The judgment of the court was delivered by
BHAGWATI, J.---These are two connected appeals with
special leave granted by this court under article 136 of the Constitution and
arise out of the appellant's assessment to income-tax for the assessment year
1946-47 and excess profits tax for the chargeable accounting period January 9,
1945, to February 2, 1946.
The appellant is a Hindu undivided family carrying on
extensive business in grain as merchants and commission agents. It is one of the
premier grain merchants and wholesalers of Sahibganj in the District of Santhal
Parganas in the State of Bihar. It has branches at Nawgachia in the District of
Bhagalpur and at Dhulian in the District of Murshidabad in West Bengal.
The appellant filed its income-tax return for the
assessment year 1946-47 showing a loss of Rs. 46,415 in the business. The
Income-tax Officer, Patna, however, in the course of the assessment noticed that
the appellant had encashed high denomination notes of the value of Rs. 2,91,000
on January 19, 1946. The Income-tax Officer asked for an explanation which the
appellant gave stating that these notes formed part of its cash balances
including cash balance in the Almirah account. The cash balances of the
appellant on January 12, 1946, on which date the High Denomination Bank Notes
(Demonetization) Ordinance, 1946, was promulgated were Rs. 29,284-3-9 in its
Rokar and Rs. 2,81,397-10-0 in the Almirah account. The Almirah account was an
account for moneys withdrawn and kept at home. The appellant sought to prove the
fact that the high denomination notes encashed by it formed part of its cash
balances from certain entries in its accounts wherein the fact that moneys were
received in high denomination notes had been noted. Portions of these entries to
the effect that moneys had been received in high denomination notes were found
by the Income-tax Officer to be subsequent interpolations made by the appellant
with a view to advance its case that the cash balances contained the high
denomination notes encashed by it. The Income-tax Officer found that the
appellant's food grains licence at Nawgachia had been cancelled for the
accounting year for its failure to keep proper stock accounts and that the
appellant was prosecuted under the Defence of India Rules but had been acquitted
having been given the benefit of doubt. The Income-tax Officer also had regard
to the fact that the appellant was a speculator and that as a speculator the
appellant could easily have earned amounts far in excess of the value of the
high denomination notes encashed. He considered that even in the disclosed
volume of business in the year under consideration in the head office and in the
branches, there was possibility of his earning a considerable sum as against
which it showed a net loss of about Rs. 46,000. The Income-tax Officer also
noticed that notwithstanding the fact that the period was very favourable to
food grains dealers, the appellant had declared a loss for the assessment year
1944-45 up to 1946-47, though it had the benefit of a large capital on hand. The
Income-tax Officer further took into consideration the circumstances that
Nawgachia and Dhulian were very important business centres and Sahibganj the
principal place of business had gained sufficient notoriety for smuggling
foodgrains and other commodities to Bengal by country boats. Dhulian which was
just on the Bengal-Behar border was also reported to be a great receiving centre
for such commodities. Having regard to all these circumstances, the Income-tax
Officer rejected the appellant's explanation that the high denomination notes
formed part of its cash balances and treated the sum of Rs. 2,91,000 as the
appellant's secreted profits from business and included it in its total income
and assessed the appellant for the said assessment year on the income of Rs.
1,39,117. Dealing with the excess profits tax assessment, he also held that the
said income was derived from the business of the appellant and hence it was
liable to excess profits tax also.
The appellant preferred an appeal to the Appellate
Assistant Commissioner against both these assessment orders and by his orders
dated February 28, 1951, the Appellate Assistant Commissioner upheld the orders
of the Income-tax Officer and dismissed the appeals.
On further appeals from the said orders of the Appellate
Assistant Commissioner to the Income-tax Appellate Tribunal, the Tribunal by its
order dated April 29, 1952, dismissed both the appeals as regards income-tax as
well as excess profits tax. Even though before the Income-tax Officer and the
Appellate Assistant Commissioner the case of the appellant was that the account
book which contained the entries in regard to the receipts of moneys in high
denomination notes were genuine and correct, this position was abandoned by the
appellant before the Tribunal. Before the Tribunal, the appellant stated that
the said entries were made in sheer nervousness after the coming into force of
the High Denomination Bank Notes (Demonetization) Ordinance, 1946, on January
12, 1946, as the appellant did not know that it had specific proof in its
possession of having the high denomination notes as part of its cash balances.
