1. The assessee is a partnership firm engaged in the business of film production. At the material time relevant for the present reference, the assessee-firm had produced a Tamil picture by name 'pasam'. It came to light that the assessee had paid the artists and technicians, who were engaged in that firm remuneration in excess of that which was brought to account. The ITO estimated the excess expenditure on this account at Rs. 2,96,520. He regarded this amount as income from 'other sources' and assessed it as such in the hands of the assessee-firm. On appeal by the assessee, the AAC sustained the finding of the ITO. He held that Rs. 2,96,520 represented understatement of production expenses and the amount was properly added as income from 'other sources' because the assessee-firm had no known sources of income for meeting the excess expenditure which had not been brought into account. The reasoning of the AAC was as follows :
'Since I am sustaining the addition of a sum of Rs. 1,05,000 out of the production expenses as either not incurred or deliberately inflated, it would be reasonable to hold that money to this extent would be available to the appellant. Therefore, the addition under 'other sources' would be restricted to a sum of Rs. 1,91,520'.
2. For some reason known only to themselves the Department did not object to the deletion by the AAC of Rs. 1,05,000 from the total income. They apparently agreed that the amount had to be set off against the years unaccounted expenditure of Rs. 2,96,520. The assessee, however, preferred an appeal to the Tribunal. In that appeal, the assessee raised an additional ground to the effect that the amount of income assessed under 'Other sources' and sustained by the AAC in the sum of Rs. 50,000 according to the assessee represented expenditure, which was disallowed in an earlier assessment for the year 1961-62, and it had to be given a set-off in this year. The Tribunal allowed the appeal and reduce the addition of Rs. 1,41,520. The Tribunal accepted the plea of the assessee for the reduction of the assessment by Rs. 50,000 with the following observation :
'There is also no material to show that the said sum of Rs. 50,000 was spent away or utilised for other purposes. In the absence of such material, the assessee cannot be denied the benefit of the availability of the said sum of Rs. 50,000 for being set off against the addition made by the Appellant Assistant Commissioner'.
3. In this reference, the order of the Tribunal is challenged by the Department on the following two question of law :
'1. Whether, on the facts and in the circumstances of the case, the Appellant Tribunal was right in law in holding that the disallowance of Rs. 50,000 as expenditure incurred but not proved in 1961-62, assessment is available for set-off against the unaccounted for payments and reducing the addition in the assessment year 1963-64 accordingly
2. Whether, on the facts and in the circumstances of the case, the Appellant Tribunal had valid material or evidence to hold that the intangible addition made by disallowance of unproved expenditure in earlier years could be available with the assessee intact for payments to the artists after a period of two years ?'
4. Learned counsel for the Revenue raised two contentions before us. One was that the Tribunal was not justified in giving a set-off against the addition made in the assessment year 1963-64 of Rs. 50,000, which was disallowed as expenditure in the assessment year 1961-62. Secondly, learned counsel submitted that there was no material whatever to support the Tribunal's finding that the sum of Rs. 50,000 which was disallowed in 1961-62 and which must represent the assessee's income outside the books, remained intact for two years and more and was available with the assessee so as to justify a pro tanto reduction in the addition made during the assessment year 1963-64. Learned counsel further submitted that the Tribunal was in error in throwing the onus on the Department to prove that the amount of Rs. 50,000 which was supported to be available to the assessee outside the books was spent by the assessee and not retained for being made available in the subsequent years right up to the assessment year 1963-64.
