The following two questions have been referred for our opinion in compliance with the order of this Court dated 5th February, 1953, under section 66(2) of the Indian Income-tax Ac :
'1. The assessee company having followed the mercantile method of accounting whether the commission of Rs. 15,432 having been received in the subsequent accounting year, relevant for the assessment year 1948-49, could be brought to tax as accrued income in the assessment year 1947-4 ?
2. Whether there was any material to hold that the sum of Rs. 25,000 being the value of the high denomination noted exchanged in pursuance to the demonetisation ordinance was an income of the assessee company from some undisclosed sourc ?'
The assessee is a private limited company known as the Kanpur Steel Company Limited which, in addition, was carrying on the work of sole agency of the Aira Sugar Factory and was receiving a commission of one per cent. on the sales of sugar of that factory. The assessment year in question is 1947-48 and the relevant accounting period is from 8th November, 1945, to 27th October, 1946. No commission was received by the assessee company during the relevant accounting year.
Subsequently, however, a sum of Rs. 15,432 was received by the company, as commission accrued upon the sales for the period relevant to the assessment year in question, on 17th March, 1947. This amount was shown by the assessee company as income relating to the subsequent assessment year 1948-49. The Income-tax Officer, however, held that this income had accrued to the assessee during the previous year corresponding to assessment year 1947-48 and, consequently, added it to the income for that year and included it in the assessment.
A second point, that cropped up before the Income-tax Officer, related to the encashment of 32 high denomination currency notes of Rs. 1,000 each by the assessee company on 12th January, 1946, when the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, came into force. The Income-tax Officer called upon the assessee to explain how those 32 currency notes of Rs. 1,000 each came into possession of the assessee. The assessee claimed that the currency notes represented part of his cash balance which, on 12th January, 1946, stood at the figure of Rs. 34,313-1-9. The Income-tax Officer rejected this explanation and, consequently, held that the amount of Rs. 32,000 represented by those currency notes of Rs. 1,000 each to be suppressed income of the assessee form some undisclosed source. The assessee appealed unsuccessfully before the Appellate Assistant Commissioner of Income-tax. When the appeal camp up before the Income-tax Appellate Tribunal, the assessee again failed on both the points but the Tribunal held that there was a possibility that seven high denomination currency notes of the value of Rs. 7,000 could represent part of the cash balance and, consequently, reduced the amount, which had been added back to the income of the assessee, to that extent. The Tribunal thus upheld the adding back of the sum of Rs. 25,000. The assessee then applied to the Tribunal under section 66(1) of the Indian Income-tax Act to make a reference to this Court. That application was rejected. When the assessee moved this Court. That application was rejected. When the assessee moved this Court, this reference was called for and, consequently, the Tribunal have sent a statement of the case after framing the two questions mentioned above.
With regard to the first question, it has become unnecessary for us to enter into any discussion, as Dr. N.P. Asthana, appearing for the assessee company, made a statement that he would not press this question, particularly, in view of the facts that emerged during the discussion after the scrutiny of the statement of the case submitted by the Income-tax Appellate Tribunal and in view of the fact that the sum of Rs. 15,432 had not been included in the income of the assessee for the subsequent assessment year 1948-49 and had only been included during the assessment year 1947-48. Consequently, we consider it unnecessary to express any opinion on this question but, it view of the concession of the learned counsel, the Tribunal will be entitled to proceed on the basis that this point is decided against the assessee.
