Full Judgment Text
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PETITIONER:
SMT. SRILEKHA BANERJEE AND OTHERS
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, BIHAR AND ORISSA
DATE OF JUDGMENT:
27/03/1963
BENCH:
HIDAYATULLAH, M.
BENCH:
HIDAYATULLAH, M.
DAS, S.K.
SARKAR, A.K.
CITATION:
1964 AIR 697 1964 SCR (2) 552
CITATOR INFO :
RF 1986 SC1849 (11)
ACT:
Income Tax-Sale of high, denomination notes-Sale proceeds,
if liable to tax-Indian Income-tax Act, 1922 (11 of 1922).
HEADNOTE:
The assessee had encashed 51 high denomination notes of Rs.
1,000/- each in january, 1946. The assessee’s explanation
in his application for encashment of the notes was that he
was a colliery proprietor and contractor, that for
conducting the business and for payment to labour which came
to about Rs.30,0001-to 40,000/- every week he had to keep
large sums of money to meet emergency and that the sum of
Rs. 50,000/realised by encashment of the notes was neither
profit nor part of profit but was floating capital for the
purpose of,conducting business. The Income--tax Officer did
not accept this explanation and treated this amount as
profit from some undisclosed
553
source and assessed it as assessable income. The assessee
contended that the burden lay on the department to establish
that the amount in question was income liable to tax and
that the department had failed to establish this.
Held that the department was justified in holding that Rs.
51,000/- was assessable income of the assessee from some
undisclosed source. It was not correct that the assessce
was not required to prove anything and that the burden was
entirely upon the department to prove that the amount
received from the encashment of high denomination notes was
income. The correct position is as follows. If there is an
entry in the account books of the assessee which shows the
receipt of a sum or conversion of the notes by the assessee
himself, it is necessary for the asscssee to establish, if
asked, what the source of that money was and to prove that
it did not bear the nature of income. The department is not
at this stage required to prove anything. If tile business,
the state of accounts and dealing of the assewsee show that
be might have, for convenience, kept the whole or part of a
particular sum in high denomination notes, the assessee
prima facie discharges his initial burden. If the assessee
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does this the department cannot act unreasonably and reject
that explanation to hold that it was income. If the
explanation is unconvincing, the department can reject it
and draw the inference that the amount represents income
either from the source already disclosed by the assessee or
from some undisclosed source. Before the department rejects
such evidence it must either show an inherent weakness in
the explanation or rebut it by putting to the assessee some
information or evidence which it has in its possession. The
fact that there was receipt of money or conversion of notes
is itself prima facie evidence against the assessee on which
the department can Proceed in absence of good explanation.
In the present case though cash used to be received from
Banks and sent to the various places where works were
carried on by the asscssee and vice versa, no central
account of such transfers was disclosed. There was also no
account of personal expenses of the assessee and he failed
to prove why such large sums were kept at hand in one place
when at each of the places where work was carried on, there
were Banks with which he had accounts. Further though this
large sum was kept on hand, further cheques were drawn to
meet current needs and this amount remained untouched.
Kanpur Steel Co. Ltd. v. C. I. T. [1957] 32 I. T. R. 56,
Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax,
Bihar and Orissa, [1959] 37 I. T. R. 288; Mahindranath
v.Commissioner of Income-tax, Bihar and Orissa, [1955]
554
27 1. T. R. 522, A. Govindarajulu Mudaliar v. Commissioner
of Income-tax, Hyderabad, [1958] 34 1. T. R. 807, Chunilal
Ticamchand Coal Co. Ltd. v. Commissioner‘ of Income-tax,
Bihar and Orissa,[1955] 27 I. T. R. 602, Mehta Parikh & Co.
v. Commissioner of Income-tax, Bombay [1956] 30 1. T. R. 181
and Soyachand Baid v. Commissioner of Income-tax, [1958] 34
1. T. R. 650, referred to.
JUDGMENT:
CIVIL APPELLATE, JURISDICTION: Civil Appeal No. 486 of 1962.