5. Before addressing ourselves to considering the contentions of the learned counsel for the Department, we would observe that cases of this kind where set-off is claimed as between one disallowance and another, or as between one addition and another in income-tax assessments would sound extremely artificial but for the fact that they have had all-round judicial approval. The theory of set-off intangible additions made in an assessment as against unexplained cash credits or unexplained investments became respectable with the decision of this court in Kuppuswami Mudaliar's case : 51ITR757(Mad) , and the earlier decision of the Andhra High Court in Lagadapati Subba Ramaiah v. CIT : 30ITR593(AP) . In both these decisions, the doctrine which was handed down was that where intangible additions are made in an assessment, these additions would, for the purpose of income-tax, represent the assessees real income so that they must be regarded as available to him when subsequently he is asked to explain cash credit entries in his accounts, or unexplained investments in the Supreme Court recently had occasion to deal with the way in which this doctrine has got to be applied in given cases. They observe that when intangible additions to book profits are max. during an assessment proceeding, they must be on the basis that the amount represented by that addition constitutes the undisclosed income of the assessee. That income, although commonly described as intangible, would represent as much be held to be available to the assessee in the same way as book profit would be available. The Supreme Court further observed that the secret profits or undisclosed income of the assessee earned in an earlier assessment year, might very well be regarded as constituting a fund, even though concealed, from which the assessee may be in a position to draw upon subsequently for meeting the expenditure or for introducing entries of cash credits in his account books. The court, however, uttered a caution against a universal proposition in all cases that any part of the secret profits or undisclosed income of an earlier year of an assessee must necessarily be regarded as providing the source of unexplained expenditure incurred or of cash credits recorded during any subsequent year. According to the Supreme Court, it is a matter for consideration in each case, whether the unexplained cash deficits and cash credits of the assessee can be reasonably attributed to a pre-existing fund of concealed profits or could be reasonably explained by reference to concealed income earned in that very year. In each case, the Supreme Court said the true nature of the cash deficit and the cash credit must be ascertained from an overall consideration of the particular facts and circumstances of the case. Proceedings further, the Supreme Court observed that evidence may exist to show that reliance cannot be placed as a matter of presumption on the availability of a previously earned undisclosed income. A number of circumstances of vital significance may point to the conclusion that the cash deficit or cash credit cannot reasonably be related to the amount covered by the intangible additions of the past years, but, on the contrary, must be regarded as pointing to the receipt of undisclosed income earned during the assessment year under consideration.
6. With respect, the decision of the Supreme court in Anantharam Veerasinghaiah's case : 123ITR457(SC) , more than any other authority, has put the record straight on this part of income-tax law and practice, which is one of constant recurrence in the assessments of taxpayers who hail from the business class. We must, therefore, proceed to examine the present case on the basis of the test laid down by the Supreme Court. But before doing so, we would express our perplexity about the lack of any inherent basis for the assessee claim in this case, which has not been realised, much less commented upon, either by the AAC or by the Tribunal. Here is a case, where there was actual proof of the assessee not having brought into account outgoing towards remuneration of artists amounting to Rs. 2,96,520. Since this expenditure did not pass through the assessee's accounts but there was evidence all the same to show that the expenditure had been actually incurred, the ITO was justified in holding that the assessee must have earned income outside the books at least to an extent sufficient to meet this unaccounted expenditure during the year. On that footing, the officer was within his rights in making the addition under the head whether sources' to the income returned by the assessee. In these circumstances, it is difficult for us to understand how this amount of undisclosed income can, to any extent, be argued away by reference to any extraneous considerations. The AAC gave a set-off amounting to Rs. 1,05,000 against this sum of Rs. 2,96,520. The logic of the set-off was that Rs. 1,05,000 had been disallowed by the ITO in this very assessment out of the expenditure actually claimed by the assessee and entered in his books. The AAC, however, was not quite clear about the reason for the disallowance of the expenditure of Rs. 1,05,000 by the officer. The disallowance might have been either because the expenditure was not proved or because the expenditure was inflated, in the sense of being fictitious. If the expenditure was not proved, it does not mean that the expenditure was not incurred. If the expenditure was actually incurred, then the amount of expenditure so incurred cannot,, at the same time continue to remain as money in the hands of the assessee, and serve as a secret fund from which the assessee could draw for purposes of business. An inflation of expenditure, on the other hand, might possibly denote a fictitious figure in the accounts, depicting outgoings which are not really outgoings at all. In this sense, the money involved could possibility be held to remain with the assessee although outside the books. Without any clear idea as to whether expenditure was incurred, but not proved, or whether it was not incurred at all, the AAC nevertheless thought that the disallowance by the ITO to the extent of Rs. 1,05,000 inevitably led to the conclusion that to that extent the assessee must be regarded as possessing funds outside is accounts so as to render that amount available for set-off against the amount of undisclosed income included in the assessment.
