This is a reference under Section 66 (1) of the Indian Income-tax Act (XI of 1922) by the Income-tax Appellate Tribunal. The questions referred to this Court for our answer are the following :-
'(1) Where there are grounds for an Income-tax Officer to suspect the genuineness of a credit entry occurring in the personal account of a third party in the assessees books of accounts, whether the Income-tax Officer can, under Section 23 (3) of the Income-tax Act, required the assessee to prove that the entry represents a genuine credit in favour of that party ?
(2) When an assessee, being required in the circumstances mentioned in question No. (1) above to prove that a credit entry represents a genuine credit a favour of a party, gives an explanation which is false or unbelievable, whether there is anything in law to prevent the Income-tax Officer or the appellate authority from presuming or inferring that the receipt evidenced by the credit entry is a revenue receipt ?
(3) Whether in the circumstances of this case the initiation of the proceedings under Section 34, Income-tax Act, by the respondent was contrary to law and for that reason the assessment is invalid ?'
We may at the outset say that the questions have not been happily worded and do not clearly bring out the points that have been urged before us.
The assessee, Messrs. Mahabir Prasad Munna Lal, is a Hindu undivided family carrying on business as cloth merchants in Generalganj, Cawnpore. Mr. Reoti Raman, Income-tax Officer, completed the assessment for the year 1938-39 on the 19th January, 1939, on the basis of the income from the previous year 1937-38, the total of which after necessary deduction was Rs. 22,325. There was no appeal from this assessment by the assessee and there was no trouble till the next year when the assessment proceedings for year 1939-40 were in progress. The Income-tax Officer for that year was Mr. N. K. Saksena. While examining the books of account for the year 1938-39, which was the relevant year, the Income-tax Officer noticed a credit entry in the name of Hari Krishan. This entry had been brought forward from the previous year. The Income-tax Officer issued notice under Section 23 (3) of the Act with regard to this item and wanted the assessee to prove the identity of Hari Kishan.
It may be mentioned, and the fact is not disputed, that in the assessment year 1938-39, on the basis of the accounts for the year 1937-38, the assessee had included in the list of his liabilities under the head 'sundry creditors' an item of Rs. 14,000 as due to Lala Hari Kishan. He had carried this item forward to the next year 1938-39 and had made an entry in that year a sum of Rs. 14,423-7-0 had been repaid to Hari Kishan and the account had been squared up.
Learned counsel has not disputed the correctness of the procedure adopted by the Income-tax Officer in issuing notice under Section 23 (3) of the Act in connection with the assessment for the year 1939-40.
In Compliance with the notice under Section 23 (3) the assessee produced books from which it appeared that the sum of Rs. 14,000 consisted of three items of Rs. 2,000, Rs. 5,000 and Rs. 7,000 which were alleged to have been deposited by one Hari Kishan in 1937-38. The munim of the assessees firm, Debi Dayal, was examined as regards the identity of this Hari Kishan, and the Income-tax Officer came to the conclusion that his statement was unsatisfactory. Debi Dayal was not able to give any information about this Hari Krishan except the fact that he had been his tenant for about two or two years and a half.
On the 29th November, 1939, the Income-tax Officer completed the assessment for the year 1939-40, and on the 2nd December, 1939, he issued notice under section 34 of the Act requiring the assessee to make a return of his income from all source which was assessable in the year ending the 31st March, 1939. The assessee made a return of Rs. 22,325, but the Income-tax Officer on the 7th February, 1940, came to the conclusion that the sum of Rs. 14,000 standing in the name of Hari Kishan represented suppressed profits, which had been disguised as cash deposit in a bogus name and had, therefore, escaped assessment. The assessee was, therefore, held liable to pay income-tax on a total income of Rs. 36,325.
The assessee appealed to the Appellate Assistant Commissioner of Income-tax who dismissed his appeal on the 21st December, 1940.
The assessee the appealed to the Income-tax Appellate Tribunal, but was unsuccessful and his appeal was dismissed by the Tribunal in the 4th April, 1941. He then applied that a case be stated to this Court under Section 66 (1) of the Income-tax Act for answer of certain questions formulated by him.
This application was granted by the Tribunal. The questions of law which, according to the Tribunal, arose for decision were reframed and in the form in which they now are, they have been set out at the beginning of the judgment.
The greater part of our time was, however, taken by the counsel for the assessee on question No. (3), which, according to him, was the main question for decision. We have already said that the question had not been happily framed. Learned counsel for the assessee has, however, urged that his objection to the initiation of the proceedings under Section 34 is based on the ground that the Income-tax Officer had no definite information, which had come into his possession, from which he could discover that any income, profit or gain had escaped assessment in the year 1938-39.
So far as we have been able to understand learned counsels argument, his first contention is that the Income-tax Officer had in his possession no such information which could lead to the information had come into his escaped assessment, and secondly that no information had come into his possession but that he himself had made certain enquiries and was dissatisfied with the result; in other words, he had found that the statement made by the assessees munim about Hari Kishan was not a satisfactory statement.
