The judgment of the court wads delivered by
BHARGAVA J. - The question referred by the Income-tax Appellate Tribunal for the opinion of this court is :
'Whether there was any material to warrant the finding that the sums of Rs. 16,200 and Rs. 13,700 in dispute were profits of the assessee liable to tax ?'
The assessee in this case is a registered firm having three partners, Pooranchand, Shivji Bhai and Parshotam. Parshotam is the son of Shivji Bhai. The proceedings relate to the assessment year 1945-46 for which the relevant previous year ran from 29th October, 1943, to 13th October, 1944. The assessee firm submitted a return on the basis of the account books and the trading result as disclosed was accepted by the Income-tax Officer with only minor additions which additions were subsequently deleted by the Appellate Assistant Commissioner. In one respect, however, the account books were not accepted. That related to these two entries of credits of sums of Rs. 16,200 and Rs. 13,700 in the accounts of the assessee firm in the name of Mahesh Chandra Agrawal, minor son of Pooranchand, partner, and of Channalal Agrawal father of Pooranchand, partner. In respect of these two items the Income-tax Officer called upon the assessee to disclose the real source of these amounts credited in the books of account of the assessee and held on rejection of the explanation given by the assessee that these two amounts were income of the assessee from undisclosed sources. On appeal the Appellate Assistant Commissioner upheld the decision though coming to the view that these amounts represented income not from entirely undisclosed sources but from black-marketing activities of the firm. The assessee went up in appeal to the Income-tax Appellate Tribunal which upheld the decision for adding these amounts to the profits of the assessee firm and dismissed the appeal. The appellant moved the Income-tax Appellate Tribunal under section 66(1) of the Income-tax Act to state the case to this court on the ground that the decision for holding that these two items represented taxable profits of the assessee was given without any material or evidence. The Tribunal rejected that application. Thereupon the assessee moved this court under section 66(2) of the Income-tax Act and the court directed the Tribunal to state the case after framing the question as reproduced above. The statement of the case has now been received and we have heard learned counsel for the parties on this question.
In dealing with the question referred to us for opinion it will be convenient to take each item separately. The first item is the sum of Rs. 16,200 credited on various dates in an account in the name of Mahesh Chandra Agrawal who is admittedly a minor son of one of the partners, Pooranchand. The circumstances and facts which appear from the appellate order of the Tribunal, the statement of the case and the documents which form part of the statement of the case as annexures relating to this point are as follows :
(1) That this sum of Rs. 16,200 was credited in the account of Mahesh Chandra Agrawal during the relevant previous year on various dates between 18th of April, 1944, and 7th of September, 1944, through Pooranchand himself.
(2) That there was a similar account in the name of Mahesh Chandra Agrawal in the previous year corresponding to the preceding assessment year 1944-45 and in the account of that previous year there were transfers of some credits and debits from the account of Pooranchand to the account Mahesh Chandra Agrawal.
(3) In the objection which was filed on behalf of the assessee no attempt was made to claim that the moneys shown in the account actually belonged to Mahesh Chandra, Minor, who being the son of Pooranchand was under his guardianship.
On the other land it was admitted that Pooranchand was operating on this account.
(4) The explanation which was offered on behalf of the assessee for these entire of deposits in the account of Mahesh Chandra Agrawal was merely that these deposits were made out of the the withdrawals made at earlier stages from the same account. But this explanation was rejected by the Tribunal on the ground that the assessee had failed to explain why these withdrawals had been made, had failed to connect those withdrawals with the deposits through any other accounts or data and had failed to show that those withdrawals had been kept intact so that they could be utilized for the purposes of making these deposits.