Appeal by special leave from the judgment and decree dated
September 24, 1959, of the Patna High Court in Miscellaneous
judicial Case No. 318 of 1957.
A.V. Viswanatha Sastri and P. K. Chatterjee, for the
appellants.
K. N. Rajagopal Sastri and R. N. Sachthey, for the
respondent.
1963. March 27. The judgment of the Court was delivered by
HIDAYATULLAH J.-This is an assessee’s appeal by special
leave of this Court against an order of the High Court of
Patna, answering in favour of the Department the question
"whether in the circumstances of the case the amount of Rs.
51,000 being the value of high denomination notes encashed
by the assessee, has been validly taxed as profits from some
undisclosed business". The original assessee, Rai Bahadur
H. P. Banerjee, is dead.- His son, who was substituted in
his place, also died during the pendency of the proceedings
in the High Court. The present appeal has been filed by the
widow of the son and other legal representatives.
Banerjee was the owner of several collieries in the Jharia
Coal fields in the State of Bihar and
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was also a contractor for raising coal. This matter relates
to the assessment year 1946-47. For that year, Banerjee was
assessed on an income of Rs. 1,28,738. The assessment was
then re-opened under s. 34 of the Indian Income-Tax Act, and
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was enhanced, but subsequently on appeal, it was reduced to
a sum a little below the original assessment. The present
assessment was made on a second re-opening of the case under
s. 34 in the following circumstances.
On January 22, 1946, Banerjee encashed high denomination
notes of the value of Rs. 51,000/-. In his application
under the Ordinance which demonetized high denomination
notes, Banerjee gave the reason for the possession of the
notes as follows:-
"I am engaged in business as colliery proprie-
tor, contractor under Messrs. Kilburn & Co.
in the name and style of H.P. Banerjee & Son
and also under the State Rly. Bokaro, Swang,
Hazaribagh district in the name of Jharia
Dhanbad Coal & Mica Mining Co..............
For conducting the business and payment to
labour, I have to pay every week between 30/40
thousand as I did not get payment for work
done every week. I had to keep large sum of
money to meet
emergency........................ It is
neither profit nor part of profit-it is very
floating capital for purpose of conducing
business. It is not an excess of profit".
He stated that he had accounts with (1) Imperial Bank of
India, (2) Nath Bank Ltd., jharia, and (3) Central Bank of
India Ltd., Bhowanipore Branch, but added that he did not
remember exactly from which Bank the notes came into his
possession, as his transanctions were frequent. The notice
which was issued to him under s. 34 of the Income Tax Act,
was not questioned on any of the grounds which are usual in
such cases. Banerjee’s explanation
556
was not accepted. The Income Tax Officer pointed out that
although his business was large and the withdrawals from the
various banks were large and frequent, he had not maintained
a central account showing withdrawals from the banks and
remittances made to his various businesses, and that none of
the books maintained by the assessee and produced by him,
contained a bank account. The Income Tax Officer found a
discrepancy of nearly Rs. 50,000 in the statements filed by
the assessee. He, accordingly, treated the high
denomination notes as profits from some undisclosed source
and assessed them as assessable income. Banerjee appealed
to the Appellate Assistant Commissioner and further to the
Tribunal. Both the authorities upheld the order of the
Income Tax Officer. The assessee demanded a case which was
refused, but the High Court directed a statement of the case
on the question already quoted. The High Court decided the
question against the assessee, and hence this appeal.
The connection of the appellants is that since the
Department had issued a notice under s. 34 of the Income Tax
Act, it was incumbent on the department to establish that
the amount in question was income which had escaped
assessment. The appellants also contend that even if the
assessee was required to prove the source of the high
denomination notes, he had sufficiently proved it by showing
that he had large amounts on hand, which were held for
convenience in high denomination notes. The appellants thus
submit that the burden, if any, upon the assessee was
discharged in the case, and the evidence being unrebutted,
the additional assessment could not be made. The appellant
rely upon Kanpur Steel Co., Ltd. v. C. 1. T. (1) where,
according to the appellants, the Allahabad High Court
explained the nature of burden of proof in the way contended
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for by the appellants. They
(1) [1957] 32 I. T. R. 56.