The Tribunal held that there was no other reason to suspect the genuineness of
the account books in which these interpolations were made. If the entire account
books were fabricated to serve its purpose, there would be no need for the
appellant to make interpolations between the lines already written in a
different ink and in such an obvious manner as to catch one's eye on the most
cursory perusal. The Tribunal, however, examined the cash book and taking into
consideration all the circumstances which had been adverted to by the Income-tax
Officer held that the appellant might be expected to have possessed as part of
its business cash balance of at least Rs. 1,50,000 in the shape of high
denomination notes on January 12, 1946, when the Ordinance above-mentioned was
promulgated. A copy of the statement of large amounts received by the appellant
from a single constituent had been filed by the appellant which showed that sums
aggregating to Rs. 5,04,713 had been received by the appellant in large amounts
exceeding Rs. 1,000 between February 6, 1945, and January 11, 1946. As to large
payments made by the appellant, no statement was filed, but the Tribunal
examined the accounts with a view to ascertain the payments which could have
been made in high denomination notes. The Tribunal came to the conclusion that
the nature of the source from which the appellant derived the remaining 141 high
denomination notes of Rs. 1,000 each remained unexplained to its satisfaction.
It accordingly ordered that the addition made by the authorities be reduced from
Rs. 2,91,000 to Rs. 1,41,000. The Income-tax Officer was also directed to make
the necessary consequential adjustment in the income-tax assessment based upon
the result of the connected excess profits tax appeal. In regard to the excess
profits tax appeal the Tribunal after taking into account the preceding and
succeeding assessments and the nature of the appellant's business and the
opportunities that it had to make substantial business profits outside the books
held that the add back of Rs. 1,41,000 must be made to the business profits
disclosed by the appellant. Consequential relief was accordingly given in the
excess profits tax appeal also.
The appellant thereafter applied to the Tribunal for
stating a case and raising and referring to the High Court the following
questions of law arising from the said order of the Tribunal both as regards the
income-tax and the excess profits tax assessments :
" (1) Whether there is any material to justify the
conclusion that Rs. 1,41,000 is secreted profit for the purpose of assessment,
this amount being a part of Rs. 2,91,000 and which was the amount represented by
high denomination notes encashed by the petitioner ?
(2) Whether there is any material for a finding that the
sum of Rs. 1,41,000 is the secreted value of the high denomination notes was
business income liable to excess profits tax ?"
By its order dated August 15, 1952, the Tribunal dismissed
these applications stating that the finding of the taxing authorities was a pure
finding of fact based on evidence before them and that no question of law arose
out of the said order of the Tribunal.
The appellant thereupon made applications to the High
Court under section 66(2) for directing the Tribunal to state a case and raise
and refer the said questions of law to the High Court for its decision. By its
order dated January 21, 1953, the High Court directed the Tribunal to state a
case and raise and refer the following question of law to the High Court for its
decision in both the applications :
" Whether there is any material to support the
finding of the Appellate Tribunal that a sum of Rs. 1,41,000 is secreted profit
liable to be taxed in the hands of the assessee under the Indian Income-tax Act
and under the Excess Profits Tax Act. "
The Tribunal accordingly stated a case and raised and
referred the aforesaid question of law to the High Court.
The said reference was heard by the High Court and
judgment was delivered on January 5, 1955, whereby the High Court answered the
referred question in the affirmative. The High Court was of the opinion that the
onus of proving the source of the said amount was on the appellant which the
appellant did not discharge and that there was evidence before the Tribunal to
come to the conclusion it did. The finding arrived at by the Tribunal was
therefore a pure finding of fact and it could not be urged that it was based on
no evidence. The High Court further held that as the appellant itself claimed
that the said amount of Rs. 2,91,000 formed part of the cash balance of its
business, the said profits were profits of the business and as such liable to
excess profits tax.
The appellant then applied to the High Court for a
certificate under section 66A(2) of the Income-tax Act for leave to appeal to
this court. These applications were rejected by the High Court on August 25,
1955, observing that it had answered the question of law not on the academic
principles of onus but on the material from which it was open to the Income-tax
authorities to arrive at the conclusion at which they arrived.