The question that thus follows for decision is whether these facts and circumstances found by the Tribunal can be said to be material on the basis of which the Tribunal could come to a finding that these deposits were the revenue income of the assessee liable to income-tax. It appears to us that these circumstances taken together are such that it is possible to draw an inference that these deposits did represent income of the assessee from undisclosed sources. The facts show that when the money actually came into the accounts of the assessee firm it was brought in by the one of the partners Pooranchand Under the law : of partnership, Pooranchand was entitled to handle the funds of the partnership business and consequently he could have in his possession moneys belonging to the partnership as well as his own moneys. The explanations given on behalf of the assessee nowhere asserted in plain language that the money which was being deposited by Pooranchand was his own money and in fact, as we have noticed above, it was not even asserted that it actually belonged to Mahesh Chandra, his minor son. The explanation that the money was deposited out of the withdrawals also appear to have been rejected on the basis of circumstances and reasons which follow relevant considerations and on the basis of which the Tribunal was entitled to act. It is true that there was no requirement in law that Pooranchand should gave maintained a separate account of the moneys withdrawn by him in order to show that the subsequent deposits were made out of those withdrawals but, when such an explanation was tendered on behalf of the assessee, it was for the assessee to give some evidence in proof of that explanation. No attempt was made even to file an affidavit in support of the explanation which was put forward. The withdrawals were by a partner and not a stranger to the firm. This was significant as the partner was a person who could have funds of the assessee firm in his hands as he was entitled to deal with moneys belonging to the firm in his capacity as a partner. This was, therefore, not a cast where the fact that withdrawals from the account were available for making re-deposits had to be proved by third person with whom the assessee had no connection. The Tribunal found that the assessee : firm failed even to give any other data from which it could be inferred that there season connection between the withdrawals and the deposits. In all these circumstances it is not possible for us to hold that in this case there was no material before the Tribunal to arrive at the finding which did. It is not competent for us to examine how far the inference drawn by the Tribunal is a correct or incorrect one. The inference has been drawn from facts which the Tribunal found and itself an inference of fact. In drawing the inference, irrelevant material was not relied upon and the inference that was drawn from the facts was a possible and a reasonable inference. In these circumstances the principles laid down by the Supreme Court in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, lead to the conclusion that this court cannot upset the decision of the Tribunal on this point. Learned counsel for the assessee, however, contended that there was at least no material on the basis of which the Tribunal could come to a finding that this sum of Rs. 16,200 represented profits belonging to the assessee firm when it could also have been held that this sum represented profits which may have been earned by Pooranchand, partner, in his individual capacity from some undisclosed sources of his own. In support of this proposition learned counsel referred us to a decision of the Bombay High Court in Narayandas Kedarnath v. Commissioner of Income-tax. In that case also a very similar question had arisen and, on the facts and circumstances of the case, the Bombay High Court held that the Tribunal was not justified in holding that the amounts shown as credited in the account of certain partners were income of the assessee firm. The facts of that case were, however, different from the facts of the case before us. In that case, the Bombay High Court reiled on the circumstance that the Tribunal had found as a fact that the amounts in question had been actually brought in from Jaipur by means of drafts of the Imperial Bank of India, Jaipur, and there was no evidence at all to connect the assessee firm with any moneys at Jaipur as the assessee firm had no business at all there. In that case also, the partner had failed to prove there own sources from which they had earned those profits at Jaipur but, in spite of their failure, it was held that the profits could not be treated as the profits of the firm. The decision in that case clearly turned on the facts of that case which were as stated above. While the moneys were brought in from Jaipur by the partners and there was no evidence to connect the assessee firm with any transactions for earning profits in Jaipur, the only solitary fact which remained was that the moneys had been deposited on the accounts of the firm by the partners. There were no other facts and circumstance in addition of that which could have led to the inference that the moneys belonged to the assessee firm and not to the partners themselves. In the case before us the facts and circumstances enumerated above show that the position is quite different. The moneys had been deposited in an account in the name of a minor son of a partner. They have not been brought in by straightforward deposits in the name of the partner himself. There is no finding at all that the moneys were brought by Pooranchand, partner, or Mahesh Chandra Agrawal from any place and in fact there was not even an indication that either of them had any other sources of income. There was no fact on the record which might indicate that the moneys come from a place with which the assessee firm had no connection. Consequently, it cannot be said that, on the facts and circumstances which appeared in this case, the reference which was drawn by the Tribunal was not a possible or reasonable inferences and consequently, the question in so far as it relates to the sum of Rs. 16,200 must be answered against the assessee.