7. We are conscious that what the AAC did by way of granting set-off for Rs. 1,05,000 is not strictly before us in this reference. This is because the Department did not make a controversy out of it, and did not file an appeal against that part of the AAC's order before the Tribunal. Our discussion of the action of the AAC is only to illustrate how slender can be the link sought to be established by the assessee between proved concealment of income, on the one hand, and amounts added back by way of disallowed expenses or intangible additions on the other. In one sense, the order of the AAC has served us as a plank for discussing the crucial issue in this case as to how and to what extent the undisclosed expenditure of the assessee for 1963-64 could be set off against the disallowance of expenditure in an earlier year 1961-62. For, the Assistant Commissioner's order alone contains a justification on principle for the set off, although briefly stated. The Tribunal's order on the point is far too sketchy for an examination or review to be made of it on the basis of principles or precedents. We can only gather that the Tribunal must have proceeded on the footing that the disallowance of the expenditure of Rs. 50,000 in the assessment year 1961-62 was a kind of disallowance on which the doctrine of set-off of intangible additions can property be worked out. The Tribunal did not go into the question whether the disallowances to the extent of Rs. 50,000 in the year 1961-62 was on the ground that the expenditure, though incurred has been disallowed as not proved, or on the ground that it was not incurred at all. It does not seem that the Tribunal was aware of the distinction between the two kinds of disallowance of expenditure. Where, for instance, an expenditure is held actually to have been incurred but disallowed by the assessing officer on the ground of want of proof, the money representing that expenditure, could not be still available with the assessee, on the principle that no one can have the cake and eat it too. There is nothing to show in the Tribunal's order that the expenditure was disallowed in 1961-62 on the ground that the expenditure was not incurred at all.
8. Mr. Swaminathan, learned counsel for the assessee, filed before us copies of the assessment proceedings for 1961-62. He did so but way of making good the omission, in the Tribunal's order, of a discussion about what happened in those proceedings. We should ordinarily have refused to look into these papers. For, in a tax reference, this court is strictly confined to the order of the Tribunal for what it says. It is not for the parties to the reference either to support or unsupport the Tribunal order by bringing in fresh material at the time of the reference before us. Nevertheless we looked into the papers filed by the assessee's learned counsel out of sheer curiosity, bust to see under what circumstances the expenditure of Rs. 50,000 happened to have been disallowed in the proceedings for the assessment year 1961-62. The papers show that the assessing officer, in the first instance, disallowed the entire expenditure to the extent of Rs. 82,000 in 1961-62, the ground of disallowance being that the whole of the amount represented 'unproved expenses'. On appeal, the AAC reduced the disallowance to Rs. 50,000. In his order, however, he did not say that the disallowance of Rs. 50,000 in the assessment was sustained by him on any ground other than the ground for which the assessing officer had made the disallowance.
9. The records for the assessment year 1961-62, therefore, are not helpful to the assessee in the present discussion as they do not show that the expenditure of Rs. 50,000 was disallowed by the officer and sustained in appeal by the Assistant Commissioner on the ground that is was a fictitious expenditure, but on the ground, that it was actual, but unproved expenditure. If it was merely unproved it was nevertheless an expenditure which made money go out of the hands of the assessee, in which event the amount cannot be regarded as still being available with the assessee as a fund from out of which the assessee could be said to be capable of drawing money in the subsequent years.
10. Without looking into all these aspects of the case, the Tribunal simply proceeded on the footing that mere disallowance of the expenditure of Rs. 50,000 in the assessment year 1961-62 did made available for the assessee a corresponding amount to draw upon as and when necessary in subsequent years. There is absolutely no basis for this conclusion, much less is there any basis for the Tribunals further remark that the sum of Rs. 50,000 continued to remain intact with the assessee from 1961-62 onwards to 1963-64. We agree with the criticism of the learned counsel for the Revenue that the Tribunal was in error in placing the burden on the Department to show that the sum of Rs. 50,000 had been spent away during the interregnum between 1961-62 and 1963-64.
11. For all the above reasons, we answer the two questions of law against the assessee and in favour of the Department. The assessee will pay the Department's costs. counsel fee Rs. 500.