 1922), S. 23‑Words "income from undisclosed source"‑Meaning. The words "income from undisclosed source" may mean income from undisclosed item of a known line of activities or it may mean income from source which was unconnected with any of the known sources or lines of profit‑earning activity followed by the assessee altogether unknown. In the case of the first category it would be a case of undisclosed profit of the known business, and in the case of second category it will be an income from a business altogether different from the business under consideration, absolutely unconnected. (b) Income‑tax Act (XI of 1922), S. 23‑Assessment‑Assessee failing to explain satifactorily source of cash credit‑Burden of proof‑Income‑tax Officer entitled to presume amount to be income of assessee‑Further presumption that "amount is on account of income from undisclosed source unconnected with known source of income"‑Not permissible in absence of material on record or circumstances justifying such inference‑Evidence Act (I of 1872), S.

106. S. Kumarswami Reddar v. Commissioner of Income‑tax, Mysore, Travancore‑Cochin and Coorg (1960) 49 I T R 590, 598 and D. C. Auddy & Brothers v. Commissioner of Income‑tax West Bengal (1955) 28 I T R 713, 722 distinguished. Indo‑European Machinery Company v. Commissioner of Income‑tax (1955) 28 I T R 493 ; G. M. Chenna Basappz v. Com missioner of Income‑tax, Hyderabad (1958) 34 I T R 576 and A. Gobindrajulu Madaliar v. Commissioner of Income‑tax, Hyderabad (1958) 34 I T R 807 ref. Asrarul Hussain, Md. Nurul Huq and Abdul Azim for Applicant. JUDGMENT CHOWDHURY, G. J.‑

In this reference under section 66 (1) of the Income‑tax Act, at the instance of the assessee, the question of law formulated in the letter of reference for opinion of the High Court is as follows: "Whether in the facts and circumstances of the case the Tribunal was right in not deducting from Rs. 20,000 the sum which had been added to the trading result of the assessee from business disclosed."

2. The short facts stated in the letter of reference, are as follows :‑The assessee is a dealer in motor parts, tyres and tubes. The Income‑tax Officer did not accept the book version of the assessee's profits on the two accounts, in motor parts account, and tyre and tube account. In the first account he assessed Rs. 4,329, and fn the second account a sum of Rs. 6,771, and the two together came up to Rs. 11,100 In addition to the gross profit shown by the assessee in his two accounts. Over and above, the Income‑tax Officer Included a sum of Rs. 24,000 shown in the account of the assessee as amanat jama from his father, which the income‑tax Officer regarded to be an income from secreted source as he had not accepted the explanation given by the assessee and his father. The Appellate Assistant Commissioner directed exclusion of the same from the total income of the assessee on the ground that the explanation given by the assessee and his father as to this sum of Rs. 24,000 was a plausible one, and that the Income‑tax Officer should not have treated it as income arising from undisclosed source. The Appellate Tribunal could not agree with Appellate Assistant Commissioner on the ground that the assessee could have income from some source which had been suppressed and arose independently but synchronously with his normal trading and directed to add the amount as such, to the Income already assessed by the Income‑tax Officer, but reduced the amount to Rs. 20,000 perhaps due to withdrawal of Rs. 4,000 from the account.

3. It is contended, before us as it was contended before the Appellate Tribunal, that in dealing with this cash credit, the additional profit which has been added in making the assessment for 1958‑59 the Income‑tax Officer has already considered it, and the addition, if any should have been adjusted accordingly. The Appellate Tribunal overruled that contention holding that the Income‑tax Officer has treated this sum of Rs. 24,000 as income arising from undisclosed source, and not as an undisclosed income of the known business, the subject‑matter of scrutiny in the year of assessment ; so no question of double taxation and adjustment could have arisen. It is contended, before us, by the learned Advocate for the assessee that there is no material, no basis before the Income‑tax Officer or of the Appellate Tribunal to treat it as an income derived from an undisclosed source, source other than the known source, the business.

