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Commissioner of Income-tax Vs. Maduri Rajaiahgari Kistaiah - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 27 of 1973
Judge
Reported in[1979]120ITR294(AP)
ActsIncome Tax Act, 1961 - Sections 256(2)
AppellantCommissioner of Income-tax
RespondentMaduri Rajaiahgari Kistaiah
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateJ.V. Srinivasa Rao and ;M.J. Swamy, Advs.
Excerpt:
.....form other sources - assessee challenged ito's order - assessee failed establish unexplained cash credits as undisclosed income from known sources - held, ito right in treating unexplained cash credits as income from other sources. - - the ito, the aac as well as the tribunal have concurrently held that the assessee had not substantiated his claim but failed to establish that the sum of rs. 51,008 towards unexplained cash credits under the head 'other sources 'it is now well settled that the onus of proving the source of a sum of money found to have been credited by the assessse either in his name or in the names of third parties is on the assessee who must be held to have the special knowledge about the circumstances under which the credit was made by him or by his agent or..........appellate tribunal were justified in holding that a separate addition on the basis of unexplained cash credits was not permissible in view of the addition made on the basis of gross profit '2. in order to appreciate the scope of the question, it is necessary to briefly state the material facts that gave rise to the same. the respondent-assessee is a firm constituted by two partners, sri maduri rajeswara rao and sri maduri narasimha rao, carrying on business in cloth. for the assessment year 1960-61 (corresponding accounting year commencing from november 11, 1958, and ending with november 30, 1959), the ito did not accept the returns submitted by the assessee but added two amounts, rs. 47,348 towards extra profit in the trading account, and rs. 1,41,729 towards explained cash credits.....
Judgment:

Kondaiah, J.

1. At the instance of the CIT and pursuant to the direction given by this court, the Income-tax Appellate Tribunal, Hyderabad Bench, submitted under Section 256(2) of the I.T. Act, 1961, an agreed statement of the case for our opinion on the following question :

' Whether, on the facts and in the circumstances of the case, the Appellate Assistant Commissioner and Income-tax Appellate Tribunal were justified in holding that a separate addition on the basis of unexplained cash credits was not permissible in view of the addition made on the basis of gross profit '

2. In order to appreciate the scope of the question, it is necessary to briefly state the material facts that gave rise to the same. The respondent-assessee is a firm constituted by two partners, Sri Maduri Rajeswara Rao and Sri Maduri Narasimha Rao, carrying on business in cloth. For the assessment year 1960-61 (corresponding accounting year commencing from November 11, 1958, and ending with November 30, 1959), the ITO did not accept the returns submitted by the assessee but added two amounts, Rs. 47,348 towards extra profit in the trading account, and Rs. 1,41,729 towards explained cash credits under the head 'Income from other sources'. On appeal, the A AC sustained the addition of Rs. 47,348 to the account of gross profits but, however, the addition of Rs. 1,41,729 as income from undisclosed sources was found referable to two periods, viz., November 11, 1958, to Aprill, 1959, and April 1, 1959, to November 30, 1959. It was found that the unexplained cash credits pertaining to the period prior to April 1, 1959, do not fall under the year of account and, hence, they have to be deleted. The amount of unexplained cash credits for the period subsequent to April 1, 1959, was found to be Rs. 51,008. Since addition of Rs. 47,348 was upheld by him on account of low gross profit, the AAC thought that no further addition on account of cash credits was justified and deleted the addition of Rs. 51,008.

3. Aggrieved by the decision of the AAC, the ITO preferred an appeal to the Tribunal. The Tribunal, on the material on record, found that the assessee has not substantiated its claim that the sum of Rs. 51,008 represents genuine credit but, however, rejected the contention of the departmental representative that the income-tax authorities are entitled to add Rs. 51,008 under the head ' Income from other sources ' as the amount represents unexplained cash credits besides the addition of Rs. 47,348 towards the gross profit account of the known source of business. Hence this reference.

