1. As these two cases arise out of the same order of the Tribunal they are dealt with together.
2. The assessee is a public limited company carrying on business in the manufacture and sale of yarn. In the accounts of the assessee for the assessment year 1948-49, the previous year being the year ending on December 31, 1947, there were the following credits in the name of one N. T. Thenappa Chettiar, a resident of the former native State of Pudukottah.
3. In the course of the assessment proceedings the particulars about N. T. Thenappa Chettiar were called for and they have been duly furnished. The assessee had filed a return showing a business loss of Rs. 1,54,150. The assessment was completed on March 21, 1953, determining the net loss at Rs. 1,50,836.
4. Subsequent to the completion of the assessment the Income-tax Officer made some enquiries as to the status of Thenappa Chettiar. The enquiries revealed that Thenappa Chettiar was a man of little means and that he could not have advanced a heavy sum of Rs. 3,00,000 to the assessee. The Income-tax Officer thereupon felt that the said cash credits in the name of Thenappa Chettiar should really represent the undisclosed business profits of the assessee. He, therefore, initiated proceedings under Section 34(1)(a) of the Indian Income-tax Act, 1922. The assessee objected to the reopening of the assessment on the ground that the credit in the name of Thenappa Chettiar has been examined and accepted as genuine in the course of the original assessment proceedings and that the assessee having disclosed fully and truly all materials necessary for the assessment, the Income-tax Officer had no jurisdiction to initiate, proceedings under Section 34(1)(a). The Income-tax Officer, however, rejected the objection and held that the information that Thenappa Chettiar was a man of little means and would not have been in a position to advance such a large sum was not before the Income-tax Officer at the time when the original assessment was completed and the assessee having failed to disclose fully and truly all materials relating to the said credit in the name of Thenappa Chettiar, the initiation of proceedings under Section 34(1)(a) is valid. Apart from the legal objection the assessee also contended before the Income-tax Officer at the stage of the reassessment proceedings that the credit in the name of Thenappa Chettiar was a genuine one for the following reasons :
(1) that the creditor had accepted the advance ;
(2) that the interest on the advance had been assessed in the hands of Thenappa Chettiar ; and
(3) that there was proper evidence of repayment of the advances. In the course of the reassessment proceedings it had been found by the Income-tax Officer that Thenappa Chettiar had purchased bank drafts at Madurai on March 11, 1947, and April 15, 1947, for Rs. 1,90,000 and Rs. 2,05,000 in his name on a bank in Colombo and cashed by him there and then remitted back in Madurai in the form of drafts in his name on March 27, 1947, and April 27, 1947, for Rs. 1,85,000 and for Rs. 2,05,000 respectively. But in his explanation as to the source for the amounts credited in the assessee's account, Thenap'pa Chettiar had stated that he had earned Rs. 5,00,000 in races and in broker business in Ceylon, that these moneys were remitted to Madurai through Indian Overseas Bank Ltd. in the form of bank drafts and that out of this sum of Rs. 5,00,000 Rs. 3,00,000 was deposited with the assessee and the balance of Rs. 2,00,000 with Golden Hill Tea Estates Ltd. In view of the fact that Thenappa Chettiar's explanation did not fit in with the actual remittances of the fund made from Madurai to Colombo, the Income-tax Officer disbelieved the version of Thenappa Chettiar, and proceeded to hold that the sum of Rs. 3,00,000 found in the assessee's account did not belong to Thenappa Chettiar but really belonged to the assessee. He also took note of the fact that there was ample scope for black marketing of yarn in the assessment year in question and that, therefore, it was possible that the assessee had substantial extra monies and kept it in the name of Thenappa Chettiar who is only a name-lender. The Income-tax Officer also held that the sum of Rs. 2,05,000 deposited by Thenappa Chettiar with the Golden Hill Tea Estates Ltd. also belonged to the assessee and that, therefore, this amount also should be taken to be the secret profits of the assessee. In this view the Income-tax Officer revised the assessment by treating the sum of Rs. 5,05,000 together with the interest of Rs. 6,633 alleged to have been paid to Thenappa Chettiar as the assessee's business income.