4. On the other hand, the learned Advocate for the Com missioner of Income‑tax contends that when the assesee failed to explain this amount of Rs. 24,000 shown in his account as amanat from his father or when the explanation given, by the assessee and his father, that it is an accumulation of saving of 35 years of service of the father and the sale proceeds of excess agricultural produce of 73 bighas of his land, not having been accepted, the Income‑tax Officer is quite entitled to treat it as an income derived from undisclosed sources, that is, sources other than the known source for which the assessee has submitted an account for assessment. In support of his contention the learned Advocate referred to the decision of Kerala High Court of India, in the case of S. Kumarswami Reddar v. Commissioner of Income‑tax, Mysore, Travancore‑Cochin and Coorg ((1960) 49 1 T R 590, 598), where the learned Judges of that High Court deduced the principle from discussion of various cases referred to in the judgment in the following words "The principle is, therefore, deducible that where the assessee gives no satisfactory explanation of a cash credit or bank deposit it is open to the Income‑tax Officer to hold that it represents an income from an undisclosed source. It is not a question of suspicion or conjecture. He can only act on the evidence which is tendered before him, and where the evidence tendered is worthless, or not tendered, he would be justified in taking the evidence of the books showing the cash deposits as conclusive of the fact that some income was made and related to undisclosed source. In this case the Income‑tax Officer was willing to find in respect of the credits and bank deposits, that `it was clear that the assessee bad money dealings over and above what is reflected in his books of accounts' and he proposed to treat them as secret profits for purpose of income‑tax. This. finding has been confirmed by the Appellate Tribunal. If so, no question of double taxation can arise." The head note of the case runs as follows: Held, that it was permissible to the Income‑tax Officer, on finding that the accounts maintained by the assessee were un reliable and the profits had to be estimated, to make additions to the book version of his profits on estimate and also bring to tax unexplained amounts representing deposits in bank accounts as income from undisclosed source.

5. In that case the assessee had a number of business. The assessee was a wholesale and also retail piece goods merchant carrying on business at Alleppay and at Quilon in whole sale only. He also dealt in umbrellas at Alleppay. He was an im porter under `A' licence and also distributor under 'B' and `C' licences for piece goods. There was a separate trading account for the import trade, but no such accounts for the business under `B' and 'C' licences. The Income‑tax Officer wrote: It is, therefore, not possible to find out the exact margin of gross profit realised under the various articles of trade except import trade. There are also no quantitative details of stock purchased and sold except under the import trade. Sales bills are also not maintained in respect of sales in this Department. It is, therefore, not possible to check up the accuracy of the quantum of the closing stock conceded by him or the correctness of the sales recorded. In the other Department dealing with goods under `B' and `C' licences and other miscellaneous articles the total turn‑over amounts to Rs. 7,93,365 yielding a gross profit of Rs. 17,581 which works out at 2,2 per cent. only. This margin appears to be very low. The major portion of the goods dealt in here are those under the `B and `C' licences where the margin allowed by the textile Department is 3 per cent. and 10 per cent., respectively. This branch (Quilon) as already stated earlier was doing business in miscellaneous goods and goods under `B' and `C' licences. The gross profit yielded by a total turn‑over of Rs. 8,39,999 amounts to Rs. 33,391 which works out at 4 per cent. only." The Income‑tax Offcer also found that there were certain credits in the wife's account ; in the name of one R. Thiuvenkita Reddiar, certain interest had been paid and not explained ; there were certain unexplained deposits in banks and credits in the goods account at the head office of the assessee, and more than all, certain advances remained unexplained. The total under this category came to Rs. 83,926 which also the Income‑tax Officer included as taxable income from business. What was contended, by the assessee, in that case, in effect was that the addition of Rs. 17,402 representing the total of the two accounts of credit in the wife's and Thiruvenkita Reddiar's account and of the deposits in the bank, could not be sustained as from business as an estimate of profits of the assessee's business in all spheres in both Quilon and Alleppey had been made and resulted in an addition of Rs. 25,856 under that head.

6. The Tribunal, in that case, held that they could not brush aside the absence of a stock register and the want of a tally in the stock book and accept the book version of profits, and found that the estimate made by the departmental officials was not excessive, and felt themselves unable to accept the assessee's argument that the credits for which separate addition under the head `business' had been made came out of the suppressed income out of the transactions disclosed in the books. In these circums tances the High Court of Kerala in India came to the conclusion referred to above. But it appears that the principle laid down and the head‑lines of the decision seem to have been too broadly stated in that if read disassociated from the facts of that case it looks like to cover not only secreted income of disclosed business but also income of undisclosed business‑business unconnected with the disclosed one.

7. The words "income from undisclosed source" may mean income from undisclosed item of a known line of activities or it may mean income from source which was unconnected with any of the known sources or lines of profit‑earning activity followed by the assessee altogether unknown. In the case of the firs A category it would be a case of undisclosed profit of the know business, and in the case of second category it will be an income from a business altogether different from the business under consideration, absolutely unconnected. The facts and circums tances in the case before the Kerala High Court is such that the income in question is of the nature that may mean income from undisclosed source meaning thereby an income from undisclosed item of known line of activities or it may mean income from some source which was unconnected with any of the known sources or lines of profit‑earning activity followed by the assessee and altogether unknown, and in fact the Income tax Officer found "it was clear the assessee had money dealing over and above what is reflected in his books of accounts."