4. Sri P. Rama Rao, the learned standing counsel for the income-tax department, contended that the ITO is justified in adding the unexplained cash credits under the head ' Income from other sources ' besides the addition of Rs. 47,348 as extra profit of the known business source and the view taken by the Tribunal and the AAC in this regard is illegal and erroneous, and relied upon an unreported decision of this court in R. C. No. 13/68 dated 11-11-1970. This claim of the department is resisted by Sri J. V. Srinivasa Rao and Sri M. J. Swamy, the learned counsel appearing for the assessee contending, (i) that the cash credits of Rs. 51,008 are genuine credits; (ii) that it is not open to the ITO to make any further addition of Rs. 51,008 towards cash credits separately when once Rs. 47,348 has been added as extra profit in trading account ; and (iii) that, in any event, since the cash credits are found in the very books of business, they must be construed to be unexplained cash credits relating to undisclosed business income which was subjected to an estimate by addition of Rs. 47,348.

5. The assessee did not prefer any appeal against the decision of the AAC confirming the addition of Rs. 47,348 as extra profit in the trading account of the business made by the ITO. Hence, the assessment to the extent of that addition towards the gross profit account of the business has been allowed to become final. In the appeal before the Tribunal, the question was whether the ITO was competent and justified in making a further addition of Rs. 51,008 towards the unexplained cash credits under the head ' Income from other sources ' having made an addition of Rs. 47,348 as extra profit in the trading account. The ITO, the AAC as well as the Tribunal have concurrently held that the assessee had not substantiated his claim but failed to establish that the sum of Rs. 51,008 found in the form of cash credits in the accounts of the assessee really represented genuine loans or credits. This finding is one of fact which has been arrived at by the Tribunal on the material on record. Such finding is binding on this court.

6. It next falls for determination whether the ITO had jurisdiction and was competent to make the further addition of Rs. 51,008 towards unexplained cash credits under the head ' Other sources '. It is now well settled that the onus of proving the source of a sum of money found to have been credited by the assessse either in his name or in the names of third parties is on the assessee who must be held to have the special knowledge about the circumstances under which the credit was made by him or by his agent or clerks in the books of account maintained by him and if he fails to establish the source of such a cash credit satisfactorily, such amount can be treated by the taxing authorities as taxable income. It is for the assessee and not for the department, either to establish satisfactorily by independent evidence that the receipt was not income or that even if it was income, the same was not taxable as it was exempt or already taxed under a different head under the provisions of the I.T. Act. (See Govinda-rajulu Mudaliar v. CIT : [1958]34ITR807(SC) , Kale Khan Mohammad Hanif v. CIT : [1963]50ITR1(SC) and CIT v. Devi Prasad Vishwanath Prasad : [1969]72ITR194(SC) . The assessee may have income which may fall under one or more of the heads of income specified in Section 14 of the I.T. Act, 1961, i.e., (a) salaries, (b) interest on securities, (c) income from house property, (d) profits and gains of business or profession, (e) capital gains, and (f) income from other sources. The moment the ITO estimates the income of an assessee under the head ' Profits and gains of business or profession ', it is not open to him to make any additions to the income of the assessee under that head. But, however, he is not only not precluded from making, but entitled to make, additions relating to the income of the assessee from salaries, interest on securities, income from house property, capital gains and income from other sources, if the facts and circumstances so warrant. The ITO is not competent and has no jurisdiction to make any additions relating to cash credits found to have their source from a business income not disclosed in the books of account relating to that particular year. However, if the cash credits in question have no connection with the business income, such unexplained cash credits cannot be treated as income from the business not accounted for. The undisclosed source may pertain to any other business not disclosed by the assessee. Where the ITO finds unexplained cash credits, it is open to him to add such sums as income from an undisclosed source. The head ' Income from other sources ' is not in any way concerned with the income from a known or disclosed source such as profits and gains of business falling under Section 14(d) of the I.T. Act, 1961. There is no presumption that any cash credit entry found in the business accounts of the assessee relates to his concealed income from the very business. The burden of proving the cash credits is always on the assessee, as the source of unexplained cash credits is within his special knowledge. The ITO need not establish by independent evidence that a particular cash credit pertains to a particular source of income of the assessee. It is open to the assessee within whose special knowledge the source of the credit is, to plead and establish that a particular credit relates to, or has any connection with, the undisclosed income from his known business in the year of account and, therefore, it cannot be added once again when the business income itself has been made subject to estimate. The income from other source is different and distinct from undisclosed income from a known source, whether it is by business or any other. The same receipt of income is not exigible to double taxation. The ITO cannot estimate the gross profit from the disclosed or known business of the assessee and add to it the cash credits forming part of the undisclosed income of the same business. But, however, where the assessee fails to satisfactorily explain that the unexplained cash credits found in his books of account form part of, or relate to, the undisclosed or unaccounted profits of the business, or known source of business already taxed either on the basis of the return of income or by resorting to an estimate, the ITO is having ample power and jurisdiction to treat such sums as income from an undisclosed source and tax them accordingly. Repelling the contention of the assessee that the addition of unexplained cash credits was not justified when once the business profits of the assessee have been estimated under Section 13 of the Indian I.T. Act, 1922, on gross profit percentage basis, this court in G. M. Chenna Basappa v. CIT : [1958]34ITR576(AP) upheld the addition of unexplained cash credits under the head ' Income from other sources ' and the estimate of the business income as ' the two additions are traceable to two distinct heads, namely, one attributable to the business activities of the assessee and is thus an undisclosed profit from the known source, and the other to profits from an undisclosed source '. The Supreme Court in Kale Khan Mohammad Hanif v. C/r : [1963]50ITR1(SC) held that the ITO having assessed the income of the assessee on a percentage basis, was also justified in treating the unexplained cash credits as profits from an undisclosed source. Repelling the contention that the entries found in the books of account of the business must be referable to the income of the business which had been computed on the basis of an estimate without accepting the return filed by the assessee, which amounts to double taxation of the same income, the learned judge, A. K. Sarkar J., speaking for the court, ruled thus (p. 5) :