557
claim that the Allahabad case applies to the facts here and
point out that the said ruling was considered and approved
by this Court in Lalchand Bhagat Ambica, Ram v. Commissioner
of Income Tax, Bihar and Orissa (1). Other cases have been
cited on behalf of the department.
The cases involving the encashment of high denomination
notes are quite numerous. In some of them the explanation
tendered by the tax-payer has been accepted and in some it
has been rejected. The manner in which evidence brought on
behalf of the tax-payer should be viewed, has of course,
depended on the facts of each case. In these cases in which
the assessee proved that he had on the relevant date a large
sum of money sufficient to cover the number of notes
encashed, this Court and the High Courts, in the absence of
something which showed that the explanation was inherently
improbable, accepted the explanation that the assessee held
the amount or a part of it in high denomination notes. In
other words, in such cases, the assessee was held prima
facie to have discharged the burden which was upon him.
Where the assessee was unable to prove that in his normal
business or otherwise, he was possessed of so much cash, it
was held that the assessee started under a cloud and must
dispel that cloud to the reasonable satisfaction of the
assessing authorities, and that if he did not, then, the
Department was free to reject his explanation and to hold
that the amount represented income from some undisclosed
source.
The case which is strongly relied upon by the assessee is
Kanpur Steel Co., Ltd. v. C. I. T.(2). In that case, 32
notes of Rs. 1,000 were encashed. It was claimed that they
were part of the cash balance of the company which amounted
to Rs. 34,000 odd. The Income Tax Officer examined the
entries regarding sales preceding the encashment of the
notes and
(1) [1959] 37 I.T.R. 288
(2) [1957] 32 I.T.R. 56.
568
found that those sales brought in sums under Rs. 1,000 and
could not have resulted in the accumulation of so many high
denomination notes. The Tribunal then came to the
conclusion that Rs. 7,000 only could have been held in high
denomination notes. On a reference, the Allahabad High
Court held that the burden lay upon the Department to prove
that Rs. 32,000 was suppressed income and there was no
burden on the assessee to show whence he got the notes,
because until demonetization, there was no idea that
possession of high denomination notes would have to be
explained. The High Court also found that the explanation
was fairly satisfactory, because big notes might have been
received even in small transactions and change taken, and
that the High Court could not make a conjecture how many
notes could or could not have accumulated. It is contended
before us that the burden in such cases lies as stated by
the Allahabad High Court.
On the other hand, in Manindranath Das v. Commissioner of
Income Tax, Bihar & Orissa (1), the tax-payer had encashed
Notes of the value of Rs. 28,600, which he contended were
his accumulated savings. His explanation was accepted in
respect of Rs. 15,000, because 15 notes could be traced to a
bank, but was rejected in respect of the balance. The Patna
High Court pointed out that if an assessee received an
amount in the year of account, it was for him to show that
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the amount so received did not bear the character of income,
and the tax-payer in the case had failed to prove this fact
in respect of the remaining notes. The Patna case finds
support in A. Govindaraju Mudaliar v. Commissioner of Income
Tax Hyderabad; (2), where it is laid down by this Court that
if an assessee fails to prove satisfactorily the source and
nature of an amount received by him during the accounting
year, the Income Tax Officer is entitled to draw the
inference that the
(1) (1955) 27 I.T.R. 522.
(2) [1958] 94 I.T.R .8.70
559
receipts are of an assessable nature. In that case, the
explanation-of the assessee in respect of the amounts shown
as credits for him in the account books of a firm of which
he was a partner, was rejected as un true. It was held that
it was open to the Income Tax Officer and the Appellate
Tribunal to hold that the amounts represented the concealed
income of the assessee.
