1. This is an assessee's appeal by special leave of this Court against anorder of the High Court of Patna, answering in favour of the Department thequestion 'whether in the circumstances of the case the amount of Rs.51,000 being the value of high denomination notes encashed by the assessee, hasbeen validly taxed as profits from some undisclosed business'. Theoriginal assessee, Rai Bahadur H. P. Banerjee, is dead. His son, who wassubstituted in his place, also died during the pendency of the proceedings inthe High Court. The present appeal has been filed by the widow of the son andother legal representatives.
2. Banerjee was the owner of several collieries in the Jharia Coal fields inthe State of Bihar and was also a contractor for raising coal. This matterrelates to the assessment year 1946-47. For that year, Banerjee was assessed onan income of Rs. 1,28,738. The assessment was then re-opened under s. 34 of theIndian Income-Tax Act, and was enhanced, but subsequently on appeal, it wasreduced to a sum a little below the original assessment. The present assessmentwas made on a second re-opening of the case under s. 34 in the followingcircumstances.
3. On January 22, 1946, Banerjee encashed high denomination notes of thevalue of Rs. 51,000/-. In his application under the Ordinance which demonetizedhigh denomination notes, Banerjee gave the reason for the possession of thenotes as follows :-
'I am engaged in business as colliery proprietor,contractor under Messrs. Kilburn and Co. in the name and style of H. P.Banerjee & Son and also under the State Rly. Bokaro, Swang, Hazaribagh districtin the name of Jharia Dhanbad Coal & Mica Mining Co.,..... For conductingthe business and payment to labour, I have to pay every week between 30/40thousand. As I did not get payment for work done every week. I had to keeplarge sum of money to meet emergency....... It is neither profit nor part ofprofit - it is very floating capital for purpose of conducting business. It isnot an excess of profit'.
4. He stated that he had accounts with (1) Imperial Bank of India, (2) NathBank Ltd., Jharia, and (3) Central Bank of India Ltd., Bhowanipore Branch, butadded that he did not remember exactly from which Bank the notes came into hispossession, as his transactions were frequent. The notice which was issued tohim under s. 34 of the Income Tax Act, was not questioned on any of the groundswhich are usual in such cases. Banerjee's explanation was not accepted. TheIncome Tax Officer pointed out that although his business was large and thewithdrawals from the various banks were large and frequent, he had notmaintained a central account showing withdrawals from the banks and remittancesmade to his various businesses, and that none of the books maintained by theassessee and produced by him, contained a bank account. The Income Tax Officerfound a discrepancy of nearly Rs. 50,000 in the statements filed by theassessee. He, accordingly, treated the high denomination notes as profits fromsome undisclosed source and assessed them as assessable income. Banerjeeappealed to the Appellate Assistant Commissioner and further to the Tribunal.Both the authorities upheld the order of the Income Tax Officer. The assesseedemanded a case which was refused, but the High Court directed a statement ofthe case on the question already quoted. The High Court decided the questionagainst the assessee, and hence this appeal.
5. The connection of the appellants is that since the Department had issueda notice under s. 34 of the Income Tax Act, it was incumbent on the departmentto establish that the amount in question was income which had escapedassessment. The appellants also contend that even if the assessee was requiredto prove the source of the high denomination notes, he had sufficiently provedit by showing that he had large amounts on hand, which were held for conveniencein high denomination notes. The appellants thus submit that the burden, if any,upon the assessee was discharged in the case, and the evidence beingunrebutted, the additional assessment could not be made. The appellant relyupon Kanpur Steel Co., Ltd. v. C.I.T. : 32ITR56(All) where, accordingto the appellants, the Allahabad High Court explained the nature of burden ofproof in the way contended for by the appellants. They claim that the Allahabadcase applies to the facts here and point out that the said ruling wasconsidered and approved by this Court in Lalchand Bhagat Ambica Ram v.Commissioner of Income Tax, Bihar and Orissa : 37ITR288(SC) . Othercases have been cited on behalf of the department.
6. The case involving the encashment of high denomination notes are quitenumerous. In some of them the explanation tendered by the tax-payer has beenaccepted and in some it has been rejected. The manner in which evidence broughton behalf of the tax-payer should be viewed, has of course, depended on thefacts of each case. In those cases in which the assessee proved that he had onthe relevant date a large sum of money sufficient to cover the number of notesencashed, this Court and the High Courts, in the absence of something which showedthat the explanation was inherently improbable, accepted the explanation thatthe assessee held the amount of a part of it in high denomination notes. Inother words, in such cases, the assessee was held prima facie to havedischarged the burden which was upon him. Where the assessee was unable toprove that in his normal business or otherwise, he was possessed of so muchcash, it was held that the assessee started under a cloud and must dispel thatcould to the reasonable satisfaction of the assessing authorities, and that ifhe did not, then, the Department was free to reject his explanation and to holdthat the amount represented income from some undisclosed source.
