The following question has been referred to this Court for opinion in compliance with and order passed by this Court under section 21 of the Excess Profits Tax Act read with section 66(2) of the Income-tax Ac :
'Whether on the facts and in the circumstances of the case the Excess Profits Tax Officer could come to the conclusion that the amount of Rs. 75,000 was income from business.'
The facts stated by the Tribunal show that the question of adding an amount as income of the assessee from an undisclosed source arose first in connection with the assessment of income-tax for the assessment year 1940-41 and the assessment of the excess profits tax for the chargeable accounting period 1st September, 1939, to 7th April, 1940. In that year the assessee was first assessed for the purpose of income-tax and the assessment being a best judgment assessment after applying section 13(2) of the Income-tax Act, the Income-tax Officer estimated a sum of Rs. 75,000 as secreted income of the assessee from undisclosed sources. In the corresponding excess profits tax assessment this income of Rs. 75,000 was held to be income from business by the Excess Profits Tax Officer and was consequently assessed to excess profits tax. Both the cases went up in appeal before the Appellate Assistant Commissioner who held that this estimated income of Rs. 75,000 had not accrued to the assessee and that the main basis on which the estimate of this income had been made was not correct. Thereafter an appeal was filed before the Income-tax Appellate Tribunal against the income-tax assessment only. The Appellate Tribunal held that this income had accrued to the assessee and should have been included in his assessment, so that the Tribunal set aside the order of the Appellate Assistant Commissioner and restored the order of the Income-tax Officer. So far as the excess profits tax case was concerned, no appeal was taken up before the Tribunal so that the order of the Appellate Assistant Commissioner excluding this amount from the excess profits tax assessment became final. Subsequently came the assessment of income-tax for the assessment year 1941-42 and the assessment of excess profits tax for the corresponding chargeable accounting period, 8th April, 1940, to 27th March, 1941. On this occasion also, the income-tax assessment was first made and it was held that the assessee had received an income of Rs. 75,000 from undisclosed sources of income. It appears from the order of assessment as well as from the subsequent order passed by the Income-tax Appellate Tribunal, when the matter came up before it in appeal, that this inclusion of Rs. 75,000 in the income-tax assessment was made on two grounds. One ground was that in spite of the fact that there had been a best judgment assessment in the preceding year 1940-41 the assessee had again failed to produce satisfactory account books so that this year also a best judgment assessment had to be made and the assessee did so knowing that he might be placed this year also in the same position as he was in the preceding year. The second ground was that in the previous year, the amount estimated was Rs. 75,000 as income from undisclosed sources and it could be reasonably presumed that the same amount must have been the income from undisclosed sources during this succeeding year also. Thereafter, there was assessment of excess profits tax and this income from undisclosed sources in that assessment was held to be income from business. It is this last mentioned assessment with which we are concerned in the present reference. As in the earlier assessment the assessee appealed successfully against the inclusion of the sum of Rs. 75,000 as income from business to the Appellate Assistant Commissioner but the Income-tax Appellate Tribunal restored the order of the Excess Profits Tax Officer. His request to the Appellate Tribunal for a reference under section 21 of the Excess Profits Tax Act read with section 66(1) of the Income-tax Act was refused. He, thereupon, moved this Court and the Court called for this reference. The question that in these circumstances arises falls within a very limited scope. It is no longer open to argument that the assessee did have an income of Rs. 75,000 from undisclosed sources during the chargeable accounting period in question. The only question that needs decision is whether there was any justification for the view that it was income from business.
In the assessment order made by the Excess Profits Tax Officer, no reason at all is indicated for holding that this income was from business. The order proceeds by saying that the profits in business as computed for income-tax purpose included this amount of Rs. 75,000. In the order of assessment of income-tax there was no clear finding that this income was from business. The decision was put down by the Income-tax Officer in the followin :
'Having regard to all the circumstances of the case, the income from undisclosed sources is estimated to be Rs. 75,000. Setting off Rs. 20,033 for the excess profits tax liability it is reduced to Rs. 54,967.'
There was in the order of assessment of income-tax no finding that this amount was income from business or from any other particular source. When the assessment of excess profits tax was being made by the Excess Profits Tax Officer it was in these circumstances necessary for him to indicate what led him to hold it to be the income from business. No such indication is given and in fact it appears that the Excess Profits Tax Officer wrongly interpreted the order of assessment of income-tax as containing a finding that the income was from business. The case of assessment of income-tax went up to the Income-tax Appellate Tribunal. Even that Tribunal did not hold the income to be income from business, and merely affirmed the finding that it was income from some undisclosed sources. In the excess profits tax appeal out of which this reference has arisen, the Tribunal has also not disclosed any fact from which an inference could possibly be drawn that it was income from business and not from some other source. There was therefore no material at all on the basis of which this could be said to be income from business. On the other hand, the facts as mentioned above show that in the preceding year the effect of the decisions given had been to hold that a sum of Rs. 75,000 had been received as income by the assessee which was chargeable to income-tax but was not chargeable to excess profits tax. The Department had not gone up in appeal against the order of the Appellate Assistant Commissioner holding that excess profits tax could not be charged on this amount of Rs. 75,000 though an appeal was filed in the income-tax assessment case. This would indicate that the Department itself accepted the fact that the sum of Rs. 75,000 in that preceding year was liable to income-tax but not liable to excess profits tax. The acceptance of this position would indicate that the Department proceeded on the basis that this amount was not income from business so that it was not liable to excess profits tax and yet was liable to income-tax. When holding that the assessee had an income of Rs. 75,000 in the subsequent year, which is now in question, it was in these circumstances necessary for the Income-tax Officer or the Income-tax Appellate Tribunal to indicate why it was held that this amount was income from business in this year when the similar amount in the previous year had been assessed to tax on the basis that it was income from some source other than business. This leads to the conclusion that the finding given this year that it was income from business was entirely arbitrary and without any material and in fact in contradiction with the material provided by proceedings of assessment of the preceding year.
In the circumstances, we answer the question referred to us in the negative. The assessee will be entitled to his costs which we fix at Rs. 250.
Reference answered in the negative.