From the last two cases, it is plain that if there is
receipt of an amount in the accounting year, it is incumbent
in the first instance upon the assessee to show that it does
not bear the character of income. If be fails to do this,
the Income Tax Officer may hold that it represents income of
the assessee either from the sources he has disclosed or
from some undisclosed source.
In applying this principle to the cases of encashment of
high denomination notes, there is some difficulty when the
assessee has books of account which are accepted and in
which there is a cash balance sufficient to cover the amount
of high denomination notes. Each case must depend upon its
own peculiar facts. A few illustrative cases may be
noticed, because they show some differences in the approach
to the problem. In Chunilal Ticamchand Coal Co., Ltd., v.
Commissioner of Income Tax, Bihar and Orissa (1), high
denomination notes of the value of Rs. 68,000 were encashed.
Evidence showed that the assessee was in the habit of
keeping large sums which he kept intact for emergencies and
meeting the current needs from withdrawals from the banks.
This explanation was supported by receipts and disbursement
in the books of account. The explanation was rejected as to
a part because the accounts did not mention the high
denomination notes and further because such notes were
hardly needed to pay wages to labourers. The Tribunal,
however, held that the explanation might be true as to a
part
(1) [1955] 27 I. T. R. 602.
560
and accepted it in respect of Rs. 35,000, rejecting it in
respect of Rs 33,000. The Patna High Court held that the
explanation which was held to be reasonable as to a part
must be good for the whole, because there was no material on
which it could be held that the balance constituted income
from some undisclosed source to distinguish the case about
the part rejected from the part accepted.
In Mehta Parikh & Co. v. Commsioner of Income Tax, Bombay,
(1) high denomination notes of the value of Rs.61,000 were
encashed. The explanation was that they were part of the
cash balance on hand. The accounts disclosed that in order
to sustain the explanation, it would have to be presumed
that the entire balance on January 1, 1946, was held in 18
notes of Rs. 1,000 each and that all receipts up to.’
January 18,1946, when the notes were encashed, were also in
High denomination notes. The affidavits of persons who
stated that they had paid amounts in Rs.1,000 notes were not
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accepted. The Tribunal accepted the explanation as to
Rs.31,000 only. This Court held that if the account books
were accepted and the deponents were not crossexamined on
their affidavits, the rejection of the explanation as to a
part proceeded only on surmise and the finding that
Rs.30,000 were income from some undisclosed source was based
on no evidence. It may be pointed out that Venkatarama
Ayyar J., in that case, chose to rest his decision on the
second ground only, treating the decision as involving an
error of law. But in Sovachand Baid v. Commissioner of
Income Tax, (2) high denomination notes of the value of
Rs.2,28,000 were encashed. The assessee stated that he had
inherited that amount from his father in 1942, and produced
account books from 1926 to 1942. He did not produce earlier
account books. The Tribunal found that the books were such
as could be written at any time and did not contain full
dealings even between 1926 and
(1) [1956] 30 I.T.R. 181.
(2) [1958] 34 I.T.R. 650,
561
1942, and there were no entries showing that any amount as
such was received from business. The Tribunal, however,
held that Rs.1,28,000 only was income from some undisclosed
source. The assessee’s appeal in this Court was dismissed,
because the rejection of the account books was held to be
reasonable in the circumstances of the case. This Court
observed that the partial rejection of the explanation by
the Tribunal must be treated as a concession rather than a
reasoned conclusion.
We now come to Lalchand Bhagat’s case which is strongly
relied upon, particulary, as it has cited the Allahabad
case, so it is said, with omplete approval. It is
therefore, necessary to examine it closely to see if there
is such an approval. In that case, 291 high denomination
notes of the value of Rs.2,91,000 were encashed. The
assessee was maintaining for a long time past two accounts:
one was known as "Almirah Account", and other, "Rokar
Account". On the date the notes were encashed there was a
balance of Rs.2,81,397 in the almirah account and Rs.29,284
in the rokar account. These two amounts between them were
sufficient to cover the encashed notes. The explanation was
that for the purposes of the business which was distributed
in many branches, a large amount of ready cash was always
kept at the head office, so that any emergency might be met.