5. On an appeal the Appellate Assistant Commissioner also held that the reassessment proceeding initiated under Section 34(1)(a) was valid and that the inclusion of a sum of Rs. 3,00,000 as business profits of the assessee was justified on the facts. He, however, held that the above sum of Rs. 2,05,000 which has been found deposited in the name of Thenappa Chettiar with the Golden Hill Tea Estates Ltd. by Thenappa Chettiar cannot be taken to be the business profits of the assessee and that there was no justification for considering credits in the business of Golden Hill Tea Estates Ltd. in the assessment of the assessee. Thus, while confirming the inclusion of the above Rs. 3,00,000 in the reassessment of the assessee he deleted a sum of Rs. 2,05,000 from the assessment. As regards the sum of Rs. 3,00,000 which was added as business profits of the assessee in the reassessment proceedings by the Income-tax Officer, the Appellate Assistant Commissioner held that out of the sum of Rs. 3,00,000, Rs. 1,85,000 should be considered as income from undisclosed sources in the previous assessment year as the assessee could not have earned it during the assessment year in view of the price and distribution control of yarn, and that only the balance of Rs. 1,15,000 as also the interest amount of Rs. 6,633 should in fact represent the income from other sources of the assessment year.
6. Both the assessee as well as the revenue went before the Tribunal. On behalf of the assessee it was submitted that there was no justification for the reopening of the assessment under Section 34(1)(a) and that in any event the materials on record cannot justify the finding that a sum of Rs. 1,15,000 represents the income of the assessee from other sources during the assessment year as the assessee had no other source of income apart from the business. The assessee also contended that no income had accrued from other sources in the earlier year and as such the sums of Rs. 1,85,000 and Rs. 6,633 as income from other sources during that year was not justified. The assessee also attacked the findings of the Income-tax Officer as well as the Appellate Assistant Commissioner that the credits in the name of Thenappa Chettiar were not genuine and those advances represent in fact the assessee's secret profits from business. It was also pointed out that Thenappa Chettiar had accepted the credits and also the withdrawals of the entire sum later, and that, therefore, there was no material to support the conclusion that they represented the undisclosed income of the assessee. On behalf of the revenue it was contended before the Tribunal that the proceedings initiated under Section 34(1)(a) were valid and fully justified, that the materials on record disclosed that the credits in the name of Thenappa Chettiar should really represent the undisclosed income of the assessee, and that Thenappa Chettiar, a man of little means, could not have advanced a sum of Rs. 3 lakhs to the assessee. The Tribunal considered the rival contentions of the assessee and the revenue, and ultimately held that the reassessment proceeding under Section 34(1)(a) was not valid and that in any event the materials do not justify the findings that the credits in the name of Thenappa Chettiar to the extent of Rs. 3,00,000 represented the undisclosed income of the assessee.
7. At the instance of the revenue the following question has been referred to this court in T. C. No. 125 of 1968 :
' Whether on the facts and in the circumstances of the case, the action under Section 34(1)(a) of the Income-tax Act, 1922, was not justified '
8. The two questions referred to in T. C. No. 294 of 1970 were also at the instance of the revenue, but the reference has been made after a direction has been given by this court, under Section 66(2) of the Indian Income-tax Act, 1922. These questions are as follows:
' 1. Whether the Appellate Tribunal had material to hold and had arrived at a reasonable conclusion on facts in holding that there was no justification to assess the sum of Rs. 1,15,000 and Rs. 6,633 as the assessee's income from business or from undisclosed sources '
'2. Whether the Appellate Tribunal was light in law in holding that the Appellate Assistant Commissioner had no jurisdiction to direct the assessment of Rs. 1,15,000 and Rs. 6,633 as income from undisclosed sources '
9. The question involved in T. C. No. 125 of 1968 deals with the scope and ambit of Section 34(1)(a) of Indian Income-tax Act, 1922. It is seen that the Tribunal dealt with this question relating to the jurisdiction of the Income-tax Officer for initiating proceedings under Section 34(1)(a) after dealing with the merits of the reassessment. Having held that the materials on record do not justify the reassessment, it proceeded to hold that the materials gathered by the Income-tax Officer subsequent to the original assessment did not establish that there was any failure on the part of the assessee to disclose fully and truly all material facts, that the assessee having furnished all the primary relevant facts called for in relation to the credit in the name of Thenappa Chettiar, the proceedings cannot be initiated under Section 34(1)(a) and that the Income-tax Officer has merely tried to make good his deficiency in the original assessment by initiating reassessment proceedings.
