1. This is a Reference under Section 66(1), Income-tax Act by the Calcutta Bench of the Appellate Tribunal of two questions of Law. One of them is concluded by the judgment we have just delivered in the case Re. -- 'R. C. Miter and Song v. Commissioner of Income-tax, West Bengal, Calcutta' : 28ITR698(Cal) .
2. The facts are as follows: The assessee is Messrs. D. C. Auddy and Brothers, Calcutta, described as an unregistered firm. It is said that the firm commenced on 30-6-1944, and that a deed of partnership was executed on 2-6-1948.
An application for registration of the firm was made on 24-8-1949, with, respect to the assessment years 1945-45 and 1946-47. The accounting year relative to the first of the assessment years was the period between 30-6-1944 and 13-4-1945 and that relative to the second assessment year was the period between 14-4-1945 and 13-4-1946. The deed of partnership was thus executed long after the expiry of even the second of the assessment years.
3. The firm's application for registration having been refused by all the authorities, thefollowing question has been referred to this Court with reference to both the assessment years.
'Whether the Assessee Firm constituted orally in June, 1944, can validly be registered in the assessment years 1945-46 and 1946-47 under Section 26A, Indian Income-tax Act on the basis of a Memorandum of Partnership executed in June, 1948?'
4. We have already held, in ' : 28ITR698(Cal) ' and for the reasons given by us in our judgment in that case, that no registration can be claimed under Section 26A of the Act with respect to any assessment year, unless at or prior to the commencement of the relative accounting year there was an instrument of partnership creating the firm and unless such an instrument governed the distribution of profits in the said accounting year.
5. The answer to the first question set out above must, therefore, be in the negative.
6. A second question has been referred in connection with the assessment for the assessment year 1946-47. It appears that the books of the assessee firm for the relevant accounting year disclosed a gross profits of only 4 per cent.
The Income-tax Officer considered the percentage of profit to be too low and thought that a considerable volume of sales had been suppressed. He therefore added a sum of Rs. 50,000/- as concealed profits of the business which raised the gross profit to 121/2 per cent. It is said that, in the year immediately preceding, the percentage of gross profit was 15 per cent.
7. Having disposed of the business profits, the Income-tax Officer took up certain cash credit entries which he found in the suspense account of the firm. The credits amounted to a total sum of Rs. 32,563/- and they were shown as put in by the partners. The explanation offered by the assessee with respect to the source of these deposits was not accepted by the income-tax Officer and he added the whole amount of Rs. 32,563/- as the firm's profits from undisclosed sources.
On appeal, the Appellate Assistant Commissioner took the view that of the amount of Rs. 32,563/-, the origin of Rs. 9,000/- had been satisfactorily explained. There remained a balance of Rs. 23,563/-. The Appellate Assistant Commissioner observed that there was no evidence to show that the assessee firm 'had any other source of business', by which he probably meant any other source of income.
Founding on that fact, the Appellate Assistant Commissioner observed that since the only known source of the assessee's income was business and the undisclosed profits of the business had already been estimated, there could be no justification for adding the unexplained cash credits as well as undisclosed profits from other sources. The Appellate Assistant Commissioner seems to have thought that if the assessee firm made any profits at all, it could have made profits only out of the business carried on by it and since the profits of that business had already been estimated by the Income-tax Officer, the profitmaking possibilities of the assessee firm had been exhausted and therefore there could be no addition of any further sum.
In the Appellate Assistant Commissioner's opinion, the right view to take would be to treat the amount of the unexplained cash credits as Included within the sum of Rs. 50,000/- added by the Income-tax Officer to the book profits of the firm. He apparently thought that the Income-taxOfficer should have been of the view that of the concealed profits of Rs. 50,000/- which the books did not show and which had been kept out of the books, the assessee firm had re-introduced the sum of Rs. 23,563/- under the guise of cash deposits and therefore that sum could not be twice assessed.
In accordance with that view, the Appellate Assistant Commissioner not only reduced the amount of the unexplained cash credits by Rs. 9,000/- but he also reduced the addition to the business profits of the assessee by Rs. 23,563. He might have wiped out the addition of undisclosed profits from other sources altogether retaining the addition of Rs. 50,000/- to the business profits, but what he appears to have done was that of the amount added as undisclosed profits, from other sources, he retained Rs. 23,563/- and deducted a corresponding sum from the Rs. 50,000/- added to the book profits of the business.