8. But the present case before us has been treated by the Income‑tax Authority, as if it is of the latter category without knowing the difference between the two. In cases coming under the first category, mentioned above, if the Income‑tax Authority added the cash credit to the additional income assessed by the Income‑tax Authority as an income from undisclosed source, was held to b.‑ illegal even in the case of D. C. Auddy & Brothers v. Commissioner of Income‑tax, West Bengal ((1955) 28 I T R 713, 712), relied on and cited by the learned Advocate for the Commissioner of Income tax. At page 722 of the report Chakravarty, J., of the Calcutta High Court observed :‑ If for example in the present case, the Income‑tax Officer had added the amount of the cash credit to the profits of the business as a part of the undisclosed profits, it would not be profits or income from an undisclosed source. The reason is obvious. Since the Income‑tax officer found himself in a position to attribute this income to the business activities of the assessee, it would be undisclosed income from the known source, that is, the business and not income from an undisclosed source . . . . . I am prepared to concede that even in the present case, if the Income‑tax Officer had added the amount of the cash credits as undisclosed profits of the business, he would have been mistaken, and such an addition could not have been sustained." Therefore, in any view of the matter the cases relied on by Mr. A. F. M. Mesbahuddin, on behalf of the Commissioner of Income‑tax are no authority in support of his contention.

9. It is impossible to agree, with the view of the Appellate Tribunal, that when the assessee failed to explain or his ex planation has not been accepted it necessarily follows that the cash credit is on account of income from undisclosed source meaning thereby income from a source unconnected B with the known source of his income. It is no doubt true, the Income‑tax Officer may presume an unexplained amount to be an income of the assessee, but there cannot be further presumption that it is an income from a different source, an un-dislcosed source, a source unconnected with the known source, in the absence of materials on the record or circumstances justifying inference of separate source.