The business of the assessee was admittedly extensive and
the almirah account had also existed for several years.
Except in the previous year in which the high denomination
notes were encashed, even the numbers of the high
denomination notes used to be shown in the almirah account.
The explanation was rejected on the ground that those were
the days of emergency and the assessee, as a grain dealer,
could have secretly made money by smuggling grain, and that
he had once been prosecuted, though acquitted. It was also
said that the area where he did his business was
562
notorious for smuggling and also that he had speculated in
the year and might easily have made profits, though he- had
returned a loss from speculation. Emphasis was also laid
upon the fact that in the year of account, the numbers of
the high denomination notes were written subsequently. The
Tribunal accepted the two books of account as genuine and
also that there was a balance of Rs.3,10,681 with the
assessee. Before the Tribunal it was explained that in the
year of account the numbers of the high denomination notes
were inserted in the almirah account out of nervousness
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owing to the demonetization of the notes. The Tribunal
accepted the explanation with regard to Rs. 1,50,000 and
rejected it with regard to Rs.1,41,000. No reasons were
given for distinguishing the good part of the explanation
from the bad.
This Court examined the reasons and held that except for the
insertion of the numbers of notes in the book, none of the
other reasons had any probative value and that they were
mere conjectures and surmises. This court pointed out that
if the explanation for the interpolations was good for the
acceptance of the explanation as to Rs.1,50,000, it must be
held to be good also for the balance, because there was
nothing to distinguish between the two parts. This Court,
therefore, pointed out that the main question about
Rs.1,41,000 was whether there was any material to justify a
different conclusion in respect of that amount and pointed
to the following facts. The assessee had established the
need for keeping a large sum on hand and had proved the
almirah account as a genuine account. The almirah account
contained the numbers of the high denomination notes in the
years previous to the year relative to the assessment. In
that year, the numbers were inserted subsequently and this
was the only substantial point against the assessee. This
Court also pointed out that there were statements of banks
and accounts
563
of the branches and of beparis, showing that large amounts
were received by the assessee, which made up the amount in
the almirah account. Between February 6, 1945 and January
11, 1946, when the notes were encashed, sum,, above Rs.
1,000 received by the assessee aggregated to as much as
rupees five lakhs. As the almirah account was not
questioned by the Tribunal at all, and out of that amount,
more than half was held to be in the shape of high
denomination notes, this Court posed the following
question:-
"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. 1000 remained
unexplained".
The Court, therefore, concluded
"If the entries in the books of account in
regard to the balance in the Rokar and the
balance in the 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. 1000 each
which it had encashed on January 19, 1946".
The case of assessee was thus accepted in toto. This Court
did not hold that the assessee need not prove anything. As
we have said earlier, the burden of proof must depend on the
facts of the case. One such fact may be the existence of a
large floating cash balance on hand, and taken with other
facts, may be sufficient to show that the high denomination
notes constituted the whole or part of that balance. In the
Allahabad case, such a balance was proved and was accepted
as to a part by the
564
Tribunal. The High Court held that the explanation was good
for the whole of the amount of the notes. No doubt, this
Court, in referring to that case, summarised the reasons,
but it pointed out that it was not open to the Tribunal to
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make a guess as to the number of high denomination notes
which could be accepted, and cited the Allahabad case and
some others in that connection.