We have already said above that learned counsel for the assessee raised no objection to the property of the notice under section 23 (3). The result of issuing that notice was that, to satisfy the Income-tax Officer about the entry relating to Hari Kishan, the assessee produced his books and his minum. The Income-tax officer examined the books and examined the munim and made the following discovery which can be summarised thus :-
1. That before the issued of the notice under Section 34 the Income-tax officer had established to his own satisfaction that the entry of Rs. 14,000 in the books of the assessee in the name of Hari Kishan was a false entry;
2. That the statement of the munim of the assessees firm that Hari Kishan was his tenant and had deposited the sum of Rs. 14,000 was false and that there was no such person of the name of Hari Kishan;
3. That the assessee could not gave any satisfactory explanation of this entry of Rs. 14,000 in his books and that this amount must have come into his hands from some source which the assessee did not desire to disclose; and
4. That the deposit of Rs. 14,000 did not carry any interest.
In the case of Badar Shoe Stores, In re, to which one member of this Bench was a party, the words 'definite information' coming into 'the possession of the Income-tax Officer' by reason of which he 'discovers' that some income has escaped assessment were carefully considered, and it was held that the words were used in Section 34 'to protect the subject against as assault by the Income-tax Officer based upon mere suspicion' and that it must be 'something more than mere gossip or rumour,' but that it need not necessarily be information of facts so long as 'the information is definite and does lead to that belief.' They have further explained this by saying that it means either direct evidence or circumstantial evidence. The word 'discover,' they have pointed out, 'must necessarily always involve a measure merely of belief, and, provided that belief of an honest and reasonable person based upon reasonable grounds' that is quite enough.
We have already set out the facts that had come to the Income-tax Officers possession before he issued the notice under Section 34. It may be that he had informed himself in the course of the assessment proceeding for the year 1939-40, but all that information, however it may have come into his possession, was available to him before he issued the notice under section 34, and we are not prepared so say that the information that he had received was not such as could lead a reasonable person acting honestly to believe that a part of the income of the assessee had escaped assessment.
Our attention has been drawn to another decision of this Court in the case of Kedar Nath v. Commissioner of Income-tax, U. P., C. P. and Berar (Miscellaneous Case No. 14 of 1945). In that case the assessee had been assessed for the year 1940-41. When, however, the successor of the Income-tax Officer took up the assessment for the year 1941-42, several facts came into his possession. According to the statement of the case the Income-tax Officer came to know that 'the assessee was entering into share transactions, including speculative transactions, through banks, brokers and his own brother in Calcutta; he knew of overdrafts from banks..... and almost immediate sales with a view to making profit.' These facts, according to the statement of the case, were all new facts which had not been known to his predecessor and which had come to his knowledge in the course of the assessment for the year 1941-42. He then issued notice under Section 34 and there was re-assessment on a fresh basis as a result of that notice. The question referred to this Court was :-
'Whether in the circumstances of the case the Income-tax Officer was entitled to re-open the assessment under Section 34 of the Act ?'
A Bench of this Court came to the conclusion that there was no justification for issuing the notice under Section 34 on the ground that the discovery was 'the result of a further investigation or a closer study of the facts and circumstances of the case' and that 'such discovery would not,' therefore, 'be in consequence of definite information within the meaning of the section.' If we may say so, with great respect, the learned Judges, who decided the case, did not keep clearly in mind the two stages. The investigation was made in connection with the assessment for the year 1941-42 and in the course of that investigation certain facts came into the possession of the Income-tax Officer which made him believe that a portion of the income had escaped assessment in 1940-41 and it was after these facts had come into his possession that he had issued the notice.
We can see the objection in allowing an Income-tax Officer to make investigation or enquiry before issuing notice under Section 34 with the object of re-opening a previous years assessment. In such a case the assessee would be quite justified in refusing to give any information. But we cannot see any justification for the view that, if during the course of an enquiry for assessment of a particular year the Income-tax Officer comes into possession some facts which relate to a previous year, he cannot issue notice under Section 34. There seems to be no good reason for the view that the information having come into his possession in the course of his enquiry for assessment for a subsequent year he cannot rely on that information and issue notice under Section 34 if he honestly believes that the income has escaped assessment. The facts stated in the statement of the case that the definite information that had come into the possession of the Income-tax Officer in the course of the enquiry for 1941-42 which made him believe that some income had escaped assessment was were, we say so with great respect, not given due weight by the Honourable Judges who decided the case of Kedar Nath, referred to above.
We are in full agreement with the view expressed in the case of Badar Shoe Stores, already mentioned in an earlier part of the judgment, and we feel it, therefore, unnecessary to discuss the meaning of Section 34 in any great length.
Our answer to the third question referred to us is, therefore, in the negative.
As regards the first question, we cannot say that there were no grounds for the Income-tax Officer to suspect the genuineness of the credit entry. We have already set out the conclusions that the Income-tax Officer had arrived at after his examination of the books and after the statement of the munim examined on behalf of the assessee. If the case had come before us in appeal, we could not have come to the conclusion that the Income-tax Officers estimate of the circumstances or of the evidence was ironed. No arguments were addressed to us on the second part of this question and learned counsel for the assessee admitted that the notice under Section 23 relating to assessment for the year 1940-41 was a proper notice. The Income-tax Officer could, therefore, require the assessee to prove that the entry represented a genuine credit in favour of a third party.
The second question, if we may say so, is still more unsatisfactory. If an assessee give an explanation which is false or unbelievable, there is nothing in law to prevent the Income-tax Officer or the appellate authority from inferring that the receipt evidenced by the credit entry is a revenue receipt. In each case it would be a question of fact and the answer must, in every case, depend on the finding whether the inference is a reasonable inference from the assessees failure to prove his case. There is nothing in law to prevent an inference and the assessee fails to satisfy the Income-tax Officer or the appellate authority the source from which the money came. That is our answer to this question. We may mention that the point was not seriously pressed.
We consider that the department is entitled to its costs of this reference. We assess the fee of the counsel for the department at Rs. 200. The fee certificate must be filed within six weeks.
A copy of the judgment shall be sent to the Income-tax Appellate Tribunal under the seal of the Court and the Signature of the Registrar.
Reference answered accordingly.