10. In the case reported in (1955) 28 1 T R 713, Chakravarty, J., (at pages 722, 723) observed :‑ The partners of firm themselves introduced the sums as cash credits or deposits made by themselves of monies which they say they had received from third parties. They were, therefore, themselves saying, in effect, that these sums had not been derived from the business and were no part of its profits. When thrown into the business and utilised in carrying on trading operations, the amount may have earned profits and those profits had either been shown in the books or were included in the sum added by the Income‑tax Officer. But so far as the deposits themselves are concerned, the case made by the partners themselves obviously was that they carne from an outside source. If their explanation as to the particular source fails, they can hardly complain that their contention that the amounts came from outside is accepted and the sums concerned are brought under assessment as undisclosed profits from other sources. It is difficult to understand under what principle of law or equity the failure to explain a particular outside source alleged will lead to some other undisclosed source, and how such conclusion is binding on the assessee to say `they can hardly complain that their contention that the amount came from outside is accepted'. Is it on the principle of estoppel? The principle is : If you like to accept the explanation submitted, accept whole of it or reject in toto ; you cannot split it up and accept a portion of it and reject the rest. I cannot agree to the above observation of Chakravarty, J., nor was it necessary for him to make that observation with reference to the facts of that case. Further, that observation goes counter to his other observations subsequently made in his judgment in that very case. It. In the absence of evidence or in case of rejection of account the Income tax Officer is to make assessment to the best of his judgment and discretion, but that does not mean an arbitrary and capricious judgment based on suspicions, conjectures or surmises or on no evidence at all. There must be some basis for holding that the cash credit amount is on account of the income derived from business unconnected with the business of the assessee, an undisclosed source, to be added to the income estimated by himself as he could not accept the book account of the assessee. As I have already pointed out the amount may be on account of some undisclosed income from disclosed activities in course of his business transaction, or it may be, the assessee minimised his income in the transaction shown in his books of account. Therefore, according to our view the Income-tax Officer first of all must see whether cash credit can be accom modated in, or attributed to, the Income of the known source of business of the petitioner. If it is so attributable partly or wholly to the income of that business the gross profit of which has already been estimated by the Income‑tax Officer, then, it may bean income of that business to that extent. If he without doing that added this cash credit amount to that estimated amount of income, there is every chance of double taxation of the self‑same amount being twice added over. If the Income‑tax Officer cannot accept the cash credit shown in the account book of the assessee as amanat jama of his father, on that alone he cannot add it to the estimated amount because it may be that the income of the business has been secreted out and brought in back in disguise in the form of deposit by his father. If it is found that the cash credit cannot be attributed to, or accommodated in the estimated amount of the income in part or in whole, then and then only the Income‑tax Officer may perhaps consider it to be an income from other sources, unconnected with the known source of income of the assessee, because in that case the very fact that it cannot be attributed to or accommodated, in part or in whole, even in the estimated income of the known source of income of the assessee, will by itself, be a circumstance for holding that the cash credit in part or whole, as the case may be, is on account of business unconnected with the known source of the assessee. In that case alone it can be added, if at all, to the estimated gross profit of the assessee from the known source of business or there must be some materials or circumstances in the case which will justify the Income‑tax Officer to consider it that it is an income derived from source unconnected with the known source of the income of the assessee. In the present case, the Income‑tax Officer and the Appellate Tribunal have not applied their minds to this aspect of the matter, and were swept away, more or less, by the burden of proof which, according to them, lies on the assessee under section 106 of the Evidence Act. There is no doubt that the burden lies on the assessee ; if he failed to prove satisfactorily that it is not his money but the money of somebody else, the Income‑tax Officer is entitled to presume that it is his income. To that extent there is no dispute The dispute is, whether the Income‑tax Authority can presum further that it is his income from an undisclosed source, a source unconnected with the known source of income. There is no law or authority for such double presumption. The Income‑tax Officer or the Authority cannot make any such presumption nor can they draw any such inference simply from the failure of the assessee to explain the absence of circumstances or materials on record justifying it. In support of this view, we can safely refer to the observation of Chakravarty, J., in the case of D. C. Auddy v. Commissioner of Income‑tax, West Bengal, in which it has been held (at page 723 of the report) :‑ "If, in the hypothetical case I have mentioned, the books are found to be unsatisfactory, the Income‑tax Officer is entitled to and has to make estimate of the real profits derived by the assessee from the sources to which the books relate. It is at that stage that he, I think, should consider whether the deposits which have not been explained to his satisfaction may not represent the whole or a part of the concealed profits derived from the known source. In other words, he may con sider whether the petition is not such that the assessee kept a part of his profits out of his books and introduced them into the books by a back door, as it were, and in guise of deposits. If he finds good reason to take the view that the cash credits really represent a part or the whole of the suppressed profits of the known source of income, he will assess it as a part of the income from that source, taking into account the extent of the capacity to yield profit, but as I have already explained, if he does so, the amounts of the cash credits while remaining concealed profits will no longer remain concealed profits from undisclosed sources. If on the other hand, the Income‑tax Officer thinks that the deposits cannot be properly related to the known source to which the accounts relate, he will be quite entitled to treat them as they are, namely, merely as undisclosed profits from some source which is not known to him or, in other words, as concealed profits from undisclosed other sources." In the case of Indo‑European Machinery Company v. Commissioner of Income‑tax ((1955) 28 I T R 493), it has been held that "where there is a credit entry of an amount in the bank account of one of the partners of a firm, there is a duty on the firm to explain the nature of the credit entry, but the Income‑tax Authorities cannot come to a finding that the sum represented the firm's income from some undisclosed sources and deposited !n the bank in the name of one of the partners unless there is some material on record to come to such a finding. They cannot come to such a finding on mere suspicion." In the case of G. M. Chenna Basappa v. Commissioner of Income‑tax, Hyderabad ((1958) 34 I T R 576), it has been held: That it was open to the Income‑tax Officer to make the two additions which fell under two distinct heads, one attributable to the business activities of the assessee and the other to profits from an undisclosed source, i.e., some profits‑earning activity which is altogether unknown. It will not, however, be per missible for the Income‑tax Officer to estimate the gross profits from the business and again to add to it the cash credits shown in the books in some disguise, as part of the income of the same business. In the case of A. Gobindarajulu Madaliar v. Commissioner of Income‑tax, Hyderabad ((1958) 34 I T R 807), the Supreme Court of India held: "Where a receipt is to be treated as income or not must depend very largely on the facts and circumstances of each case. "Where an assessee fails to prove satisfactorily the source and nature of certain amounts of each received during the accounting year, the Income‑Tax Officer is entitled to draw the interference that the receipts are of an assessable nature." The Supreme Court of India held this much and no further, and it is not an authority for the proposition we are confronted with in this reference case.

13. In these circumstances, we hold that the amount of Rs. 20,000 was illegally added to the assessed income of the assessee. The income estimated by the Income‑tax Authority exceeded by Rs. 11,000 in the income shown by the assessee in his books of accounts. To this extent, out of Rs. 20,000 can be related to the estimated income of the assessee. Therefore, this Rs. 11,000 is to be deducted from the sum of Rs. 20,000 as covered by the income assessed by the Income‑tax Officer, and the balance may be treated as an income from undisclosed source, namely, source unconnected with known source of income of the assessee. We, therefore, answer the question, referred to us, in the negative. But the Commissioner of Income‑tax must pay the cost of the assessee. M. R. KHAN, J.‑

I agree with my Lord the Chief Justice. S. Q./K. B. A. Reference answered in the negative.