The appellant thereupon on October 22, 1955, applied to
this court for special leave to appeal which was granted by this court on
November 28, 1955, in both the appeals arising out of the assessment for
income-tax as well as excess profits tax. Both the appeals arising out of these
orders being Civil Appeals Nos. 679 and 680 of 1957 are now before us.
The main question to determine in these two appeals is
whether there was any material to support the finding of the Tribunal that the
sum of Rs. 1,41,000 represented the secreted profits of the appellant's business
and as such liable to be taxed in the hands of the appellant under the Indian
Income-tax Act and the Excess Profits Tax Act ? The contention of the Revenue
all throughout has been that it is a finding of fact reached by the authorities
competent in that behalf and this court should not interfere with such findings
of fact. The contention of the appellant, on the other hand, has been that even
though it may be a finding of fact to be reached by the authorities concerned on
the materials on the record before them, such finding is vitiated by reason of
the authorities indulging in conjectures, suspicions and surmises and basing the
same on no material whatever which goes to support the same. It is also
contended that the finding reached by them is a perverse one which a reasonable
body of men could not have arrived at on the material on the record.
The limits of our jurisdiction to interfere with finding
of fact reached by the courts or tribunals of facts have been laid down by us in
various decisions of this court. In Dhirajlal Girdharilal v. Commissioner of
Income-tax we observed that when a court of fact arrives at its decision by
considering material which is irrelevant to the enquiry, or acts on material,
partly relevant and partly irrelevant, where 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 of fact 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. We also observed in
Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax that an assessment so
made without disclosing to the assessee the information supplied by the
departmental representative and without giving any opportunity to the assessee
to rebut the information so supplied and declining to take into consideration
all materials which the assessee wanted to produce in support of the case
constituted a violation of the fundamental rules of justice and called for
interference on our part. In Mehta Parikh and Co. v. Commissioner of Income-tax
this court observed that the conclusions based on facts proved or admitted may
be conclusions of fact but whether a particular inference can legitimately be
drawn from such conclusions may be a question of law. Where, however, the fact
finding authority has acted without any evidence or upon a view of the facts
which could not reasonably be entertained or the facts found were such that no
person acting judicially and properly instructed as to the relevant law could
have found, the court is entitled to interfere. In our decision in Sree
Meenakshi Mills v. Commissioner of Income-tax after discussing the various
authorities on the subject we laid down that :
" (3) A finding on a question of fact is open to
attack under section 66(1) as erroneous in law when there is no evidence to
support it or if it is perverse. "
The latest pronouncement of this court in Omar Salay
Mohamed Sait v. Commissioner of Income-tax summarises the position thus :
" We are aware that the Income-tax Appellate Tribunal
is a fact finding tribunal and if it arrives at its own conclusions of fact
after due consideration of the evidence before it this court will not interfere.
It is necessary, however, that every fact for and against the assessee must have
been considered with due care and the Tribunal must have given its finding in a
manner which would clearly indicate what were the questions which arose for
determination, what was the evidence pro and contra in regard to each one of
them and what were the findings reached on the evidence on record before it. The
conclusions reached by the Tribunal should not be coloured by any irrelevant
considerations or matters of prejudice and if there are any circumstances which
required to be explained by the assessee, the assessee should be given an
opportunity of doing so. On no account whatever should the Tribunal base its
findings on 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 or surmises and if it does
anything of the sort, its findings, even though on questions of fact, will be
liable to be set aside by this court. "
It is in the light of these observations that we have to
determine the question arising before us in the present appeals. It is clear on
the record that the appellant maintained its books of account according to the
mercantile system and there were maintained in its cash books two accounts: one
showing the cash balances from day to day and the other known as "Almirah
account" wherein were kept large balances which were not required for the
day-to-day working of the business. Even though the appellant kept large amounts
in bank deposits and securities monies were required at short notice at
different branches of the appellant. There were also collections made from
various beoparees or merchants and monies were also required for doing the grain
purchase work on behalf of the Government. These monies were credited in the
Almirah account which showed heavy cash balances from time to time. In the books
of account for previous years it was the practice of the appellant to give
details of the notes of high denominations giving the distinctive numbers of
these notes received or paid or at least other description, e.g., "so many
notes" of Rs. 1,000 each. In the assessment year, however, this practice
does not appear to have been followed but entries continued to be made of monies
thus received from the banks, different branches, beoparees etc., without any
such details being filled therein. A statement of these cash balances, viz., the
balances in the Rokar and the balance in the Almirah from September 1, 1945, to
January 31, 1946, was filed before the income-tax authorities and this statement
showed that apart from the balance in the Rokar the balance in the Almirah rose
from Rs. 1,36,397-10-0 on September 1, 1945, to Rs. 1,97,397-10-0 on September
30, 1945, to Rs. 2,23,397-10-0 on October 13, 1945, to Rs. 2,65,397-10-0 on
November 27, 1945, to Rs. 2,91,397-10-0 on December 29, 1945, and remained at
Rs. 2,81,397-10-0 on January 10, 1946. The balance in the Rokar fluctuated
considerably but on the relevant date January 10, 1946, it stood at Rs.
