K. Srinivasan, J.
1. The following question stands referred to us:
Whether on the facts and in the circumstances of the case, there was material for the Tribunal to hold that the sum of Rs. 21,500 which the assessee claimed he had borrowed from Murugesam Pillai and Krishnamurthi of Karaikkal represent income assessable under the head 'Other Sources, and as income from undisclosed sources
2. The assessee carried on the business of clearing and forwarding agency at Nagapattinam. For the assessment year 1956-57, he returned a net income of Rs. 1,993 and that was accepted in so far as his business income was concerned. But, on a scrutiny of the accounts, the Income-tax Officer found various deposits and withdrawals in the name of one Murugesam Pillai and one Krishnamurthi of Karaikkal. In support of his claim that they were merely borrowings and repayments, the assessee filed letters from the two persons referred to. The Income-tax Officer separately corresponded with these parties and they wrote to the officer confirming that they had made deposits with the assessee. The Income-tax Officer however was not satisfied and he asked the assessee to produce the two parties for examination. They were not so produced. Thereafter, enquiries were caused to be made by the Inspector attached to the Department. The Inspector found that there were no persons going by the name of Murugesam Pillai and Krishnamurthi at the addresses given by the assessee. The Income-tax Officer accordingly concluded that they were fictitious persons and that those amounts must be regarded as representing the undisclosed income of the assessee and so brought a total amount of Rs. 21,500 to tax. The assessee appealed, the contention of the assessee being that the credits were genuine and that the transactions were not make-believe ones. Before the Appellate Assistant Commissioner, two affidavits purporting to proceed from these two persons were filed, which that authority however refused to credit. He demanded to be satisfied that these persons had in fact advanced the loans. He offered to remand the case back to the Income-tax Officer if the assessee would undertake to produce the persons before that officer. This offer was declined by the assessee on the ground that those two persons were afraid of the consequence which would follow upon their giving evidence. The result was that the appeal was dismissed. A further appeal to the Appellate Tribunal also failed.
3. On the refusal of the Tribunal to state a case, the assessee moved this Court. This Court by its order dated 22nd December, 1959, observed thus:
To call upon the assessee to produce Murugesam Pillai and Krishnamurthi for examination was not the only method possible to verify the truth or otherwise of the statement made by Murugesam Pillai and Krishnamurthi. From the records placed before us, it would appear that at one stage an Inspector of the Department was sent from Nagapattinam to Karaikkal. The distance was not great. But that Inspector was apparently not able to contact these two gentlemen. Whether either at the stage of the appeal before the Assistant Commissioner or at the stage of the appeal before the Tribunal, a similar course could have been adopted of having Murugesam Pillai and Krishnarmurthi examined at Karaikkal by an Officer or an Inspector of the Department does not appear to have been considered either by the Assistant Commissioner or by the Tribunal. Learned Counsel for the Department represents that even at this stage the Department could send an Inspector provided the assessee could co-operate and arrange for the examination of Murugesan Pillai and Krishnamurthi at Karaikkal. That opportunity, we think should be given to the assessee to represent his view-point effectively. Before drawing up a statement of the case, the Tribunal will endeavour to have Murugesam Pillai and Krishnamurthi examined by an Inspector of the Department...The record of such examination if it fructifies should also be submitted along with the statement of the case.
Pursuant to these directions, these two persons were contacted and examined by an Inspector of the Department and the depositions recorded from them have been annexed to the statement of the case.
4. The principal argument advanced by Mr. Swaminathan, learned Counsel for the assessee, is that the assessee had given the best of his assistance to establish the truth of his claim, namely, that these were loan transactions entered into by the assessee for the purpose of his business. He claims that even at the earliest stage, the Department directly corresponded with these two persons and obtained replies from them confirming the nature of the transactions. That was done by the Department independently of the assessee. According to the learned Counsel that should have settled the decision of this question. It is urged that the Department was not justified in rejecting the statements made by these two persons out of hand and in demanding that the assessee should prove positively by other means that the transactions were of the character which he attributed to them.
5. Reliance has also been placed upon a decision of the Bombay High Court in The Orient Trading Company v. Commissioner of Income-tax : 49ITR723(Bom) . In that case, certain cash credits appeared in the accounts of the assessee. The decision according to the head note is:
If the entry stands not in the name of any such person having a close relation or connection with the assessee but in the name of an independent party, the burden will still lie upon him to establish the identity of that party and to satisfy the Income-tax Officer that the entry is real and not fictitious. When however in a case where the entry stands in the name of a third party, the assessee satisfied the Income-tax Officer as to the identity of the third party and also supplied such other evidence which will show prima facie that the entry is not fictitious, the initial burden which lies upon him can be said to be discharged by him. It will not thereafter be for the assessee to explain further how or in what circumstances the third party obtained money or how or why he came to make a deposit of the money with the assessee. The burden will then shift on to the Department to show why the assessee's case cannot be accepted any why it must be held that the entry though purporting to be in the name of the third party, still represents the income of the assessee from a suppressed source. In order to arrive at such a conclusion, however, the Department has to be in possession of sufficient and adequate material.