It seems to us that the correct approach to questions of
this kind is this. If I here is an entry in the account
books of the assessee which shows the receipt of a sum or
conversion of high denomination notes tendered for
conversion by the assessee himself, it is necessary for the
assessee to establish, if asked, what the source of that
money is and to prove that it does not bear the nature of
income. The Department is not at this stage required to
prove anything. It can ask the assessee to bring any books
of account or other documents or evidence pertinent to the
explanation if one is furnished, and examine the evidence
and the explanation. If the explanation shows that the
receipt was not of an income nature, the Department cannot
act unreasonably and reject that explanation to hold that it
was income. If, however, the explanation is unconvincing
and one which deserves to be rejected, the Department can
reject it and draw the inference that the amount represents
income either from the sources already disclosed by the
assessee or from some undisclosed source. The Department
does not then proceed on no evidence, because the fact that
there was receipt of money, is itself evidence against the
assessee. There is thus prima facie evidence against the
assessee which he fails to rebut, and being unrebutted, that
evidence can be used against him by holding that it was a
receipt of an income nature. The very words "an undisclosed
source" show that the disclosure must come from the assessee
and not form the Department. In cases of high denomination
notes,
565
where the business and the state of accounts and dealings of
the assessee justify a reasonable inference that he might
have for convenience kept the whole or a part of a
particular sum in high denomination notes, the assessee
prima facie discharges his initial burden when he proves the
balance and that it might reasonably have been kept in high
denomination notes. Before the Department rejects such
evidence, it must either show an inherent weakness in the
explanation or rebut it by putting to the assessee some
information or evidence which it has in its possession. The
Department cannot by merely rejecting unreasonably a good
explanation, convert good proof into no proof. It is within
the range of these principles that such cases have to be
decided. We do not think that the Allahabad view puts no
burden upon the assessee and throws the entire burden on the
Department. The case itself does not bear this out. If it
does, then, it is not the right view.
In the present case, the assessee claimed that the high
denomination notes were a part of the cash balance at the
head office. The Income Tax Officer found that at first the
cash on hand was said to be Rs. 1,62,022, but on scrutiny,
it was found to be wrong. Indeed, the assessee himself
corrected it before the Appellate Assistant Commissioner and
stated there that the balance was Rs. 1,21,875. Ordinarily,
this would have prima facie proved that the assessee might
have kept a portion of this balance in high denomination
notes. But the assessee failed to prove this balance, as
books of the assessee did not contain entries in respect of
banks. Though cash used to be received from banks and sent
to the various places where works were carried on and vice
versa, no central account of such transfers was disclosed.
There was also no account of personal expenses of the
assessee and he had failed to prove why such large sums were
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kept on hand in one place when at each of the places where
work was carried
566
on, there were banks with which he had accounts. The
Appellate Assistant Commissioner also went into the question
and found that on the same day when the high denomination
notes were encashed, a sum of Rs. 45,000 was drawn by
cheque. The next remittance immediately afterwards was of
Rs. 16,000 to Bokaro, but Rs. 17,000 were withdrawn a few
days before to meet this expense. A withdrawal of Rs. 8,000
was made a day later and Rs. 20,000 were withdrawn ten days
later to finance the business. It appears that the money on
hand (Rs. 45,000) was not touched at all, but on January 30,
1946, a further sum of Rs. 6,000 was withdrawn and not
utilized, which made up the sum of Rs. 51,000 for which the
high denomination notes were encashed.
On these facts, the Tribunal came to the conclusion that the
high denomination notes represented not the cash balance but
some other money which remained unexplained, and the
Tribunal treatted it as income from some undisclosed source.
The High Court held on the above facts and circumstances
that there were materials to show that Rs. 51,000 did not
form part of the cash balance, and the source of money not
having been satisfactorily proved, the Department was
justified in holding it to be assessable income of the
assessee from some undisclosed source. In this conclusion,
the High Court was justified, regard being had to the
principles we have explained above.
The argument that as this was a case under s. 34 of the
Income Tax Act, it cast a special burden on the Department
to show that this income had escaped earlier, need not
detain us. No doubt, proceedings under s. 34 can only be
commenced under the conditions prescribed in the section,
but when the proceedings are validly commenced, there is no
difference between an ordinary assessment and an additional
assessment under s. 34, and the same rule
567
as to burden of proof governs the additional assessment.
In our opinion, this appeal has no substance; it fails and
is dismissed with costs.
Appeal dismissed.