' The question would seem to suggest that because the income from a disclosed source has been computed on the basis of an estimate and not on the basis of the return filed in respect of it, an income represented by a credit entry in the books of account of that source cannot be held to be income from another and undisclosed source. We do not see why it cannot be so held......if the income is treated as one from an undisclosed source which the question postulates, it is not treated as income of the disclosed source which had previously been assessed to tax and, therefore, there is in such a case no double taxation. It is not a case where the income sought to be taxed was held to be undisclosed income of a disclosed source, the income of which source had previously been taxed on the basis of an estimate......the question whether income represented by an entry in the books of a business is income of that business or of another business would have to be decided on the facts which showed the business to which it belonged. But quite clearly the answer to that question would not depend on whether the income from the first mentioned business had been computed on the basis of a return filed or of an estimate of the income made by the taxing authorities......Therefore, it cannot be said that the taxing authorities were precluded from treating the amounts of the credit entries as income from undisclosed sources simply because the entries appear in the books of a business whose income they had previously computed on a percentage basis.'

7. The same view has been reiterated by the Supreme Court in C1T v. Devi Prasad Vishwanath Prasad : [1969]72ITR194(SC) . The learned judge, Shah J. (as he then was), speaking for the court, ruled thus :

' There is nothing in law which prevents the Income-tax Officer in an appropriate case in taxing both the cash credit, the source and nature of which is not satisfactorily explained and the business income estimated by him under Section 13 of the Income-tax Act, after rejecting the books of account of the assessee as unreliable......... Whether in a given case the Income-tax Officer may tax the cash credit entered in the books of account of the business, and at the same time estimate the profit must, however, depend upon the facts of each case...... Where there is an unexplained cashcredit, it is open to the Income-tax Officer to hold that it is income of the assessee and no 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.'

