1. At the instance of the revenue the following two question are referred for our determination under section 66(2) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act' :
'1. Whether the Tribunal misdirected itself in law in finding that the sum of Rs. 2,00,000 shown as credited to the deceased's account (sic) assessee's reserve fund account, on March 29, 1956, came out of the withdrawals made by it in the year 1948
2. Whether, on the facts and in the circumstances of the case, it was necessary for the department to prove, in order to bring to tax the unexplained cash credit of Rs. 2,00,000 standing in the assess's books during the accounting year, that during the year of account there were condition showing the possibility of the assessee earning large amounts outside the normal course of business ?'
2. The question referred to relate to the assessment year 1956-57 for which the relevant previous year ends on March 31, 1956. The assessee is a private limited company incorporated in Miraj State in 1944 with a capital of Rs. 11 lakhs. It carried in business in the manufacture and sale of taxtile goods. There were on income-tax in Miraj at that time the company obtained concessions by way of exemptions from income-tax and other taxes under a notification dated October 28, 1945.
3. The company maintained accounts, but there were deposits and investments which did not appear in the said books. The deposit outside the books in the year 1946 were as follows :
Sl.No. Date of Name of bank Amountsdeposit Rs.1. 26-3-1946 New Citizens Bank of India Ltd. 2,00,000(Sangli branch)2. 12-7-1946 ' ' 1,00,0003. 7-11-1946 ' ' 3,00,0004. 28-11-1946 Bank of India Ltd. (in the account 3,00,000of Sangli Bank Ltd.)
4. Items Nos. 1 and 2 in the above table were encashed on March 26, 1948, after maturity. Item No. 4 was kept as a deposit with a view to make investment in securities, etc. Securities were purchased and they were later on sold, but it is, however, not clear when they were sold. Before the Tribunal it was stated that they were sold some time in the year 1947. Item No. 3 in the above table comprises of two deposits, one for Rs. 2 lakhs and the other for Rs. 1 lakh. These deposits were made by one Divekar, a director of the assessee-company. In May, 1947, a fixed deposit of Rs. 1 lakhs out of item No. 3 was encashed and it is stated to have been paid over to one Bhide, managing director of the assessee company. The balance of Rs. 2 lakhs was renewed as a deposit and later on when this deposit matured it was encashed and the amount there of is stated to have been taken over by the miss at Madhavanager. Bhide who was once the managing director died on November 25, 1953.
5. Proceedings under section 34 of the Act for the assessment years 1946-47 and 1947-48 were initiated more than once. In the year 1952, they were initiated in respect of the deposits covered by items Nos. 1, 2 and 4 in the above table. During the course of this enquiry a latter was written by the managing director of the assessee-company on April 4, 1952, wherein he, inter alia, stated that there were on other amounts except the sum of Rs. 6 lakhs (covered by items Nos. 1, 2 and 4) outside the books of the company. On June 18, 1952, the board of directors of the assessee-company. passed a resolution crediting the sum of Rs. 6,21,647-0-3 to the reserve fund. This amount comprised of the total of the three deposits and the interest earned thereon and the surplus on sale of securities. The proceedings were, however, not concluded and they were dropped on September 23, 1952, Second time proceedings for reopening assessment for these two assessment years 1946-47 and 1947-48 were initiated in March, 1955. In the court of these proceeding, G. L. Natu, the then managing director of the assessee-company, made a statement on February 24, 1956, wherein he, inter alia, disclosed the deposit item at serial No. 3 in the table. In this statement Natu mentioned that the total deposits not mentioned in the books of account aggregated to Rs. 9 lakhs. These proceedings initiated in March 1955, were completed on February 24, 1956. The Income-tax Officer took the view that the company made huge profits but kept them outside the books. The amounts taxed in the said assessments were Rs. 12,23,988 and Rs. 13,40,500, respectively. The sum of Rs. 13,40,500 included a sum of Rs. 2 lakhs which was part of the deposit under item at serial No. 3 in the table above referred to. This sum of Rs. 2 lakhs was credited to the reserve fund account of the assessee-company of March 29, 1956, after a resolution to the same effect was passed by the board of directors of the assessee-company. The assessment orders passed under section 34 in reassessment proceedings initiated in March, 1955, were set aside in appeals by the Appellate Assistant Commissioner by his order dated February 13, 1961, as he was of the view that the said orders were made without jurisdiction.
6. As the sum of Rs. 2 lakhs above referred to was credited in the books of account to the reserve fund account of March 29, 1956, for the assessment year 1956-57, the Income-tax Officer took the view that this sum represented the income of the assessee from undisclosed sources during the relevant accounting period ending on March 31, 1956 as a credit entry was made on 29th March of that year. On an appeal by the assessee the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer including this item of Rs. 2 lakhs as income from undisclosed sources for the relevant accounting year. He found that this sum of Rs. 2 lakhs credited on March 29, 1956, had nothing to decided on with the earlier deposits made in the year 1946 and the Income-tax Officer was right in treating this sum as income from undisclosed sources. On a further appeal by the assessee before the Tribunal, the Tribunal allowed the appeal. The Tribunal considered the explanation offered on behalf of the assessee that the sum Rs. 2 lakhs credited in the books of account under date March 29, 1956, formed part of the deposit of Rs. 3 lakhs under items at serial No. 3 in the table above referred to. Such explanation according to the Tribunal was probable and it allowed the appeal of the assessee in so far as this amount was concerned.