26,092-10-9. It was Rs. 24,976-13-3 on January 11, 1946, and Rs. 29,284-3-9 on
January 12, 1946, when the High Denomination Bank Notes (Demonetization)
Ordinance, 1946, was promulgated. These entries showed that there was with the
appellant on January 12, 1946, an aggregate sum of Rs. 3,10,681-13-9 and it was
highly probable that the high denomination notes of Rs. 2,91,000 were included
in this sum of Rs. 3,10,681-13-9. The books of account of the appellant were not
challenged in any other manner except in regard to the interpolations relating
to the number of high denomination notes of Rs. 1,000 each obviously made by the
appellant in the accounts for the assessment year in question in the manner
aforesaid and even in regard to these interpolations the explanation given by
the appellant in regard to the same was accepted by the Tribunal. Even though
the Income-tax Officer made capital out of the interpolations and subsequent
insertions in the books of account and styled the evidence furnished by them as
created or manipulated evidence thus discounting the story of the appellant in
regard to the source of these high denomination notes, the Tribunal was
definitely of opinion that there was no other reason to suspect the genuineness
of the account books in which these interpolations were found. As a matter of
fact the Tribunal accepted these books of account as genuine and worked up its
theory on the basis of the entries which obtained in these books of account. The
Tribunal had before it the statement of large amounts received by the appellant
from the banks, different branches of the appellant and its beoparees or
merchants which showed that between February 6, 1945, and January 11, 1946,
amounts exceeding Rs. 1,000 aggregating to Rs. 5,04,713 had been received by the
appellant. Even though large amounts may have been paid out by the appellant in
this manner between the said dates, the entries of the balance in Rokar and the
balance in Almirah showed that on January 12, 1946, the balance in Rokar was Rs.
29,234-3-9 and balance in Almirah was Rs. 2,81,397-10-0 the total cash balance
thus aggregating to Rs. 3,10,681-13-9. Nobody had any inkling of the
promulgation of the High Denomination Bank Notes (Demonetization) Ordinance,
1946, on January 12, 1946, and if in the normal course of affairs and situated
as the appellant was, the appellant kept these large cash balances in high
denomination notes of Rs. 1000 each, there was nothing surprising or improbable
in it. If the appellant had to disburse such large sums of monies at short
notices at the different branches of the appellant and also to its beoparees
apart from financing the Government for grain purchase work which it used to
carry on, it would be convenient for it to handle these large sums of moneys in
high denomination notes of Rs. 1,000 each and the most natural thing for it to
do was to keep these cash balances in as many high denomination notes as
possible. The Tribunal in fact took count of this position and after giving due
weight to all the circumstances arrived at the conclusion that the appellant
might be expected to have possessed as part of its business cash balance of at
least Rs. 1,50,000 in the shape of high denomination notes on January 12, 1946,
when the Ordinance above-mentioned was promulgated. This conclusion of the
Tribunal could only be arrived at on the basis that the entries in the books of
account in regard to the balance in Rokar and the balance in Almirah were
correct and represented the true state of affairs, in spite of the
interpolations and subsequent insertions which had been made to bolster up the
true case.
