The judgment to the court was delivered by
UPADHYA, J. - The questions referred for the opinion of this court are :
'1. Whether the proceedings under section 34 of the Income-tax Act are legal and valid ?
2. Whether there was material for the finding that rupees ten thousand out of forty-five thousands realised by the assessee by encashment of 45 high denomination notes on January 18, 1946, represented the income of the assessee liable to tax under the Indian Income-tax Act ?'
The assessee is a Hindu undivided family doing financing work and was the Government Treasurer at Shahjehanpur. The original assessment for the year 1947-48 was made on an income of Rs. 12,588. Thereafter the Income-tax Officer started proceedings under section 34 of the Income-tax Act as he got information that the assessee had encashed high denomination notes for Rs. 45,000, on January 18, 1946, which date fell within the relevant previous year of the assessee. On being required to explain how he came by these notes, the assessee said that he had to maintain a large cash balance which was necessary because of the nature of his business and these included high denomination notes invariably. On January 11, 1946, when the Demonetisation Ordinance was promulgated, the assessees cash balance was Rs. 58,046. The cash balance varied from day to day and on January 18, 1946, when the notes were encashed the cash balance was Rs. 65,619. The cash balance was never below Rs. 50,000. The Income-tax Officer, however, did not accept the assessees explanation that the notes formed part of his cash balance and added the sum of Rs. 45,000 to his total income and made an assessment. On appeal, the Appellate Assistant Commissioner maintained the assessment. On further appeal, the Appellate Tribunal reduced the addition by Rs. 35,000 but upheld the addition of Rs. 10,000 to the assessees total income. The assessee then applied for a reference to this court and the questions mentioned above have been referred to us.
We have been asked to take the second question first and we have no objection to do so. The assessee was a treasurer of the Government Treasury at Shahjehanpur at the relevant time and in the course of his business activities had to finance other business concerns in that city. It is not disputed that he maintained a large cash balance which was necessary for the purpose of his business. The Income-tax Appellate Tribunal in deciding the appeal observed :
'There is no doubt that in the course of business activities the assessee had during the year of account to handle various denominations of currency notes. It does not seem reasonable, however, that the cash balance of Rs. 58,000 odd included 45 notes of Rs. 1,000. On an estimate, we find that the assessee was in possession of 35 such notes on the day the Demonetisation Ordinance was promulgated. The balance of 10 notes are, in our opinion, from an undisclosed source.'
Having accepted that the assessee financed several businesses at Shahjehanpur and was the treasurer of the Government Treasury and having further accepted that in the course of business activities the assessee had to handle various denominations of currency notes and that the cash balance in hand was Rs. 58,000 and odd, it appears extremely difficult to appreciate how the Tribunal thought it necessary or proper to make an estimate of 35 notes at Rs. 1,000 each to have been contained in the cash balance. The Tribunal has given no reason whatever for its finding that the assessee possessed 35 notes of Rs. 1,000 each on the day the Ordinance was promulgated. This evidently is an arbitrary expression of its own guess, which cannot be accorded the status of a finding. Equally arbitrary is the other finding that the balance of 10 notes was from an undisclosed source. The persistent claim by assessees prior to 1939 that an independent body should be empowered to decide finally the appeals relating to taxation was responsible for the creation of the Income-tax Appellate Tribunal. This Tribunal is expected to function in a judicial manner. The Supreme Court and some other courts have had occasion to express the view that the Tribunal should act in a judicial manner, and it is only when proper findings are recorded by the Tribunal that its decision should be accepted as final findings of fact. After having heard learned counsel for the Department and after giving our best consideration to the matter we find ourselves quite unable to see any reason or basis for the so-called finding recorded by the Tribunal that the assessee was in possession of 35 notes on the day Ordinance was promulgated or that 10 notes were from some undisclosed source. These cannot be recognised as findings at all.
The assessees business was not one in which large amount of petty notes might have been necessary for the purpose of business, and keeping money in large notes is evidently more convenient for counting, for making payments and for other purposes and no material has been placed before us to show that the explanation offered by the assessee was one which was inherently improbable or one which could not be accepted. The so-called estimated made by the Income-tax Appellate Tribunal was to our mind a mere guess. In fact there was no justification in the circumstances of the case for making an estimate at all. The assessee had a large cash balance which could very conveniently include the 45 high denomination notes encashed by him. The explanation offered by the assessee was not unreasonable and nothing has been said which could justify its being rejected as unreasonable. On the other hand the so-called estimate by the Tribunal is based on no reason and is purely arbitrary and cannot be upheld as legal.
