Jagannadha Das, C.J.
1. These two cases are analogous and raise common questions on the same set of facts. They come to us for final hearing on a reference made by the Income-tax Appellate Tribunal under Section 66 of the Income-tax Act, in pursuance of a direction of this Court made on 13-10-49. At that hearing three questions were raised on behalf of the assessee. This Court did not agree with the contention of the assessee so far as one of those questions was concerned, but felt that the other questions raised by him and overruled by the Income-tax Appellate Tribunal required further consideration by this Court. Those questions have now been consolidated into one by the Income-tax Appellate Tribunal and the question that has now been referred for our decision is as follows:
'Whether on the facts and in the circumstances of the case, the Tribunal was right in confirming the additions of Rs. 10,291/-and Rs. 10,000/- in the assessment for the years 1944-45 and 1945-46 respectively?'
The facts which gave rise to this question are as follows: During the two assessmentyears in question, the Income-tax authorities added the above-mentioned amounts to the assessable income as an estimated 'income outside the books'. The reason for these additions may be gathered from the order of the Income-tax Officer for the respective years. In the assessment order for 1944-45, the Income-tax Officer dealing with this matter states as follows:
'Income outside the books: This aspect of the case has been fully thrashed out in the last assessment order and it has been clearly shown (i) lakhs of rupees worth assets are kept outside the books; (ii) There is undisclosed amount of cash in the assessee's hands outside the books and how it is utilised is also not disclosed, (iii) The assessee is not prepared to file wealth statement wherein he will have to disclose the entire capital whether liquid or fixed, and (iv) large sums were drawn out of this business as well as out of sums lying to assessee's credit with Chaturbhuj Piramal of Bombay. Past history being what it is, interpolation in books being an easy affair, and business opportunities for the capitalist in the previous yearbeing almost unbounded, I add for undisclosed income indicated by the above facts and on the basis of past records a sum of Rs. 10,291/-.'
It may be noticed that all the facts noted herein are facts of the previous year's assessment i.e., of the accounting year 1942-43. The assessment order for the year 1945-46 dealing with this question states as follows:
'Income outside the books: This aspect of the case has been fully discussed in the last year's assessment order and it has been proved that the assessee has got businessactivities not disclosed to the department. From year to year he has been requested to file a wealth statement, but through a written statement he has stated that it is not possible to prepare and file it, and thus compels me to make an addition for omissions of income for activities kept outside the books. On the basis of past history I add back a sum of Rs. 10,000/- as net income from such activities.'
Thus, the assessment under this head in 1945-46 merely refers back to 1944-45 and the assessment of the year 1944-45 refers back to what has been done in 1943-44. At our suggestion, and with the consent of both sides the assessment order of the year 1943-44 has been placed before us for reference and a scrutiny thereof shows that the various facts and circumstances on which reliance was placed in that assessment order for assessment of income under this head are material and have relation to dates prior to the year of 1942-43 and prior thereto. Thus it will be seen that the income-tax authorities have gone on assessing this assessee from year to year for the supposed income outside the books on mere 'past history' of years earlier than 1942-43. The theory on which this method has been adopted has been succinctly stated by the Income-tax Appellate Tribunal in para. 2 of the statement of the case in their reference to us which is as follows:
'For the assessment years 1944-45 and 1945-46, the Income-tax Officer added Rs. 10,291/- and 10,000/- respectively as income outside books. In the preceding year viz., assessment year 1943-44 the Tribunal held that the assessee had income which was not brought into the books and that it justified an addition of Rs. 13,000/-. The appellate Assistant Commissioner confirmed the additions and on appeal before the Tribunal, it was contended by the Dept. that the source from which that income had been derived had not been shown to have ceased to exist and therefore an estimate of such income had to be made for the two assessment years in question. The Tribunal held that until the assessee proved that the source of that income had in any manner disappeared it necessarily had to (sic) assumed that that source was still available to the assessee in the account years. In that view of the matter it confirmed the additions of Rs. 10,291 and Rs. 10,000/-. Copies of the relevant portions of the Tribunal's order dated 11th November, 1948 marked annexures'A' and 'A-1' are appended herewith and form part of the case.'