10. It is the contention of the revenue before us that the Tribunal should have dealt with the question of jurisdiction under Section 34(1)(a) first, before considering the merits of the reassessment and that its conclusion on merits of the assessment has coloured its view on the question of jurisdiction. It is also contended by the revenue that in this case the onus is on the assessee to prove the truth of the credits found in the name of Thenappa Chettiar in its books and that though at the original assessment stage the statement made by the assessee relevant to the credit entry was accepted and the assessment completed on that basis, the subsequent enquiry had revealed that the amount cannot belong to Thenappa Chettiar, that the inconsistent statement and materials produced by Thenappa Chettiar had led to the inference that the amount cannot really belong to Thenappa Chettiar, that the materials gathered as a result of the subsequent enquiry formed sufficient basis for the Income-tax Officer to reasonably conclude that the amount should really belong to the assessee and not to Thenappa Chettiar, and that as such the initiation of proceedings under Section 34(1)(a) is legal and justified. According to the learned counsel for the revenue for deciding the question of jurisdiction to initiate the proceedings under Section 34(1)(a) the sufficiency of the material cannot be gone into and it is enough if the Income-tax Officer had reason to believe that the statement made by the assessee as to the credits in the name of Thenappa Chettiar was not true. The learned counsel for the revenue contends that the reasoning of the Tribunal that the assessee having produced the account books and all information necessary for the assessment is not under a duty to prove the financial status of the creditors, and that once the details of the creditors are given it is for the department to make investigation and then, complete the original assessment is erroneous and that the said view of the Tribunal is not in accord with the view taken in Anne Nagendram and Bomma Reddi Venkayya and Co. v. Commissioner of Income-tax : 66ITR46(AP) , Commissioner of Income-tax v. T.S.PL. P. Chidambaram Chettiar : 80ITR467(SC) and in V.N.S. Sockalingam Chettiar v. Commissioner of Income-tax : 91ITR224(Mad) . We are inclined to agree with the above contention of the learned counsel.
11. In Anne Nagendram and Bomma Reddi Venkayya and Co. v. Commissioner of Income-tax, which is also a case relating to cash credits, it was observed:
' Where the Income-tax Officer . ..... after considering the cash credits accepted them and allowed interest, when it is subsequently discovered that those cash credits are false and not genuine, the provisions of Section 34(1)(a) can be invoked because that would be a non-disclosure fully or truly of all material facts necessary for the assessment.'
12. In Commissioner of Income-tax v. T. S. PL. P. Chidambaram Chettiar, their Lordships of the Supreme Court dealing with a similar situation expressed that :
' the Income-tax Officer could have made further enquiry into the matter but the fact that he did not make any further enquiry does not take the case out of Section 34(1)(a) particularly when the assessee had failed to place truly and fully all the material facts before him.'
13. This decision sufficiently meets the observation of the Tribunal that it is for the Income-tax Officer to have made a detailed enquiry at the stage of the original proceedings as to whether Thenappa Chettiar was a man of little means and whether he had sufficient funds in his hands to make the deposits in question with the assessee, and that having not done so, he is not entitled to invoke Section 34(1)(a) even if the subsequent materials disclosed that the amounts may not belong to Thenappa Chettiar. In a recent decision, this court in V.N. Sockalingam Chettiar v. Commissioner of Income-tax pointed out that if a fresh information or new material showed that the original information given by the assessee was not full or fully true, Section 34(1)(a) could be invoked, that if the original statement were not true or full it is certainly not a disclosure, much less a true and full disclosure, and that such a disclosure as had been made in the original assessment proceedings would only tend to mislead the authorities. These decisions indicate that if the materials coming to the knowledge of the Income-tax Officer or gathered by him subsequent to the original assessment showed that the statements made by the assessee at the stage of the original assessment proceedings cannot be true or full, then he is entitled to initiate proceedings under Section 34(1)(a) notwithstanding the fact that he has accepted the statements of the assessee made at the stage of the original assessment without further scrutiny. We are not inclined to agree with the Tribunal that in this case the Income-tax Officer has tried to make good his deficiency in the original assessment. Admittedly, the materials gathered by the Income-tax Officer which formed the basis of the reassessment were not there at the stage of the original assessment. He had no opportunity to consider these materials at that stage. There is, therefore, no question of any deficiency in his original assessment. It is in view of the materials gathered subsequently after the original assessment, the reassessment had been initiated on the ground that from those materials it is reasonable to infer that the statement made by the assessee regarding the credits in the name of Thenappa Chettiar cannot be true. We are of the view that, on the materials, the initiation of proceedings under Section 34(1)(a) was justified. The question referred in T.C. No. 125 of 1968 is, therefore, answered in favour of the revenue.