In Sri Sri Nilkantha Narayan Singh v. Commissioner of Income-tax the assessee had encashed high denomination notes worth Rs. 95,000. The Income-tax Officer rejected the assessees explanation about them and added the entire amount as income from an undisclosed source. The Appellate Tribunal felt satisfied that Rs. 11,000 (one note of Rs. 10,000 and another of Rs. 1,000) had been received from the Bengal Discount Co. Ltd. as the number of the notes were mentioned in a document but affirmed the addition of Rs. 84,000. The Patna High Court after examining the reason on which the Tribunal had based its decision held that there was no material for the inference that Rs. 84,000 represented the assessees income. The Tribunal had observed that (1) the assessee did not produce any home chest account though his explanation was that the notes were savings from his personal allowance, (2) that he could not save any money as there was a recital in a lease that he needed money to pay income-tax and road cess, and lastly (3) that 'the assessee was not in a position to say wherefrom the notes of Rs. 10,000 each were obtained and his failure to do so led to the conclusion that he was unwilling to disclose the source.' The court held that there was no material to suggest that a home chest account was maintained and no adverse inference could be drawn because such account was not produced. The court noticed that the assessee had produced accounts for seven years before the Tribunal showing that the Raja had a balance of Rs. 18,400 and recital in the document, therefore, was not proved to be correct. The court further held that no onus could be thrown upon the Raja to indicate the source from each note to the value of Rs. 10,000 was received and no adverse inference ought to have been drawn by the Tribunal against the assessee.
In Ganguly v. Commissioner of Income-tax the same Bench upheld the addition of Rs. 4,000 on the ground that while it was admitted that the assessee had encashed these notes he had produced no evidence in support of his explanation that the amount represented his savings. It was not pleaded that the notes formed part of the cash balance in the accounts. The court held that there was material on which the addition was justified.
Raja Nilkanth Narayan Singhs case was distinguished by the Patna High Court in two later decisions, Manindra Nath Dash v. Commissioner of Income-tax and Tewary v. Commissioner of Income-tax, on the ground that the assessee had produced no evidence to support his explanation at all and the fact of the receipt of money by encashing the notes being proved or admitted, the onus was on the assessee to explain how he came to have the money. These again were not cases where the assessee had claimed that the notes formed part of his cash balance.
In Chunilal Ticamchand Coal Co. Ltd. v. Commissioner of Income-tax the assessee had encashed notes worth Rs. 68,000 and the explanation offered was that they formed part of the opening cash balance which amounted to Rs. 77,195 on January 12, 1946. The Income-tax Officer rejected the explanation but the Tribunal took the view that notes worth Rs. 35,000 may be treated as forming part of the cash balance. The Patna High Court held that the addition of Rs. 33,000 maintained by the Tribunal was illegal. The Income-tax Officers reasons were that the account books as such did not contain any express reference to the high denomination notes and that the assessee did not require high denomination notes for carrying on daily transactions in coal business. The first ground was hardly of any substance and examining the dealings which the company had with the banks the fact it did have the large cash balance disclosed by the account was properly established. The Tribunal, however, gave no reasons for recording the finding that Rs. 33,000 should be treated as secreted profits of the assessee. The learned judges observed :
'It should be remembered in this connection that the Appellate Tribunal is a judicial tribunal and under section 33 of the Indian Income-tax Act the powers conferred on the Tribunal are very wide and extensive. It is essential in the public interest that these powers should be exercised by the Tribunal carefully and in a judicial manner. In the present case it is a matter of regret that the Tribunal has not indicated upon what material they have reached the conclusion that the amount of Rs. 33,000 out of the amount of Rs. 68,000 should be treated as secreted profit of the assessee. We consider that the order of the Appellate Tribunal is bad on account of this defect.'