So far as the second question is concerned, it appears that the Income-tax Appellate Tribunal lost sight of the fact that the burden of proof lay upon the Department to show that the sum of Rs. 32,000, represented by the 32 high denomination currency notes of Rs. 1,000 each which were cashed by the assessee, represented suppressed income of the assessee from undisclosed sources. The burden was not on the assessee to prove how it had received those high denomination currency notes. Until the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, came into force, the high denomination currency notes could be used as currency as freely as notes of any lower denomination and no one had any idea that it would be necessary for him to explain the possession of high denomination currency notes. The use of high denomination currency notes depended upon convenience of the individual possessing them and upon the nature of the transaction that he may have to go through. It was only when the High Denomination Bank Notes (Demonetisation) Ordinance of 1946 came into force on the 12th of January, 1946, that it became necessary in this case for the assessee company to explain its possession of those currency notes. The assessee company had naturally not kept any statement indicating when it received each one of those currency notes, because, at the time when it received them, it had no idea that it would be required to give such an explanation and, therefore, it was not in a position to prove how and when it came into possession of those currency notes. The assessee company, however, gave an explanation which, it appears to us, was fairly satisfactory and which the Tribunal has not found to be false. On 12th January, 1946, the assessee company had a cash balance of Rs. 34,000 and odd and, consequently, there is the possibility that the assessee company had 32 currency notes of Rs. 1,000 each in its possession as part of that balance. This explanation was not accepted by the Income-tax Appellate Tribunal but we have not been able to find any satisfactory reasons for this view taken by the Tribunal. The Tribunal has taken into account a statement of sales relating to a few days just preceding the date on which the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, came into force. The statement of sales for those dates, which begin on 6th January, 1946, and end on 12th January, 1946, has been appended as annexure C to the statement of the case. It appears to us that such a statement was hardly relevant to the question which the Tribunal had to examine. In order to find out whether there was any one transaction on any of those dates when the assessee company received a sum of Rs. 1,000 or more from one individual, the account book, that should have been examined, was the cash book in which, on the receipt side, there would have been entries of the various items of cash received by the assessee company in the course of each day. The statement contained in annexure C refers to bills of each day but does not mention that they represented the cash amounts received on each of those days. In fact, the mention in the annexure of numbers of bills would indicate that the entries do not relate to cash sales. Cash might have been received by the assessee company on each day in respect of cash sales of that day as well as in payment of previous credit sales. In the circumstances, we are constrained to hold that the Income-tax authorities, in relying on the entries relating to bills of each day, committed an error and no inference should have been drawn from them. Further it appears to us that even the inferences drawn are not justified. It has been mentioned by the Tribunal that, according to the statement contained in annexure C there was no single transaction on any of those dates in which sale proceeds exceeded Rs. 1,000. The highest amount of any one single transaction was Rs. 399-9-3. The Tribunal do not appear to have examined the entries to find out whether several of the sales of the same date might not be in favour of the same individual, so that one single payment may have been made for several bills and might have exceeded the sum of Rs. 1,000. Further, the Tribunal have not at all touched upon the possibility that, in case of payments for transactions amounting to several hundreds, such as Rs. 380 (which is a figure that occurs very frequently on these dates) the payer might have chosen to hand over currency notes of Rs. 1,000 asking for the return of the balance in notes of lower denomination. These entries could not, therefore, in any way, indicate that these 32 currency notes of Rs. 1,000 each could not have come into the hands of the assessee in the course of its business transactions and could not have formed part of its cash balance. The Tribunal has also referred to another statement of the cash balance of the assessee on each day beginning with 20th December, 1945, and ending on 12th January, 1946. The Tribunal noted from this statement that the cash balance of the assessee company was steadily increasing. If the cash balance of the assessee company was steadily increasing it would not be all unreasonable to accept the explanation given by the assessee company that, for the sake of convenience, the cash balance was being kept in high denomination currency notes. High denomination currency notes could be stored more easily and, at the time of accounting, they would have facilitated counting. Since the balance was increasing steadily, the assessee might not have felt it necessary to keep the balance in currency notes of low denomination in excess of Rs. 2,000 or so. It would thus appear that the Tribunal rejected the explanation of the assessee company on surmises and their opinion, which is not based on any material at all but on reasoning which is not necessarily correct, can hardly be acceptable. In this case, therefore, it cannot be said that the explanation given by the assessee company was either unreasonable or wrong. When the assessee company had given an explanation which was reasonable, the Income-tax authorities could have been entitled to treat the sum of Rs. 32,000 as income from undisclosed sources only if there was some other material from which such inference could have been drawn. No other material has been mentioned by the Tribunal in their appellate judgment or in the statement of the case. It further appears that the Tribunal, in holding that seven high denomination currency notes of the value of Rs. 7,000 only could form part of the cash balance and the remaining currency notes could not do so, were acting on their surmises for which there was no basis and which had no support from any material on the record. In these circumstances, it must be held that there was no material for holding that the sum of Rs. 25,000 being the value of high denomination currency notes exchanged in pursuance of the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, represented income of the assessee company from some undisclosed sources. This view of ours is in line with the decision of the Supreme Court in Mehta Parikh & Co. v. Commissioner of Income-tax, Bombay, in which case their Lordships of the Supreme Court also approved of a decision of the Patna High Court in Chunilal Ticamchand Coal Co. Ltd. v. Commissioner of Income-tax, Bihar and Orissa.
Let the record be returned with our opinion on the second question as expressed above. The assessee company will be entitled to its costs from the Department which we assess at Rs. 250.
Reference answered accordingly.