7. The case which is strongly relied upon by the assessee is Kanpur SteelCo., Ltd. v. C.I.T. : 32ITR56(All) . In that case, 32 notes of Rs. 1,000were encashed. It was claimed that they were part of the cash balance of thecompany which amounted to Rs. 34,000 odd. The Income Tax Officer examined theentries regarding sales preceding the encashment of the notes and found thatthose sales brought in sums under Rs. 1,000 and could not have resulted in theaccumulation of so many high denomination notes. The Tribunal then came to theconclusion that Rs. 7,000 only could have been held in high denomination notes.On a reference, the Allahabad High Court held that the burden lay upon theDepartment to prove that Rs. 32,000 was suppressed income and there was noburden on the assessee to show whence he got the notes, because until demonetization,there was no idea that possession of high denomination notes would have to beexplained. The High Court also found that the explanation was fairlysatisfactory, because big notes might have been received even in smalltransactions and change taken, and that the High Court could not make aconjecture how many notes could or could not have accumulated. It is contendedbefore us that the burden in such cases lies as stated by the Allahabad HighCourt.
8. On the other hand, in Manindranath Das v. Commissioner of Income Tax,Bihar & Orissa : 27ITR522(Patna) , the tax-payer had encashed notes ofthe value of Rs. 28,000, which he contended were his accumulated savings. Hisexplanation was accepted in respect of Rs. 15,000, because 15 notes could be tracedto a bank, but was rejected in respect of the balance. The Patna High Courtpointed out that if an assessee received an amount in the year of account, itwas for him to show that the amount so received did not bear the character ofincome, and the tax-payer in the case had failed to prove this fact in respectof the remaining notes. The Patna case finds support in A. Govindaraju Mudaliarv. Commissioner of Income Tax, Hyderabad;  34 I.T.R. 70., where it islaid down by this Court that if an assessee fails to prove satisfactorily thesource and nature of an amount received by him during the accounting year, theIncome Tax Officer is entitled to draw the inference that the receipts are ofan assessable nature. In that case, the explanation-of the assessee in respectof the amounts shown as credits for him in the account books of a firm of whichhe was a partner, was rejected as untrue. It was held that it was open to theIncome Tax Officer and the Appellate Tribunal to hold that the amounts representedthe concealed income of the assessee.
9. From the last two cases, it is plain that if there is receipt of anamount in the accounting year, it is incumbent in the first instance upon theassessee to show that it does not bear the character of income. If he fails todo this, the Income Tax Officer may hold that it represents income of theassessee either from the sources he has disclosed or from some undisclosedsource.
10. In applying this principle to the cases of encashment of highdenomination notes, there is some difficulty when the assessee has books ofaccount which are accepted and in which there is a cash balance sufficient tocover the amount of high denomination notes. Each case must depend upon its ownpeculiar facts. A few illustrative cases may be noticed, because they show somedifferences in the approach to the problem. In Chunilal Ticamchand Coal Co.,Ltd., v. Commissioner of Income Tax, Bihar and Orissa : 27ITR602(Patna) ,high denomination notes of the value of Rs. 68,000 were encashed. Evidenceshowed that the assessee was in the habit of keeping large sums which he keptintact for emergencies and meeting the current needs from withdrawals from thebanks. This explanation was supported by receipts and disbursement in the booksof account. The explanation was rejected as to a part because the accounts didnot mention the high denomination notes and further because such notes werehardly needed to pay wages to labourers. The Tribunal, however, held that theexplanation might be true as to a part and accepted it in respect of Rs.35,000, rejecting it in respect of Rs. 33,000. The Patna High Court held thatthe explanation which was held to be reasonable as to a part must be good forthe whole, because there was no material on which it could be held that thebalance constituted income from some undisclosed source to distinguish the caseabout the part rejected from the part accepted.