8. The Commissioner of Income-tax was not prepared to accept that decision and appealed to the Appellate Tribunal. The Tribunal went into, the question of the business profits once again and made a reduction which brought down the percentage of gross profit from 121/2 per cent. to 8 per cent. This relief was given in an appeal preferred by the assessee firm which I forgot to mention. In the Commissioner's appeal, the Tribunal restored the addition of Rs. 23,563/- as income from undisclosed sources. The reasons given by the Tribunal were as follows:
'The credits in the personal account have been included by the Income-tax Officer under the head 'other sources'. If the explanation regarding the sources from which the credits under review were derived is not forthcoming, it does not necessarily follow that such credits represent suppressed business receipt. Either these credits are explained satisfactorily or if they are not so explained, they have to be added as income from undisclosed sources.
In this case we are not satisfied that the true source from which the various credits aggregating Rs. 23,563/- were derived have been disclosed by the assessee. We therefore confirm the addition of Rs. 23,563/- as income from undisclosed sources. This will be apart from the gross profits estimated at 8 per cent. of the turnover'.
9. Mr. Khaitan who appeared on behalf ofthe assessee strongly objected that the Income-tax Officer should have added the amount of the unexplained cash credits as undisclosed profits from other sources after making an estimate of the whole of the undisclosed profits of the business carried on by the assessee and that the Appellate Tribunal should have confirmed his decision in the view that if the assessee's contention that the cash credits were capital deposits was not accepted it did not necessarily follow that such credits represented suppressed business receipts.
Mr. Khaitan's point was that the finding recorded by the Appellate Assistant Commissioner that the assessee firm had no other source of income had not been set aside and therefore the position was that the only source of income which the assessee had was business. If that was so, and since the whole of the business profits which the assessee might have kept out of its books had been estimated, there could be no room for any further undisclosed profits, because there was no other source from which such profits could have been derived.
Following up that argument, Mr. Khaitan contended that in view of the definite finding ofthe Appellate Assistant Commissioner, the Appellate Tribunal was not justified, in law, in restoring the addition made by the Income-tax Officer without definitely finding that the assessee had some other source of income from which the amount concerned might possibly have come.
10. In my opinion, the argument of Mr. Khaitan proceeded on a fallacy. He relied, in particular, on a decision of the Patna High Court in the case of -- 'Ramcharitar Ram Harihar Prasad v. Commissioner of Income-tax, B and O' : 23ITR301(Patna) . There the Income-tax Officer rejected the assessee's books of account and made an estimate of the profits of the business for the accounting year. Having done that, he took up certain cash credits which were shown in the boobs of account and held that they too were the secreted profits of the business.
The High Court rightly pointed out that since the Income-tax Officer had made an estimate of what he considered to be the real profits of the business and had made an addition on that basis, he could not, at the same time, add a further amount as the undisclosed profits of that very business. As the addition was made under the head 'business', the learned Judges pointed out that the addition could be justified only if there was material to show that the assessee carried on some different and independent business, apart from the business to which its books related and on which it was being assessed.
It appears to me that the reasons for the decision of the learned Judges of the Patna High Court are perfectly clear and those reasons cannot possibly apply to the facts of the present case. The Income-tax Officer in the present case has not made the mistake which the Income-tax Officer at Patna made and he has not, after making an estimate of the profits of the business and making an addition to the disclosed book profits, added a further sum as undisclosed profits of the same business. He has added the sum under an independent head as profits from undisclosed sources. The decision of the Patna High Court relied on by Mr. Khaitan is, therefore, of no assistance to him.
11. Taking up the question on its merits, it is pertinent to enquire what income from undisclosed sources means. Popularly speaking, it may mean income from an undisclosed item of a known line of activities or it may mean income from some source which was unconnected with any of the known sources or lines or profit-earning activity followed by the assessee and altogether unknown.
If, for example, in the present case, the Income-tax Officer had added the amount of the cash credits to the profits of the business as a part of the undisclosed profits, it would not be profit or income from an undisclosed source. The reason is obvious. Since the Income-tax Officer found himself in a position to attribute this income to the business activities of the assessee, it would be undisclosed income from the known source, that is the business, and not income from an undisclosed source.