7. Mr. Hajarnavis on behalf on the revenue contended that the finding of the Tribunal is not supported by any piece of evidence on record a nd is totally inconsistent with the evidence of record. He also submitted that, so far as the second question is concerned, the burden is erroneously thrown upon the revenue, because the Tribunal has stated in the order that the conditions in the year 1956 have not been shown to be such as to lead to an inference of the possibility of such a large amount being earned outside the normal course of business. In our opinion, the contentions urged on behalf of the revenue cannot be accepted. It is undoubtedly true that the a Appellate Assistant Commissioner in his order has confirmed the finding of the Income-tax Officer that the sum of Rs. 2 lakhs credited under date March 29, 1956, represented the income of the assessee from undisclosed sources. Two circumstances are relied upon by the Appellate Assistant Commissioner in confirming this finding. The first circumstance that was relied upon was that in the year 1952 during the course of the reassessment proceedings under section 34 in the letter by the assessee-company by its director through the managing agents it is clearly mentioned that, apart from the sum of Rs. 6 lakhs which was the total of three deposits under serial Nos. 1, 2 and 4 in the table above referred to, there were no other amounts lying as deposit in respect of which no entries were made in the books of accounts of the company. The Appellate Assistant Commissioner also declined to accepts the explanation urged on behalf of the assessee-company that the sum of Rs. 2 lakhs formed part of the deposit of Rs. 3 lakhs under item No. 3 in the table above referred to. He took the view that it was inconceivable that the assessee-company would keep such a large amount without being invested for a period of over eight years because the deposit receipt was encashed on maturity on March 22, 1948. As these explanations were not accepted, he took the view that proceeds of the deposit of Rs. 3 lakhs under item No. 3 were either spent or absorbed by the company and they were not in existence after June, 1952, when all suppressed profits were brought into the books. He, accordingly, took the view that this item of Rs. 2 lakhs which was credited in the books of March 29, 1956, represented the income from undisclosed sources during the accounting year. The Appellate Assistant Commissioner found the explanation offered on behalf of the assessee defective because of these circumstances. So far as the Tribunal was concerned, it was persuaded to take a contrary view. So far as the explanation given in March, 1952, was concerned, it took the view that, as the enquiry at that time related to the aggregate amount of Rs. 6 lakhs, the fourth deposit of Rs. 3 lakhs dated November 7, 1946, was not referred to and explained at that time and the Tribunal accepted the explanation given on behalf of the assessee with regard to the resolution dated June 18, 1952, for bringing into account the sum of Rs. 6 lakhs and odd as containing some weakness, but it was clearly pointed out that the omission of the sum of Rs. 2 lakhs at this time was deliberate as the company did not wish to bring that amount into the books of account at that time. It also tested the contention urged on behalf of the assessee on the footing that the explanation offered in April, 1952, was not above board; even then it has taken the view in regard to the explanation offered on behalf of the assessee that the sum of Rs. 2 lakhs which was credited under date March 29, 1956, was part of the remaining balance of the deposit of Rs. 3 lakhs under item No. 3 in the table above referred to. Actually that explanation has been accepted by the Tribunal as probable. As Bhide who was in full possession of facts had died, the Tribunal took the view that the explanation ought to be judged only from broad probabilities and, judged from that standered, it was regarded as probable. According to the Tribunal there was no material on record which will show that the assessee's explanations was improbable and, therefore, unacceptable. In coming to this conclusion it, inter alia, took into account the fact that the conditions in the year 1956 were not shown to be such as to lead to an inference that it was not possible for such a large amount being earned outside the normal course of business. This circumstance was only incidentally referred to as one of the surrounding circumstances and the probability of the explanation offered was judged on its own merits and having regard to all the circumstances then existing in view of the death of Bhide. Under the Evidence Act a fact is said to be proved when after considering the matters before it the court either believes it to exist or considers it existence so probable that a prudent man ought under the circumstances in a particular case to act upon the supposition that it exists. Upon the broad probabilities of the case the Tribunal accepted the explanation urged on behalf of the assessee that the sum of Rs. 2 lakhs which was brought into the account under date March 29, 1956, formed part of the deposit of Rs. 3 lakhs under date November 7, 1946, referred to at serial No. 3 in above table. This finding is based on factual appreciation of circumstances and it is, therefore, not possible to take the view that there is no evidence to support it or it is inconsistent with the facts on record.