2. We have no doubt that this view taken by the Income-tax authorities based on the alleged presumption is erroneous in law. 'Past History' may be legitimate material, but that is not sufficient by itself without more, to justify assessment in a particular year. There must be some material relatable to the accounting year which taken with the 'past history' may reasonably entitle the Income-tax authorities to hold that there must in fact have been some concealed income during the accounting year and which is liable to assessment. For instance as appears from the assessment orders of 1943-44, 'past material' relied on for that assessment was substantially that
'there was a 'Banshidhar Onkarmall Bissa' account in the books of Chaturbhuj Piramall of Bombay which was not reflected in the assessee's books and that large sums were drawn out of business and from Chaturbhuj Piramall of Bombay for unknown purposes.'
Now if it appeared from the accounts or otherwise that large sums were drawn out for unknown purposes during the accounting year, that might well be taken along with the existence of past undisclosed capital to justify the income-tax authorities in drawing an inference that there was undisclosed income in the accounting year which is liable to assessment. But that is not the kind of material on which the assessments in question are based.
To base an assessment barely on a presumption relating to capital found to exist in some previous year, appears to us to be unwarranted. The income-tax authorities have proceeded on the view that the burden of proof is on the assessee to show that the 'past capital' has disappeared, for which we can find no justification, and we have been shown no authority. It is well settled that the assessment of any particular year must be based not on mere suspicion or bare guess, but on legitimate material from which a reasonable inference of income having been earned during the accounting year in question can be drawn, and that the initial burden of finding such material however slight, is on the income-tax authorities and not on the assessee. In the present case, all the materials before the Income-tax authorities are (i) the existence of 'past capital' and (ii) the fact that the assessee has not filed a wealth statement for the accounting year though called upon to do so. We do not think that these facts are sufficient to shift the burden of proof on to the assessee. These facts do not necessarily justify any prima facie inference that the past capital produced income during the accounting year. Before such an inference can be drawn, some foundation must be laid for the assumption that there was income from such capital during the accounting year; for instance, as in the case reported in -- 'Commr. of Income-tax, Bihar and Orissa v. Kameshwar Singh', AIR 1933 PC 108.
In that case, as appears from the report at p. 114, there was an addition by way of an estimated income from year to year in respect of a large mortgage loan business; but the additions of each year were based on the admissions of the assessee that some income during the particular accounting year was derived in respect of the mortgage-loan. It is in respect of this state of facts in that case that the learned Chief Justice Sir Courtney Terrell of Patna High Court, with the concurrence of other Judges said as follows:
'Learned counsel for the assessee has argued that the officer is not entitled to make a guess without evidence and I agree with that contention, but in this case the state of affairs in the previous years, coupled with the fact that the assessee had a large mortgage loan business and must have enforced mortgages by sale on many occasions, afford ample material for the assessment made.'
Their Lordships in the Privy Council while accepting that statement as correct remarked as follows:
'Their Lordships also agree, adding only that if the assessee wished to displace the taxing officer's estimate, it was open to him to adduce evidence of all his purchase transactions during the year and of the financial results thereof, which he apparently made no attempt to do.'
Having regard to the facts of the case before the Privy Council, these dicta can only be taken to mean that the burden shifted to the assessee because, there was material relating to the accounting year, for instance, (the admission of receipt of some income from the mortgage-loan business for the particular accounting year) from which an inference of income from the undisclosed source during that year could reasonably be drawn, and which, therefore, required to be estimated, because the assessee did not place all the relevant materials before the taxing authorities.
3. We are satisfied that the question referred to us must, therefore, be answered as follows:
'On the facts and in the circumstances of the case the Tribunal erred in confirming the additions of Rs. 10,291/- and Rs. 10,000 in the assessments for the years 1944-45 and 1945-46 respectively.'
4. It has been faintly suggested before us that whether or not there was material to show any business income from the undisclosed past capital, during the accounting year, it could reasonably be assumed that the past capital earned at least interest and that the income by way of interest could be added on to the assessments of these years. The assessment orders do not show that the estimate was made on any such footing and we are not called upon to answer the reference on any such hypothetical basis.
5. The reference is answered as above and the assessee will have the costs of this reference which we fix at five gold mohurs.
6. I agree.