1. This case has come to us by means of a reference under section 66(2) of the Indian Income-tax Act, 1922 (to be referred to hereinafter as the 'Act'). The question referred for our opinion i :
'Whether the finding of the Appellate Tribunal is vitiated as being based on suspicion and partly on irrelevant materials which were not relied on by the department before the said Appellate Tribunal and without drawing the attention of the petitioners thereto.'
2. The order of the Tribunal whose correctness is assailed before us is found in I.T.A. No. 4017 of 1954-55 on the file of the Income-tax Appellate Tribunal, Bombay Bench 'A'. It is a common order in respect of the assessment for the years 1947-48, 1948-49, 1949-50, 1950-51 and 1951-52. The order assessing the assessee to income-tax for the assessment year 1947-48 was made on March 29, 1952. The orders relating to the income-tax for the other assessment year were made on March 25, 1953.
3. The returns made by the assessee for the relevant years were rejected by the Income-tax Officer. The Income-tax Officer did not believe the accounts produced by the assessee. He was of the opinion that the income credited to the accounts of Messrs. A.M. Khot, S.B. Wadikar, B. B. Kolhapure, R.V. Shinde, D.S. Patil, M.B. Murdande and S.P. Patil were really the income earned by the assessee. He added those profits to the profits earned by the assessee and assessed the assessee accordingly. The reasons for so including are found in the assessment order made for the assessment year 1947-48. More or less identical reasons are given in his other orders. These are reasons mentioned by hi :
'For in the previous year these sales (assessed on) were about Rs. 227 thousands and odd, as against sales of Rs. 145 thousands and odd this year. There are some suspicious accounts wherein both purchases and sales are effected, which deserve special mention, viz : ----------------------------------------------------------------------Name Sales Profit----------------------------------------------------------------------Rs. Rs.Sri. A.M. Khot 59,896 10,336' S.B. Wadikar 66,471 17,197' B.B. Kolhapure 91,394 15,584' R.V. Shinde 47,342 3,991' D.S. Patil 21,304 10,550' M.B. Murdande 111,679 18,556' S.P. Patil 78,917 13,882----------------------------------------------------------------------*
4. Invariably, in all these accounts both purchases and sales are effected through the same dalal. Most of these persons have agriculture as their mainstay, and they are not at all very conversant with the tobacco trade. The assessee contends that these persons have entrusted him with the work of purchasing and selling tobacco and he has done business for these persons without surety; and invariably, in all these transactions the parties have earned very good margin of profit. Apart from this, it is particularly noteworthy that these persons have broker's licence only, and all the tobacco that was purchased in their names remained in the godown of the assessee under the assessee's licence only. All these facts clearly lead one to the conclusion that the assessee has done business transactions in these benami names, whenever he could earn huge profit. This also explains the ow turnover of this year.
5. Peculiarly enough, no party mentioned above has taken away the profit as earned for this particular year; the amounts are lying with the assessee only. Though in some cases the parties have come and admitted that it is their own business, the same cannot be accepted in the absence of corroborative proofs for the same. Moreover, psychologically as human nature is, one cannot expect a dalal to be satisfied only with 5% commission on the sales effected, when he could see under his nose that so many persons are earning exhorbitant margin of profit, and this is exactly the position. In these circumstances, I hold that these profits are earned by the assessee himself. However, I give some credit to these parties for having lent their names and allow 10% of the profit.'
6. Aggrieved by the order of the Income-tax Officer the assessee took up the matters to the Appellate Assistant Commissioner of Income-tax in appeal. The Appellate Assistant Commissioner substantially allowed the appeal of the assessee. He came to the conclusion that the Income-tax Officer was not right in including the income of these persons excepting that of D.S. Patil. His reasons for his conclusion are as follow :
'Except in the case of one Sri D.S. Patil all other persons are being regularly assessed. In order to verify further, the parties were examined on oath and their statements showing the profits earned by them and the way in which these were utilised are given. Also from record it is found that all these persons are being assessed regularly. Under the circumstances these persons are proved to be genuine.