14. As regards the questions raised in Tax Case No. 294 of 1970 the first , question relates to the assessment of sums of Rs. 1,15,000 and Rs. 6,633 as the assessee's income from business or from undisclosed sources. As already stated the Tribunal has held that the materials on record are not sufficient to base a reasonable conclusion that the said sums represent the assessee's income either from business or from undisclosed sources. This finding of the Tribunal has been challenged by the revenue before us. According to the revenue the materials available can lead only to one conclusion that the credit entries in the name of Thenappa Chettiar should in fact represent the concealed income of the assessee. Various materials have been referred to before us. But the main circumstance pointed out is that Thenappa Chettiar when examined has given a statement that he got a sum of Rs. 5,00,000 from races, lotteries, chits and the broker business in Ceylon, which is definitely falsified by his own admission that the sum of Rs. 3,95,000 was sent from Madurai to Colombo and got back by bank drafts a few days later, that in fact records disprove Thenappa Chettiar's statement that he got a sum of Rs. 5,00,000 from races, etc., in Ceylon and that amount was deposited with the assessee. One other circumstance pointed out was that Thenappa Chettiar has been found to be a man of little means. Except a house, he had no other sources of income nor was he in possession of any funds at or about the time he is said to have advanced the amount to the assessee. Whatever be the source, the facts admittedly disclose that the assessee received a sum of Rs. 3,90,000 on or about April, 1947, through the Indian Overseas Bank, Madurai. Though the learned counsel points out that there is no proof this amount was advanced to the assessee, the fact remains that Thenappa Chettiar in fact had a sum of Rs. 3,90,000 in April, 1947. One other factor that has also to be taken into account is that the sum said to have been advanced by Thenappa Chettiar with Golden Hill Tea Estates (P.) Ltd. has been found to be true by the Appellate Assistant Commissioner and that finding has not been challenged. It also in a way supports the assessee's stand that Thenappa Chettiar is a man of means and he was in a position to advance a sum of Rs. 3,00,000 to the assessee-company. The inference that had been suggested by the revenue at earlier stages and also before us is that the assesses could have arranged to send the amount to Colombo and get it back to Madurai in the name of Thenappa Chettiar through bank drafts so as to make it appear that the amount really belonged to Thenappa Chettiar. As pointed out by the Tribunal it has not been shown that the assessee was in any way connected either with the remittances of the amount of Rs. 3,95,000 in April, 1947, from Madurai to Colombo in the name of the assessee or with the purchase of bank drafts at Madurai. In the circumstances, we have to proceed on the basis that Thenappa Chettiar came to possess those funds by some means, that the fact that Thenappa Chettiar was not able to properly disclose his sources for those monies cannot be used against the assessee and the assessee cannot be said to have been the owner of those monies. We are inclined to agree, on those facts and circumstances of the case, with the view of the Tribunal. The revenue has not made out its case that the credits in the name of Thenappa Chettiar represent the undisclosed income of the assessee.
15. As a matter of fact a case on all fours' with the facts of this case came up for consideration in Commissioner of Income-tax v. Daulat Ram Rawatmull : 87ITR349(SC) . In that case also an assessee's books disclosed credit entries to a sum of Rs. 5,00,000 in the name of one Biswanath. The explanation furnished by Biswanath with regard to the source of the said sum of Rs. 5,00,000 in his personal assessment was found to be incorrect and false. This fact was taken into account by the Tribunal for arriving at a conclusion that the said sum of Rs. 5,00,000 in the name of Biswanath was the concealed income of the assessee. The High Court took the view that such circumstance alone was not sufficient to hold that the sum was really relating to the assessee. When the matter ultimately came before the Supreme Court, it expressed the view that the fact that Biswanath was not able to give satisfactory explanation regarding the source of income of Rs. 5,00,000 would not be decisive even of the matter as to whether Biswanath was or was not the owner of that amount, that a person can still be held to be the owner of a sum of money even though, the explanation furnished by him regarding the source of that money is found to be not correct and from the fact that the explanation regarding the sources of money furnished by Biswanath in whose name the money is lying in deposit has been found to be false, it would be a remote, and far-fetched conclusion to hold that the money belongs to the assessee. The above decision squarely applies to the facts of this case. In this case, as already stated, the revenue has established only that Thenappa Chettiar was not in a position to explain the source for the monies deposited in his name in the assessee's account. From that fact alone the conclusion cannot be arrived at that the money belonged to the assessee.
16. In this view we have to uphold the view of the Tribunal in this regard. The question No. 1 is, therefore, answered in favour of the assessee.
17. Now that we have held that the sum of Rs. 1,15,000 as well as Rs. 6,633 is not assessable as the assessee's income, the question ' whether the Appellate Assistant Commissioner had jurisdiction to direct the assessment of these two sums only as income from other sources ' cannot arise, and we, therefore, consider it unnecessary to express any opinion on this question. We, therefore, refrain from answering the second question in T. C. No. 294 of 1970.
18. The revenue will have its costs from the assessee in T.C. No. 125 of 1968 and the assessee will get its costs from the revenue in T.C. No. 294 of 1970. Counsel's fee is Rs. 250 in each case.