If these were the materials on record which would lead to
the inference that the appellant might be expected to have possessed as part of
its cash balance at least Rs. 1,50,000 in the shape of high denomination notes
on January 12, 1946, when the Ordinance was promulgated, was there any material
on record which would legitimately lead the Tribunal to come to the conclusion
that the nature of the source from which the appellant derived the remaining 141
high denomination notes of Rs. 1,000 each remained unexplained to its
satisfaction. If the entries in the books of account in regard to the balance in
Rokar and the balance in Almirah were held to be genuine, logically enough there
was no escape from the conclusion that the appellant had offered reasonable
explanation as to the source of the 291 high denomination notes of Rs. 1,000
each which it encashed on January 19, 1946. It was not open to the Tribunal to
accept the genuineness of these books of account and accept the explanation of
the appellant in part as to Rs. 1,50,000 and reject the same in regard to the
sum of Rs. 1,41,000. Consistently enough, the Tribunal ought to have accepted
the explanation of the appellant in regard to the whole of the sum of Rs.
2,91,000 and held that the appellant had satisfactorily explained the encashment
of the 291 high denomination notes of Rs. 1,000 each on January 19, 1946.
The Tribunal, however, appears to have been influenced by
the suspicions, conjectures and surmises which were freely indulged in by the
Income-tax Officer and the Appellate Assistant Commissioner and arrived at its
own conclusion, as it were, by a rule of thumb holding without any proper
materials before it that the appellant might be expected to have possessed as
part of its business, cash balance of at least Rs. 1,50,000 in the shape of high
denomination notes on January 12, 1946,---a mere conjecture or surmise for which
there was no basis in the materials on record before it.
The Income-tax Officer had indented in support of his
conclusion the surrounding circumstances, viz., that the appellant was one of
the premier arhatdars and grain merchants of Sahibganj with branches, doing
similar business, at Nawgachia and Dhulian and all these places were very
important business centres and Sahibganj the principal place of business had
gained sufficient notoriety for smuggling foodgrains and other commodities to
Bengal by country boats, and Dhulian which was just on the Behar-Bengal border
was reported to be a great receiving centre for such commodities, that the food
grains licence of the appellant at Nawgachia was also cancelled during the
accounting year for not keeping proper stock accounts and the appellant was
prosecuted under the Defence of India Rules but was given the benefit of doubt
and was acquitted, that the accounting year and the year preceding it as also
the year succeeding it were very favourable for the food grain dealers but the
appellant though he had large capital in hand declared losses all through from
1944-45 assessment year up to 1946-47 assessment year, the loss according to its
books in the year under consideration being to the tune of about Rs. 46,000,
that the appellant was in very favourable circumstances in which there was a
possibility of its earning a considerable amount in the year under
consideration, that it also indulged in speculation [a loss of about Rs. 40,000
shown in Nawgachia branch (in Kalai account)] in which profit in a single
transaction or in a chain of transactions could exceed the amounts involved in
the high denomination notes, that even in the disclosed volume of business in
the year under consideration in the head office and in branches there was
possibility of its earning a considerable sum as against which it showed a net
loss of about Rs. 45,000 and that the appellant had all these probable source or
sources from which the appellant could have earned the sum of Rs. 2,91,000 which
was represented by the high denomination notes of Rs. 1,000 each.
The Appellate Assistant Commissioner also emphasized the
said aspect but based his conclusion mainly on the ground that the appellant had
failed to prove that the high denomination notes had their origin in capital and
not in profit and held that the Income-tax Officer was justified in treating the
sum of Rs. 2,91,000 as secreted profits.
This was the background against which the Tribunal came to
its own conclusion. Even though it recognised that it was not improbable that
when very large sums, say in excess of Rs. 10,000 at a time, were received, a
fairly good portion thereof consisted of high denomination notes and as high
denomination notes were valid tender and nobody could have foreseen that they
would be demonetised suddenly in January, 1946, there was nothing out of the way
in persons dealing with tens of thousands of rupees and whose balances ran to
lakhs, being in possession of a fair proportion of their balances in the shape
of high denomination notes. While recognising this probability of the appellant
having been in possession of a fair proportion of its balances in the shape of
high denomination notes, the Tribunal, unconsciously though it was, fell into an
error when it held that the appellant might be expected to have possessed at
least Rs. 1,50,000 in the shape of high denomination notes as part of its cash
balance, thus treating the remaining Rs. 1,41,000 in the high denomination notes
of Rs. 1,000 each as outside the purview of these cash balances.