In Mehta Parikh & Co. v. Commissioner of Income-tax the Supreme Court had occasion to consider a case where the assessees explanation that high denomination notes worth Rs. 61,000 formed part of the cash balance had not been accepted in full. The cash balance of the assessee on January 12, 1946, was Rs. 69,891 and was said to contain 61 notes of Rs. 1,000 each. The income-tax authorities did not conseder the expalanation satisfactory. The Appellate Tribunal took the view that 31 notes could have formed part of the cash balance, but upheld the addition Rs. 30,000 as justified. The High Court of Bombay treated this finding of the Tribunal as a pure finding of fact. The Supreme Court reversed the decision and after referring to the law as pronounced by the House of Lords in Cameron v. Prendergast, Bomford v. Osborne and Edwards v. Bairstow, laid down as follows :
'It follows, therefore, that facts proved or admitted may provide evidence to support further conclusions to deduced from them, which conclusions may themselves be conclusions of fact and such inferences from facts proved or admitted could be matter of law. The court would be entitled to intervene if it appears that the fact-finding authority has acted without any evidence or upon a view of the facts, which could not reasonably be entertained or the facts found are such that no person acting judicially and properly instructed as to the relevant law would have come to the determination in question.'
It was remarked that the Tribunal had not given any inkling of what was at the back of its mind when it fixed upon the figure of Rs. 31,000. 'Really speaking the Tribunal had not indicated upon what material it held that Rs. 30,000 should be treated as secret profit or profits from undisclosed sources and the order passed was bad.' Chunilal Ticamchands case decided by the Patna High Court was referred to with approval as applicable to the case.
A Bench of this court of which one of us was a member followed the above decisions of the Supreme Court and the Patna High Court in Kanpur Steel Co. Ltd. v. Commissioner of Income-tax. In that case the assessee contended that notes worth Rs. 32,000 encashed by it formed part of its cash balance amounting to Rs. 34,000. The explanation was found to have been wrongly rejected by the Tribunal on mere surmises and suspicion and this court found that there was no material to justify the treatment of the amount as the assessees income.
In Lal Chand Bhagat Ambica Ram v. Commissioner of Income-tax the assessee had encashed high denomination notes worth Rs. 2,91,000. The explanation was that they formed part of the cash balance. The Tribunal held that Rs. 1,41,000 out of this was not part of the cash balance but was income. After considering the facts and circumstances of the case the Supreme Court reversed the decision. The court held that :
'... the Tribunal, in arriving at the conclusion it did in the present case, indulged in suspicions, conjectures and surmises and acted without any evidence or upon a view of the facts which could not reasonably be entertained or the facts found were such that no person acting judicially and properly instructed as to the relevant law could have found, or the findings was, in other words, perverse and the Supreme Court was entitled to interfere.'
In the instant case the Income-tax Officer, in his order, has given two reasons for discarding the assessees explanation. The first is that the details of the daily cash balance were not noted in any account. Ordinarily details of cash balance are not noted and when high denomination notes were legal tender and ordinarily acceptable in the market, it is unreasonable to expect an assessee to give details of the notes and coins which his cash balance contained day after day. The other reason given by the Income-tax Officer is that the actual source of the notes must have been within the special knowledge of the assessee hadn he has not given any evidence to show from whom he recieved these notes. When a person is handling large amounts of money and notes of various denominations are received and disbursed every day, it is obviously unreasonable to expect that an assessee should remember from whom he received any particular note, even if the note was not a ten rupee or a hundred rupee note but a thousand rupee note. We do not think that the reasons for which the Income-tax Officer made the addition were ar all proper or relevant. These reasons given by the Income-tax Officer, however, have not been expressly approved of by the Tribunal. The Tribunal itself proceeded in an unreasonable manner to make an estimate which as mentioned above was quite unjustified and based on no material. We are unable to hold that the so-called finding given by the Tribunal was a finding of fact at all. It is purely an arbitrary guess based on no material whatsoever.
Having heard learned counsel at some length we are of opinion that the answer to the second question must be in the negative.
As we have answered to second question in the negative and in favour of the assessee, learned counsel for the assessee does not press that the first question may be answered.
The assessee is entitled to his costs which we assess at Rs. 200. We fix the fee of the learned counsel for the Department at the same amount.
Reference answered accordingly.