The Income-tax Officer has also mentioned that they had no tobacco (sic). This is a true fact but absence of licence does not mean that the parties had not done the business. The fact that they had done business is accepted by the Income-tax Officer when the persons concerned were individually assessed and, moreover, those assessments are not precautionary assessments. In view of all these evidence, it cannot be said to have been proved that the first six persons are benamidars of the appellant. Hence, in their cases there was no justification for treating their profit as the profit of the appellant. The business done in the name of Sri D.S. Patil is, however, not properly explained as this person has not been separately assessed. From a scrutiny of the account in his name it is found that the total sales in the accounts of D.S. Patil are Rs. 16,586 and not Rs. 21,304 as mentioned in the assessment order. The reason for this discrepancy is that the remaining amount is merely opening credit balance and not sales of tobacco. As the appellant was not able to prove that the business done in the name of D.S. Patil was not his own, the profit on the sales credited in the account of D.S. Patil has been rightly treated as the appellant's own profit. However, as regards the remaining persons, they are proved to be genuine parties as mentioned above and the Income-tax Officer was, therefore, not justified in including the profits in their names in the income of the appellant except to the extent of Rs. 2,898, being profit on the business done in the name of D.S. Patil which is the appellant's own profit. Hence, the addition of profits in the names of benamidars requires to be reduced by Rs. 78,459.'
7. The Income-tax Officer took up this matter in appeal to the Appellate Tribunal. The only ground taken in the appeal memorandum filed by the Income-tax Officer, shortly put, is that the order of the Income-tax Officer is correct in all respects and that of the Appellate Assistant Commissioner is wrong. No special ground as such was taken. The Income-tax Officer did not seek the permission of the Tribunal to adduce any additional evidence. Nor does it appear that the Tribunal required any additional evidence for a proper determination of the appeals. At any rate no steps were taken under rule 29 of the Rules framed under the 'Act'. Despite the fact that no additional evidence was received by the Tribunal, in its order it went on relying on various facts and circumstances, not available from the records before it, in arriving at the conclusion that the order of the Appellate Assistant Commissioner is wrong and that of the Income-tax Officer is correct. We may proceed to quote some of the reasons given by the Tribunal in support of its order. This is what the Tribunal state :
'For the assessment years 1940-41 to 1943-44, the assessee held himself out to be only a broker in tobacco and denied to be a dealer in it. Every year his accounts showed dealing in tobacco in names other than his own and there were also several unexplained cash credits. Both were brought to tax by the Income-tax Officer for these four years and but for such additions, the assessee would not have had any assessable income. The assessee's appeals against such additions for the assessment years 1940-41, 1941-42, and 1943-44 were rejected by the Appellate Assistant Commissioner as barred by limitation. The one he decided on merits for the assessment year 1942-43 was against the assessee. The Appellate Assistant Commissioner then gave a clear finding that the assessee did deal in tobacco in benami names and concealed his real profits. Indeed, the Appellate Assistant Commissioner upheld the levy of penalty under section 28(1)(c) for the assessment year 1942-43. For the next three assessment years 1944-45 to 1946-47, the assessee admitted that not only he was a broker in tobacco but he dealt in it on his own account. Between 1940-41 and 1943-44 the highest total income assessed was about Rs. 16,000 for the assessment year 1943-44, which included unexplained cash credits of about Rs. 13,800. Thereafter, the profits continuously rose to as much as about Rs. 51,000 for the assessment year 1946-47. It is significant to add that the Income-tax Officer had to take action under section 34 for the assessment years 1945-46 and 1946-47 to bring to tax share income in tobacco business wherein the wife of Ganapati was alleged to be a partner. An appeal was taken against this inclusion before the Appellate Assistant Commissioner for the assessment year 1945-46, but was subsequently withdrawn. It is this kind of assessee with whom the Income-tax Officer had to deal for the assessment year 1947-48 and subsequent years.
Early in January, 1949, the Income-tax Officer received information anonymously that several accounts in the books of the assessee which recorded purchase and sale in certain names were the assessee's own benami accounts. On making investigation the Income-tax Officer held that the following account relevant for the assessment year 1947-48 were the assessee's own benami account :
----------------------------------------------------------------------Name Sales Profit-----------------------------------------------------------------------Rs. Rs.A.M. Khot 59,896 10,336S.B. Wadikar 66,471 17,197B.B. Kolhapure 91,394 15,584R.V. Shinde 47,342 3,991D.S. Patil 21,304 10,550M.B. Murdande 1,11,679 18,556S.P. Patil 78,917 13,882 He examined these persons and several others as well. Kolhapure alleged that he was doing business in tobacco some 8 to 10 years ago, that in Shake year 1867-68 (account year for the assessment year 1947- 48) he did business in tobacco in partnership with one Sidramappa Bagewadi through the assessee, that he held a broker's licence, that in Shake year 1868-69, Sidramappa Bagewadi severed the partnership and since then, he was carrying on this business on his own account and that he withdrew the profits in his business. Sidramappa Bagewadi alleged that he was a partner with Kolhapure in some business, that he did not advance any capital and that he was told by Kolhapure that he ceased to be partner from Shake year 1868-69. There is thus contradiction between the two as to who severed the partnership. Both these persons denied to have maintained any accounts of their dealing in tobacco though purchase and sale transactions were many and on several occasions. Even though Kolhapure held broker's licence, he did no broking business. Other persons also made statements to similar effect. Certain things that strike one are that all these persons simultaneously decided to do business in tobacco in Shake year 1867-68 and many of them for the first time, that none of them maintains his own accounts relating to his own purchase and sale transactions and that they all tacitly accept their accounts, as they appear in the assessee's books, as reliable and conclusively final.'