Reliance has been placed upon this decision and Mr. Swaminathan, learned Counsel, contends that the assessee has established that the entries are true and genuine and that the third parties in whose names the entries find place are real persons. To that extent he claims the assessee has discharged the onus that initially rests upon him. Learned Counsel argues that unless the Department is further able to show that there is some source of income to the assessee other than those disclosed in his return, it would not be proper for them to correlate those entries with some undiscovered source and to claim that these deposits must represent income from such undisclosed sources.
6. Though in the order calling for a statement of the case, this Court gave certain direction with regard to the examination of Murugesam Pillai and Krishnamurthi, we are exceedingly doubtful whether in the limited jurisdiction which this Court possesses under Section 66 of the Indian Income-tax Act, the collection of further evidence for the assessee or for the Department is at all permissible. Whatever doubts there might have existed on this point have been set at rest by the decisions of the Supreme Court categorically laying down that at this stage of the proceedings it is not within the jurisdiction of the High Court to call for additional evidence of any description. It would therefore follow that the statements recorded from Murugesam Pillai and Krishnamurthi have to be rejected and cannot be taken into consideration in answering the question that stands referred to us. We shall therefore deal with the material firstly without any reference to such additional evidence that has been recorded.
7. Even according to the decision of the Bombay High Court to, the initial burden is always that of the assessee. When the learned Judges say that the assessee should satisfy the Income-tax Officer as to the identify of the third party and also supply such other evidence which will show prima facie that the entry is not fictitious, the initial burden which lies on him can be said to have been discharged by him. What they, to our minds mean is that such evidence as the assessee is able to place before the Income-tax Officer should establish the true nature of the transaction. The entry regarded as an entry is no doubt genuine in the sense that it appears in the accounts of the assessee. That cannot certainly be what the learned Judges meant. It is incumbent upon the assessee to produce evidence to show that the transaction is not a fictitious one, that is to say, he must establish that it was a loan transaction. That would necessarily involve an examination of the circumstances under which the loan was taken or the capacity of the parties put forward as having made the loan to possess funds requisite for the purpose. It is not merely the duty of the assessee to show that the person whose name finds recorded in the book as having made the loan is a real person and that that person comes forward and says that he made the loan. If that was all the substance of the onus that lies upon the assessee, then any entry can be made in the account-books of the assessee and passed off as a genuine transaction with impunity. That is not what, to our minds, the learned Judges of the Bombay High Court say. It is the real nature of the transaction with learned to which the assessee has to produce prima facie evidence and unless that evidence satisfies the Income-tax Officer, the assessee cannot be said to have discharged the onus that lies upon him.
8. In the present case, the assessee did no doubt produce letters from these persons. The Income-tax Officer wrote to them and they again confirmed the making of the deposits. These persons, it must be recalled, were persons resident outside the taxable territory. This feature no doubt justified the existence of a doubt in the minds of the Income-tax Officer with regard to the transaction. If these persons were outside the taxable territory and the possession of funds by them would not be a matter for the Income-tax authorities to take any note of as income earned by them and not taxed, for they would be beyond the ambit of the Indian Income-tax Act,.. there is no reason why those persons should not have appeared and given evidence before the Income-tax Officer. Merely to claim to have made an advance is hardly sufficient, for that claim must necessarily be supported by evidence of the status of the person claiming to make the advance. The refusal of these persons to appear before the Income-tax Officer was undoubtedly very suspicious and we can hardly see any reason to hold that this suspicion was not well-founded. It is again to be mentioned that except for the entries in the account books of the assessee, there was no document of any description which supported the making of the deposit or the repayment of portions thereof.
9. It seems to us that the further argument of the learned Counsel that unless the Department can point to any possible source from which such income could have been derived, it is not open to the Department merely to rely upon undisclosed or undiscovered sources as a head of assessment, must fail. If the assessee has been shown to have received funds which may or may not be in the nature of income, it is for him to show that it is not income. If he fails to establish that fact, depending as he does upon the claim that they represent capital in the shape of a loan taken by him, the only other alternative is to regarded these sums as income. It would be impossible for the Department to trace out from what source such income could be derived. Such an onus does not rest upon the Department before it can bring to tax an unexplained entry which for want of other evidence has to be regarded as income receipt. It follows that even excluding the statements subsequently recorded from these two persons, there was material upon which the Tribunal could reach the conclusion that this sum of Rs. 21,500 must be regarded as income from undisclosed sources.
10. Since this Court has called for such additional evidence and the statements of these two persons form part of the record, we may examine these statements. In his statement, Murugesam Pillai claimed that he had advanced a total amount of Rs. 24,500 to the assessee. He took no promissory notes or bonds. He did not even advance the amounts with a view to getting any interest. When he was asked where-from it was possible for him to make these advances he merely stated that he saved by earning in several ways and that he was keeping it as cash on hand. He did hot even. obtain any receipt for the amounts which he advanced. He had some property till about 1956 which he had sold away and at the time of his examination was living on the support of his nephew. The statement of Krishnamurthi is not much different. He has no records. He advanced the amount on account of friendship, and faith. There was no stipulation with regard to the payment of any interest. He was unwilling to disclose what his sources of earning the money were. Peculiarly enough, the assessee is the only person with whom he had any money dealings.
11. Having read the evidence of these witnesses, it will suffice to state that even if this evidence had been tendered earlier, the Department could not have reached a different conclusion.
12. In the result, the question is answered against the assessee, who will pay the costs of the Department. Counsel's fee Rs. 250.