Unless the Tribunal had at the back of its mind the
various probabilities which had been referred to by the Income-tax Officer as
above it could not have come to the conclusion it did that the balance of Rs.
1,41,000 comprising of the remaining 141 high denomination notes of Rs. 1,000
each was not satisfactorily explained by the appellant.
If the entries in the books of account were genuine and
the balance in Rokar and the balance in Almirah on January 12, 1946, aggregated
to Rs. 3,10,681-13-9 and if it was not improbable that a fairly good portion of
the very large sums received by the appellant from time to time, say in excess
of Rs. 10,000 at a time, consisted of high denomination notes, there was no
basis for the conclusion that the appellant had satisfactorily explained the
possession of Rs. 1,50,000 in the high denomination notes of Rs. 1,000 each
leaving the possession of the balance of 141 high denomination notes of Rs.
1,000 each unexplained. Either the Tribunal did not apply its mind to the
situation or it arrived at the conclusion it did merely by applying the rule of
thumb in which event the finding of fact reached by it was such as could not
reasonably be entertained or the facts found were such as no person acting
judicially and properly instructed as to the relevant law could have found, or
the Tribunal in arriving at its findings was influenced by irrelevant
considerations or indulged in conjectures, surmises or suspicions in which event
also its finding could not be sustained.
Adverting to the various probabilities which weighed with
the Income-tax Officer we may observe that the notoriety for smuggling food
grains and other commodities to Bengal by country boats acquired by Sahibgunj
and the notoriety achieved by Dhulian as a great receiving centre for such
commodities were merely a background of suspicion and the appellant could not be
tarred with the same brush as every arhatdar and grain merchant who might have
been indulging in smuggling operations, without an iota of evidence in that
behalf. The cancellation of the food grain licence at Nawgachia and the
prosecution of the appellant under the Defence of India Rules was also of no
consequence inasmuch as the appellant was acquitted of the offence with which it
had been charged and its licence also was restored. The mere possibility of the
appellant earning considerable amounts in the year under consideration was a
pure conjecture on the part of the Income-tax Officer and the fact that the
appellant indulged in speculation (in Kalai account) could not legitimately lead
to the inference that the profit in a single transaction or in a chain of
transactions could exceed the amounts, involved in the high denomination
notes,---this also was a pure conjecture or surmise on the part of the
Income-tax Officer. As regards the disclosed volume of business in the year
under consideration in the head office and in branches the Income-tax Officer
indulged in speculation when he talked of the possibility of the appellant
earning a considerable sum as against which it showed a net loss of about Rs.
45,000. The Income-tax Officer indicated the probable source or sources from
which the appellant could have earned a large amount in the sum of Rs. 2,91,000
but the conclusion which he arrived at in regard to the appellant having earned
this large amount during the year and which according to him represented the
secreted profits of the appellant in its business was the result of pure
conjectures and surmises on his part and had no foundation in fact and was not
proved against the appellant on the record of the proceedings. If the conclusion
of the Income-tax Officer was thus either perverse or vitiated by suspicions,
conjectures or surmises, the finding of the Tribunal was equally perverse or
vitiated if the Tribunal took count of all these probabilities and without any
rhyme or reason and merely by a rule of thumb, as it were, came to the
conclusion that the possession of 150 high denomination notes of Rs. 1,000 each
was satisfactorily explained by the appellant but not that of the balance of 141
high denomination notes of Rs. 1,000 each.
The position as it obtained in this case was closely
analogous to that which obtained in Mehta Parikh & Co. v. Commissioner of
Income-tax. In that case the assessee had to satisfactorily explain the
possession of 61 high denomination notes of Rs. 1,000 each and the Tribunal came
to the conclusion that the assessee had satisfactorily explained the possession
of 31 of these notes and not of the remaining 30. The High Court had treated the
finding of the Tribunal as a finding of fact. It was held by this court that the
entries in the cash bo