8. The aforesaid decisions of the Supreme Court are authorities for the proposition that the fact that the entries are found in the books of account of the business whose income had already been computed on the basis of the estimate but not on the return filed by the assessee, not only does not prevent the ITO from treating, but entitles him to treat, the unexplained cash credits as income from an undisclosed source which falls under the head 'Income from other sources' unless the assessee, by independent and satisfactory evidence, establishes that those amounts relate or are referable to the undisclosed income of the very known or disclosed source, namely, the business whose income had already been estimated. We may add that a Division Bench of this court consisting of one of us (Kondaiah J.) and Sriramulu J in C1T v. Janab Mohd. Suleman (Referred Case No. 13 of 1968 dated 11-11-1970) and Kesarimal Sohanraj v. CIT : [1972]84ITR519(AP) expressed the same view on similar facts and circumstances.

9. We shall now advert to the decisions cited by the assessee's counsel in support of his contention that the sum of Rs. 51,008 unexplained cash credits must be treated as undisclosed income from the very business of the assessee as those entries are found in the books of account of its business. True, as submitted by the assessee's counsel, the Supreme Court in Lakhmichand Baijnath v. CIT : [1959]35ITR416(SC) observed: ' When the amount is credited in business books, it is not an unreasonable inference to draw that it is a receipt from business '. The context in which this observation was made has to be noticed. In that case, the assessee's claim that the sum of Rs. 2,30,346 found in the business accounts of the assessee represented the price of the family jewels sold, was rejected and the same was found to be the concealed business profits and that finding of the Tribunal was held to be binding on the court and the same could not be interfered with in a reference under Section 66 of the Indian I.T. Act, 1922. Even the Supreme Court treated the credits as business receipts which were chargeable to tax, rejecting the explanation of the assessee that it represented the sale price of family jewels. Hence, that case does not assist the assessee in the present case. The next case that is relied upon is Mansfield & Sons v. CIT [1963] 48 ITR 254. Therein, it was held that where an unexplained cash credit is found in the business accounts of an assessee, such amount is taken to be income from an undisclosed source and the same can be treated as business income if the assessee has no other source of income, and taken into account as business income for purposes of excess profits tax. That decision also is not a case of the type with which we are now concerned in this reference. Daulatram Rawatmull v. CIT : [1967]64ITR593(Cal) is the next case cited by the assessee's counsel. In that case, the Calcutta High Court, on a consideration of the facts, held that the concealed income in the form of fixed deposits entered in the account books was all income from the assessee's very business disclosed, as the assessee was found to have no other source of income. It was observed at page 618 thus :

' There is nothing on record to show that the firm had any source of income other than business. Therefore, in our opinion, it is not unreasonable to hold that any amount representing secret income arose out of the business of the firm.

We, therefore, hold that the fixed deposits represented income from business and that they were assessable......'

10. The aforesaid cases relied upon by the assessee's counsel are, therefore, distinguishable on facts and they are not on all fours with the case on hand.

11. In the present case, the assessee did not succeed in establishing the cash credits amounting to Rs. 51,008 as genuine loans. The assessee's stand from the beginning and also before this court is that the cash credits are genuine. The assessee never took the specific stand that these unexplained cash credits are referable to the income from,, the disclosed source, viz., business, whose income has been estimated by the ITO by adding a sum of Rs. 47,348 to the profits disclosed in the business accounts. This addition has been sustained by the AAC and no further appeal has been preferred by the assessee to the Tribunal. The submission of the assessee's counsel that his client did not choose to lead evidence to show that the unexplained cash credits pertain to the business income as the definite stand taken by the assessee from the beginning is that they are genuine will not advance this case. The law on the subject being well settled as referred to earlier, the assessee must be held to have failed to establish that the unexplained cash credits are referable to the business income which has been already estimated by the ITO. In the circumstances, we have no hesitation to hold that the ITO was competent and justified in holding that the unexplained cash credits are income from an undisclosed source which falls under the head ' Income from other sources ' in spite of the fact that the business income has been estimated rejecting the return filed by the assessee. The AAC and the Tribunal are, therefore, not justified in holding that a separate addition on the basis of unexplained cash credits was not permissible in view of the addition made on the basis of gross profit.

12. For all the reasons stated, we answer the question in the negative, in favour of the CIT and against the assessee. The assessee shall pay the costs of this reference. Advocate's fee fixed at Rs. 250.


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