The position with regard to the other amount of Rs. 13,700 appears to us to be quite different. This sum is entered in an account which stands in the name of Channalal Agrawal, the father of Pooranchand, partner. In the objection which was field on behalf of the assessee firm it was stated that Channalal had another independent business of his own. Further Channalal being an adult person there could be no inference that either moneys deposited in his account could belong to Pooranchand, partner, or to the firm of which he was a partner. It is true that in this case also the Income-tax Appellate Tribunal did not accept the explanation given on behalf of the assessee that this amount was received as a loan from Channalal. The mere non-acceptance of that explanation does not, however, provide material for a finding that this sum represented income of the assessee firm. There is no finding of fact that the money when deposited in the accounts of the firm came from the hands of any person who could, in the natural course of circumstances, be in possession of the firms moneys such as a partner. No doubt Channalal was the father if one of the partners but there was nothing to show that Channalals funds were being manipulated by Pooranchand or by any one else connected with the assessee firm. On the face of the accounts, the receipt did not appear as a receipt of money belonging to the assessee firm. In order to tax this receipt as income of the assessee it was necessary to arrive at three finding; first fo all there had to be a finding that the money received belonged to the assessee firm, secondly, the source of that receipt had to be determined, and finally the question had to be decided whether the money having been found to belong to the assessee and coming from a particular source or an undisclosed source amounted to a receipt of such a nature that it was liable to tax, which and that it was a revenue receipt and not a capital receipt or receipt of some other nature which is not liable to charged with income-tax. It is the first requirement of showing that the ownership vested in the assessee which is the most important one of the three. Until a finding is given that the receipt represents money belonging to the assessee, there can be no question of taxing the amount received as income of the assessee. The burden of providing that a particular receipt represents money belonging to the assessee lies on the Department when, on the face of the record or accounts, it does not appear to be so. In the accounts in the present case the moneys appear as belonging to Channalal, a third person, who himself had no interest in the assessee firm. No doubt the explanation which was given on behalf of the assessee that this receipt represented a loan received from Channalal was not accepts by the Income-tax Appellate Tribunal but that circumstances by itself cannot give rise t any inference that the money belonged to the assessee. The case is different where the explanation set forth by the assessee is found to be unreasonable or false, in which case that circumstances will be relevant for deciding whether the receipts represents moneys belonging to the assessee or to some other person. This principle was laid down by this court in Mithoo Lal Tek Chand v. Commissioner of Income-tax. It was there held :
'When the assessee furnishes an explanation, if that explanation as unsatisfactory, that may in itself be a circumstance which the Income-tax Officer may be entitled to take into consideration but it end not necessarily, in every case, lead to the conclusion that the receipt is a receipts a revenue taxable as income received in a particular year. The question must always remain a question of fact which has to be decided on the materials available. In each case the revenue authorities are entitled to take into consideration the fact the explanation given by the assessee either unreasonable or is false and then to consider whether that circumstances alone or other materials available along with that circumstance would entitle them to hold that the amount so deposited represented the undisclosed income of the assessee in the year in question.'
The decision in that case was further explained by the same Bench in a subsequent case reported as Sheo Narain Lal, in re, where it was stated :
'Similar observations were made by us in Mithoo Lal Tek Chand v. Commissioner of Income-tax, where we pointed out that if and assessee gives explanation which is false or unreasonable, that may be a circumstance which might entitle the Department to hold against the assessee, but, the burden in such cases being on the Department, the mere rejection of an explanation does not necessarily lead to the result that the case of Department must be correct, nor can it be used as positive evidence to prove their case against the assessee.'
In these two cases, thus, distinction was drawn between cases where the explanation given by the assessee is found to be false or unreasonable, and cases where the explanation is, no doubt, rejected but it is not found to be false or unreasonable or unsatisfactory. In the latter type of cases, the explanation is rejected usually on the ground that the evidence tendered by the assessee in support of the explanation is not satisfactory, that the explanation has not been proved. In a case where the explanation is only rejected as not proved or for want of proof, no positive circumstance comes into existence which provides material for the Tribunal to draw an inferences against the assessee and the inference has to be drawn on other materials available to the Income-tax Appellate Tribunal. In the case before us also, the only finding which the Tribunal gave was that the explanation given on behalf on the assessee that the sum was received from Channalal as a loan could not be believed and had to be rejected. The mere rejection of that explanation provides no material for an inference that the receipt of money appearing in the accounts as belonging to Channalal really belonged to the assessee firm. To give that finding the Tribunal had to find some other facts. The facts as indicated by the Tribunal in its appellate order, the statement of the case and the various annexure attached to the statement of the case nowhere