8. Again in paragraph 5, we find the following observation :
'We called for the assessment records of some of these persons and found out the circumstances in which they had made their belated voluntary returns for the assessment year 1947-48. All these persons made voluntary returns for the assessment year 1947-48, either on the 6th or 7th July, 1948. When asked to explain why the voluntary returns for the assessment year 1947-48, which normally become due by the middle of June, 1947, was filed so late, Mr. Shinde explained that he made the voluntary return at the instance of Mr. D.B. Kulkarni, who is the authorised representative of the assessee. We also find that Khot was represented by the same authorised representative when he made his return on July 6, 1948. We have carefully gone through other returns. We have no doubt in our mind that all these returns were prepared by one and the same person or at his instance and it is not difficult to guess who that person can be. It appears that before the Income-tax Officer completed assessments in these cases he recorded their statements to the effect that they had no other business in the past and no other income except the small property income (which in no case exceeding Rs. 50 per year) and the business income disclosed in the return. There is also no substance in the Appellate Assistant Commissioner's reasoning that the Income-tax Officer did not make these assessment as precautionary ones. When a person comes forward and says that he has made a certain profit, there is no reason for the Income-tax Officer to say that he would make only a precautionary assessment. At any rate, whether the assessment made by him is precautionary or not, has no bearing on the issue before us. The Appellate Assistant Commissioner distinguished the case of D.S. Patil only on this ground, viz., that he was not assessed by the Income-tax Officer. Against the amount included by the Income-tax Officer, in the total income of the assessee, the assessee has come in appeal before us, vide I.T.A. No. 3547 of 1954-55. We are unable to distinguish his case from those of others. Hence, the assessee's contention in the said appeal has to be rejected.
In support of the view taken by the Appellate Assistant Commissioner regarding these six accounts, it was strongly pressed upon us that these persons have withdrawn their profits if not in the account year, at least in subsequent years and that these persons have admitted such withdrawals. Indeed as a matter of fact, these persons made certain affidavits after the Appellate Assistant Commissioner had disposed of the appeals wherein they admitted to have withdrawn the profits and to have utilised them in meeting marriage expenses, construction of house property, purchase of machinery, etc., with a view to improving their agricultural operations. It is said that these affidavits were made at the instance of the Appellate Assistant Commissioner. In our opinion, the apparent withdrawal of profits by the persons shown in the account books and the said affidavits are part and parcel of one scheme and they do not outweigh several other pieces of evidence which go to indicate that these accounts are benami accounts of the assessee.'
9. Some of the facts stated by the Tribunal do not appear to be correct. To mention just one, the alleged benamidars had filed their affidavits before the Appellate Assistant Commissioner in 1953, and not after the Appellate Assistant Commissioner passed his orders on August 5, 1954, as mentioned by the Tribunal. Therefore, the Tribunal was not right in opining that 'indeed as a matter of fact, these persons made certain affidavits after the Appellate Assistant Commissioner had disposed of the appeals.'
10. We do not know how the Tribunal got hold of the assessment records for the years 1940-41 to 1946-47. Those records were not marked as exhibits in the case. In the reference made by the Tribunal it is mentioned that those documents had been referred to by the representative of the department at the hearing. It is not known why he was permitted to make reference to those records when they were not parts of the records of the case. Further from the reference in question it does not appear that the records of the Tribunal show that any reference was made to those documents at the time of the hearing. By the time the Tribunal was called upon to make a reference under section 66(2), its composition had been changed. Only one Member of the Tribunal continued to hold office, the other being a new Member. It is said that the facts in question were gathered from the notes maintained by Sri. G.L. Pophale, the member who continued to hold office. This is hardly a satisfactory way of doing things. The Tribunal in reaching its conclusions appears to have been largely influenced by extraneous materials. We do not know what its decision would have been if it had not allowed itself to be influenced by materials which were not on record. Hence we are unable to agree with the contentions of the counsel for the department that our answer must be in favour of the department as the finding of the Tribunal is a finding of fact. Our view of the matter is fully supported by the high authority of the Supreme Cour : see Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax.
11. For the reasons mentioned above, our answer to the question referred i :
'That the finding of the Appellate Tribunal is vitiated as the same is based on extraneous materials and not properly brought on record.'
12. The department to pay the costs of the assessee. Advocate's fee Rs. 250.