11. In Mehta Parikh & Co. v. Commissioner of Income Tax, Bombay ( 30 I.T.R. 181., high denomination notes of the value of Rs. 61,000 wereencashed. The explanation was that they were part of the cash balance on hand.The accounts disclosed that in order to sustain the explanation, it would haveto be presumed that the entire balance on January 1, 1946, was held in 18 notesof Rs. 1,000 each and that all receipts up to January 18, 1946, when the noteswere encashed, were also in high denomination notes. The affidavits of personswho stated that they had paid amounts in Rs. 1,000 notes were not accepted. TheTribunal accepted the explanation as to Rs. 31,000 only. This Court held thatif the account books were accepted and the deponents were not cross-examined ontheir affidavits, the rejection of the explanation as to a part proceeded onlyon surmise and the finding that Rs. 30,000 were income from some undisclosedsource was based on no evidence. It may be pointed out that Venkatarama AyyarJ., in that case, chose to rest his decision on the second ground only,treating the decision as involving an error of law. But in Sovachand Baid v. Commissioner of Income Tax : 34ITR650(SC) , high denomination notes ofthe value of Rs. 2,28,000 were encashed. The assessee stated that he hadinherited that amount from his father in 1942, and produced account books from1926 to 1942. He did not produce earlier account books. The Tribunal found thatthe books were such as could be written at any time and did not contain fulldealings even between 1926 and 1942, and there were no entries showing that anyamount as such was received from business. The Tribunal, however, held that Rs.1,28,000 only was income from some undisclosed source. The assessee's appeal inthis Court was dismissed, because the rejection of the account books was heldto be reasonable in the circumstances of the case. This Court observed that thepartial rejection of the explanation by the Tribunal must be treated as aconcession rather than a reasoned conclusion.
12. We now come to Lalchand Bhagat's case which is strongly relied upon,particularly, as it has cited the Allahabad case, so it is said, with completeapproval. It is therefore, necessary to examine it closely to see if there issuch an approval. In that case, 291 high denomination notes of the value of Rs.2,91,000 were encashed. The assessee was maintaining for a long time past twoaccounts : one was known as 'Almirah Account', and other, 'RokarAccount'. On the date the notes were encashed there was a balance of Rs.2,81,397 in the almirah account and Rs. 29,284 in the rokar account. These twoamounts between them were sufficient to cover the encashed notes. Theexplanation was that for the purposes of the business which was distributed inmany branches, a large amount of ready cash was always kept at the head office,so that any emergency might be met. The business of the assessee was admittedlyextensive and the almirah account had also existed for several years. Except inthe previous year in which the high denomination notes were encashed, even thenumbers of the high denomination notes used to be shown in the almirah account.The explanation was rejected on the ground that those were the days ofemergency and the assessee, as a grain dealer, could have secretly made moneyby smuggling grain, and that he had once been prosecuted, though acquitted. Itwas also said that the area where he did his business was notorious forsmuggling and also that he had speculated in the year and might easily havemade profits, though he had returned a loss from speculation. Emphasis was alsolaid upon the fact that in the year of account, the numbers of the highdenomination notes were written subsequently. The Tribunal accepted the twobooks of account as genuine and also that there was a balance of Rs. 3,10,681with the assessee. Before the Tribunal it was explained that in the year ofaccount the numbers of the high denomination notes were inserted in the almirahaccount out of nervousness owing to the demonetization of the notes. TheTribunal accepted the explanation with regard to Rs. 1,50,000 and rejected itwith regard to Rs. 1,41,000. No reasons were given for distinguishing the goodpart of the explanation from the bad.
13. This Court examined the reasons and held that except for the insertionof the numbers of notes in the book, none of the other reasons had anyprobative value and that they were mere conjectures and surmises. This courtpointed out that if the explanation for the interpolations was good for theacceptance of the explanation as to Rs. 1,50,000, it must be held to be goodalso for the balance, because there was nothing to distinguish between the twoparts. This Court, therefore, pointed out that the main question about Rs.1,41,000 was whether there was any material to justify a different conclusionin respect of that amount and pointed to the following facts. The assessee hadestablished the need for keeping a large sum on hand and had proved the almirahaccount as a genuine account. The almirah account contained the numbers of thehigh denomination notes in the years previous to the year relative to theassessment. In that year, the numbers were inserted subsequently and this wasthe only substantial point against the assessee. This Court also pointed outthat there were statements of banks and accounts of the branches and of beoparis,showing that large amounts were received by the assessee, which made up theamount in the almirah account. Between February 6, 1945 and January 11, 1946,when the notes were encashed, sums above Rs. 1,000 received by the assesseeaggregated to as much as rupees five lakhs. As the almirah account was notquestioned by the Tribunal at all, and out of that amount, more than half washeld to be in the shape of high denomination notes, this Court posed thefollowing question :-
'Was there any material on record which wouldlegitimately lead the Tribunal to come to the conclusion that the nature of thesource from which the appellant derived the remaining 141 high denominationnotes of Rs. 1000 remained unexplained'.
14. The Court, therefore, concluded :
'If the entries in the books of account in regardto the balance in the Rokar and the balance in the Almirah were held to begenuine logically enough there was no escape from the conclusion that theappellant had offered reasonable explanation as to the source of the 291 highdenomination notes of Rs. 1000 each which it had encashed on January 19,1946'.