include any other fact which would be relevant for holding that this receipt of Rs. 13,700 belonged to the assessee. In this connection, learned counsel for the Department ruled very greatly on a very recent decision of the Supreme Court in Govindarajulu Mudaliar v. Commissioner of Income tax. Having carefully examined the decision of their Lordships of the Supreme Court, we find that the principle which the learned counsel for the Department wanted to be deduced from that decision does not all the follow. In that case also, there was an entry of certain amounts having been deposited in the account books of a firm in the name of one of the partners. But the question that arose in that case was quite different from the question that has arisen in the present case before us. In that case, the proceedings in which the dispute arose related to the assessment of the partner in his personal capacity and not to the assessment of the firm in the books of account of which the credit entry had appeared. The money in the books of account in that case, as we have stated earlier, showed these moneys as belonging to the assessee partner and to have been received by the firm from him. No inference was drawn by the Supreme Court that the amounts deposited represented revenue receipts of the firm. In fact the ownership of those amounts, according to the account books, vested in the assessee partner and this was accepted on all hands. Neither the firm claimed to be owner of those amounts nor did the partner contend that the firm was the owner of those amounts. The amounts having been found to belong to the assessee partner, the question then arose whether they were taxable revenue receipts in the hands of that assessee partner. For that purpose the assessee was called upon to give an explanation. The assessees explanation was in two parts. For a sum of Rs. 80,000, his explanation was that this sum represented profits which had been earned by his father who had kept these profits with himself till the died and that just prior to his death he had entrusted them to the assessees aunt who died subsequently and who before her death handed over this amount to the appellant. As regards the balance of about Rs. 42,000 the explanation of the appellant was that they represented profits earned in another partnership business which the assessee had carried union certain earlier years. The Tribunal giving its finding of fact held that the explanation that referred to the sum of Rs. 80,000 was false, whereas the explanation with regard to the remaining amount of Rs. 42,000 was not established. It was on these facts and findings that the Supreme Court expressed the view that it was open to the Income-tax Officer to hold that the income must be the concealed income of the assessee. It will thus be seen that in the case before the Supreme Court no occasion arose to draw an inference with regard to the ownership of the amounts in question. They were admittedly owned by the assessee and the only question that fell our determination was whether being amounts belonging to the assessee, they were revenue income liable to income-tax. For that purpose, the source from which the assessee had received those amounts had to be determined. On the question of determination of the source, the burden was no doubt placed on the assessee. The case was decided on the basis that it was for the assessee not only to explain the sources from which he had received the moneys but to affirmatively prove that those were the sources from which he had received the money. A similar principle was also lad down by the Andhra High Court earlier in Raghava Reddi v. Commissioner of Income-tax. That is a principle which is not at all for consideration before us. The basis of the decision in those two cases appears to have been that once a finding of fact was given that a certain amount belonged to the assessee the burden lay on the assessee to prove it sources as that was a fact within the assessees special knowledge and which the Income-tax authorities could not be expected to disclose. In none of those cases was any inference drawn that the money appearing in the books of account in a firm as belonging to another person really belonged to the firm merely because the firm, when being assessed, failed to substantiate the correctness of the entry by adducing sufficient proof for that purpose. The very basis of assessing an income in the hands of a person is the ownership of the amount being taxed vesting in that very person and the burden of establishing that fact from some material rests initially on the Income-tax Department in case that sum is not admitted by the assessee to be his own income or receipt. In such a case, the assessee may be required to give and explanation in respect of that entry but the mere rejection of that explanation given by him without a finding that the explanation is unsatisfactory or unreasonable or false, does not provide any material for an inference or finding that the money belongs to the assessee and not to the person to whom it purports to belongs according to the entry in the books of account, particularly when that person is one who would not, in the natural course of business, be in possession of assets of the assessee firm, who is not shown to be in possession of the assets of the assessee firm, so that he was not in a position to make the deposit by utilizing the income of the firm itself. In the case of Channalal, there were thus no circumstances from which an inference could have been drawn by the Tribunal that this sum of Rs. 13,700 belonged to the assessee firm and were the revenue of the assessee liable to income-tax.
As a result our answer to the question referred by the Tribunal is that there was material to warrant the finding that the sum of Rs. 15,200 were profits of the assessee liable to tax, while there was no material to warrant the finding that the sum of Rs. 13,700 were profits of the assessee liable to tax. Let this answer be returned to the Income-tax Appellate Tribunal. In view of the fact that our opinion in respect of one amount is in favour of one party and in respect of another amount in favour of the other party, we direct the parties to bear their own costs of this references.
References answered accordingly.