8. As the Tribunal in its order has, inter alia, observed that during the relevant year there was in rule of presumption, Mr. Hajarnavis has invited our attention to three decision of the Supreme Court in which a view has been taken that if an explanation offered by the assessee has been found to be unsatisfactory and not acceptable to the taxing authorities, then the inference could be drawn that the amount represents income from undisclosed sources. The first decision to which our attention was invited is that in the case of A. Govindarajulu Mudaliar v. Commissioner of Income-tax. In this case the Supreme Court has taken the view that whether a receipt is to be treated as income or not must depend very largely on the facts and circumstance of each case. Where as assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipts ate of an assessable nature. Reference was also made to the decision of the Supreme Court in Kale Mohammad Hanif v. Commissioner of Income-tax. The Supreme Court in this case has taken the view the it is well-established that the onus of proving the source of a sum of money found to have been received by the assessee is on him. If he disputes the liability for tax, it is for into show either that the receipt was not income or that if it was, it was exempt from taxation under the provisions of the Income-tax Act. In the absence of such proof, the Income-tax Officer is entitled to treat it as taxable income. The last decision referred to in this connection was that in the case of Commissioner of Income-tax v. Devi Prasad Vishwanath Prasad. In this case the Supreme Court has taken the view that where there is an unexplained credit, it is open to the Income-tax Officer to hold that it is income of the assessee, and on further burden lies on the Income-tax Officer to show that that Income is from any particular source. It is for the assessee to prove that, even if the cash credit represents income, it is income from a source which has already been taxed.
9. The Tribunal has found as a fact that in the year 1946 there were four deposit with the bank which aggregated to the sum of Rs. 9 lakhs. Explanation was offered in April, 1952, in respect of three of the deposits which aggregated to Rs. 6 lakhs. The fourth deposit was of the sum of Rs. 3 lakhs under date November 7, 1946. The assessee's contention was that this deposit comprised of two deposits, one of Rs. 2 lakhs and the other of Rs. 1 lakhs. In May, 1947, the deposit of Rs. 1 lakhs was encashed and was stated top have been paid over to Bhide, the managing director of the assessee-company. The other deposit of Rs. 2 lakhs was renewed as deposit and it was later on encashed on March 22, 1948. This amount remained with the company and it was brought into credit in the books of account after a resolution to that effect was passed by the board of directors on March 29, 1956. That explanation has been considered by the Tribunal as probable looking to the facts and circumstances of the case. Looking to the probability it also took into account the fact that the earlier deposit of Rs. 6 lakhs was encashed in the year 1948, but was brought into account only in the year 1952. So also in considered the explanation in respect of Rs. 2 lakhs as probable looking to the circumstances of the case.
10. It is undoubtedly true that the Tribunal in its order, inter alia, observed as under :
'The conditions of the year 1956 have not been shown to be such as to lead us to infer the possibility of such large amount being earned outside the normal course of business.'
11. Question No. 2 above referred to is pertaining to these observations and it is founded on the facts that this was an independent finding on the basis of which the explanation was accepted and for which purpose the burden was erroneously thrown on the revenue. In our opinion, if the order of the Tribunal is read as a whole, the observations are merely passing observations as referring to one of the surrounding circumstances and not for the purpose of throwing the burden on the revenue. Actually, in paragraph 10 the Tribunal was persuaded to accept the explanation of the assessee that the sum of Rs. 2 lakhs credited in the books of account under date March 29, 1956, was part of the deposit of Rs. 3 lakhs being item No. 3 in the table.
12. Before we answer the question referred to us, it is necessary to refer to the decision of the Bombay High Court in the case of Commissioner of Income-tax v. Deviprasad Khandelwal & Co., Ltd. The High Court in this case has taken the view that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipts are of an assessable nature. But it cannot be said that in every case where the Income-tax Officer rejects the explanation submitted by an assessee in respect of unexplained cash credit in his books of accounts, a finding against the assessee must be made that the ca sh 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.' In that case, the Tribunal though it disbelieved the explanation of the assessee still took the view that on the evidence and surrounding circumstance the cash credit cannot be held to be the income of the assessee. Such a finding of the Tribunal was treated by this court as one of fact and can only be unreasonable or perverse.
13. In the present case we have already pointed out that the Tribunal has considered the explanation offered on behalf of the assessee in respect of the sum of Rs. 2 lakhs probable and we have rejected the contention on behalf of the revenue that there is no evidence to support it or it is inconsistent with the evidence on record. Such a finding in view of this decision is really one of fact. Accordingly, our answers to the question referred to us are as under :
Question No. 1 is answered in the negative.
14. So far as question No. 2 is concerned it proceeds on the assumption that the burden is cast upon the revenue. It was only a passing circumstance while considering the other circumstance in coming to the conclusion whether the explanation offered on behalf of the assessee was probable or not. As the assumption is incorrect this question need not be answered.
15. The revenue shall pay the costs of the assessee.