15. The case of assessee was thus accepted in toto. This Court did not holdthat the assessee need not prove anything. As we have said earlier, the burdenof proof must depend on the facts of the case. One such fact may be theexistence of a large floating cash balance on hand, and taken with other facts,may be sufficient to show that the high denomination notes constituted thewhole or part of that balance. In the Allahabad case, such a balance was provedand was accepted as to a part by the Tribunal. The High Court held that theexplanation was good for the whole of the amount of the notes. No doubt, thisCourt, in referring to that case, summarised the reasons, but it pointed outthat it was not open to the Tribunal to make a guess as to the number of highdenomination notes which could be accepted, and cited the Allahabad case andsome others in that connection.
16. It seems to us that the correct approach to questions of this kinds inthis. If there is an entry in the account books of the assessee which shows thereceipt of a sum or conversion of high denomination notes tendered forconversion by the assessee himself, it is necessary for the assessee toestablish, if asked, what the source of that money is and to prove that it doesnot bear the nature of income. The Department is not at this stage required toprove anything. It can ask the assessee to bring any books of account or otherdocuments or evidence pertinent to the explanation if one is furnished, andexamine the evidence and the explanation. If the explanation shows that thereceipt was not of an income nature, the Department cannot act unreasonably andreject that explanation to hold that it was income. If, however, theexplanation is unconvincing and one which deserves to be rejected, theDepartment can reject it and draw the inference that the amount representsincome either from the sources already disclosed by the assessee or from someundisclosed source. The Department does not then proceed on no evidence,because the fact that there was receipt of money, is itself evidence againstthe assessee. There is thus prima facie evidence against the assessee which hefails to rebut, and being unrebutted, that evidence can be used against him byholding that it was a receipt of an income nature. The very words 'anundisclosed source' show that the disclosure must come from the assesseeand not form the Department. In cases of high denomination notes, where thebusiness and the state of accounts and dealings of the assessee justify areasonable inference that he might have for convenience kept the whole or apart of a particular sum in high denomination notes, the assessee prima faciedischarges his initial burden when he proves the balance and that it mightreasonably have been kept in high denomination notes. Before the Departmentrejects such evidence, it must either show an inherent weakness in theexplanation or rebut it by putting to the assessee some information or evidencewhich it has in its possession. The Department cannot by merely rejectingunreasonably a good explanation, convert good proof into no proof. It is withinthe range of these principles that such cases have to be decided. We do notthink that the Allahabad view puts no burden upon the assessee and throws theentire burden on the Department. The case itself does not bear this out. If itdoes, then, it is not the right view.
17. In the present case, the assessee claimed that the high denominationnotes were a part of the cash balance at the head office. The Income TaxOfficer found that at first the cash on hand was said to be Rs. 1,62,022, buton scrutiny, it was found to be wrong. Indeed, the assessee himself correctedit before the Appellate Assistant Commissioner and stated there that thebalance was Rs. 1,21,875. Ordinarily, this would have prima facie proved thatthe assessee might have kept a portion of this balance in high denominationnotes. But the assessee failed to prove this balance, as books of the assesseedid not contain entries in respect of banks. Though cash used to be receivedfrom banks and sent to the various places where works were carried on and viceversa, no central account of such transfers was disclosed. There was also noaccount of personal expenses of the assessee and he had failed to prove whysuch large sums were kept on hand in one place when at each of the places wherework was carried on, there were banks with which he had accounts. The AppellateAssistant Commissioner also went into the question and found that on the sameday when the high denomination notes were encashed, a sum of Rs. 45,000 wasdrawn by cheque. The next remittance immediately afterwards was of Rs. 16,000to Bokaro, but Rs. 17,000 were withdrawn a few days before to meet thisexpense. A withdrawal of Rs. 8,000 was made a day later and Rs. 20,000 werewithdrawn ten days later to finance the business. It appears that the money onhand (Rs. 45,000) was not touched at all, but on January 30, 1946, a furthersum of Rs. 6,000 was withdrawn and not utilized, which made up the sum of Rs.51,000 for which the high denomination notes were encashed.
18. On these facts, the Tribunal came to the conclusion that the highdenomination notes represented not the cash balance but some other money whichremained unexplained, and the Tribunal treated it as income from someundisclosed source. The High Court held on the above facts and circumstancesthat there were materials to show that Rs. 51,000 did not form part of the cashbalance, and the source of money not having been satisfactorily proved, theDepartment was justified in holding it to be assessable income of the assesseefrom some undisclosed source. In this conclusion, the High Court was justified,regard being had to the principles we have explained above.
19. The argument that as this was a case under s. 34 of the Income Tax Act,it cast a special burden on the Department to show that this income had escapedearlier, need not detain us. No doubt, proceedings under s. 34 can only becommenced under the conditions prescribed in the section, but when theproceedings are validly commenced, there is no difference between an ordinaryassessment and an additional assessment under s. 34, and the same rule as toburden of proof governs the additional assessment.
20. In our opinion, this appeal has no substance; it fails and is dismissedwith costs.
21. Appeal dismissed.