Indeed, it appears to me that in the terminology of the Income-tax Act, income from an undisclosed source or undisclosed income from other sources must necessarily mean income from some source which is altogether unknown, taking the word 'source' in the larger sense and not income from some undisclosed item or transaction in at known source of income which is exploited bythe assessee. I am quite prepared to concede that.even in the present case, if the Income-tax Officer had added the amount of the cash credits, as undisclosed profits of the business, he would have been mistaken and such an addition could not have been sustained.
12. The partners of the firm themselves introduced the sums as cash credits or deposits made by themselves of monies which they say they had received from third parties. They were, therefore, themselves saying, in effect, that these sums had not been derived from the business and were no part of its profits. When thrown into the business and utilised in carrying on trading operations, the amount may have earned profits and those profits had either been shown in the books or were included is the sum added by the Income-tax Officer.
But so far as the deposits themselves are-concerned, the case made by the partners themselves obviously was that they came from an outside source. If their explanation as to the particular source fails, they can hardly complain that their contention that the amounts came from outside is accepted and the sums concerned are brought under assessment as undisclosed profits from other sources.
13. When certain amounts appear in the books of an assessee as cash credits or capital deposits, the taxing authorities, if they feel suspicious, naturally ask for an explanation. If the explanation offered is satisfactory, there is amend of the matter and no other question arises. If the explanation be not found to be satisfactory, it is now well-settled that the taxing authorities are entitled to bring such sums under assessment, on a basis which involves several presumptions.
Once the explanation fails, the taxing authorities are entitled not only to treat the amounts, as income amounts but also as amounts forming; part of the income of the year in which the entries were made. These principles are too well-established now to be questioned. What then is the position when an assessee is known to derive income from certain sources but his account of the receipts is found unacceptable and at the same time his books are found to show certain cash credits or deposits of substantial sums?
If, in the hypothetical case I have mentioned, the books are found to be unsatisfactory, the Income-tax Officer is entitled to and has to make an estimate of the real profits derived by the assessee from the sources to which the books relate. It is at that stage that he, I think, should consider whether the deposits which have not been explained to his satisfaction may not represent the whole or a part of the concealed profits derived from the known source.
In other words, he may consider whether the position is not such that the assessee kept a part of his profits out of his boobs and introduced them into the books by a back door, as it were, and in the guise of deposits. If he finds good reason to take the view that the cash credits really represent a part or the whole of the suppressed profits of the known source of income, he will assess it as a part of the income from that source, taking into account the extent of the capacity of that source to yield profit, but as I have already explained, if he does so, the amounts of the cash credits, while remaining concealed profits, will no longer remain concealed profits from undisclosed sources.
If, on the other hand, the Income-tax Officer thinks that the deposits cannot be properly related to the known source to which the accounts relate, he will be quite entitled to treat them as they are, namely, merely as undisclosed profits from some source which is not known to him or, in other words, as concealed profits from undisclosed other sources. There is no error of law in so regarding amounts of cash credits as undisclosed profits derived from some independent and unknown source.
14. It might, however, be said that the Income-tax Officer does not seem to have applied his mind in this case to the question as to whether the amount of the cash credits might not be a para of the business profits which he thought had been concealed. Mr. Meyer pointed out that the Tribunal, at least, had done so and he referred to the order of the Tribunal. The contention pressed before us by the assessee was precisely the contention pressed before the Tribunal and they, as the final court of fact, dealt with it.
As I have already said, they examined the accounts afresh, reduced the addition made by the Income-tax Officer to the business profits to a figure which brought down the percentage of profit from 12 1/2 to 8 per cent. and after doing so, and having the contention of the assessee present to their mind, they decided to treat the amount of the cash credits as income from an independent undisclosed source. I am unable to see that the Tribunal committed any error of law.
15. Indeed, unless there be strong reasons to connect unexplained cash credits with the undisclosed profits derived from a known source of income, it is not possible to see how the taxing authorities can follow any course other than bringing them under assessment as income from other undisclosed sources. As has so often been pointed out, it is the assessee who is in full possession of facts regarding the true character of the amounts and the sources from which they were derived and Section 106, Evidence Act casts on him the burden of proving what lies within his special knowledge.
We must proceed on the assumption that when his explanation is rejected, it is properly rejected. If it is not properly rejected other questions arise, but if it is properly rejected and the Income-tax Officer is left with an amount by which the assessee's wealth increased during the accounting year, he is entitled, in law, to treat it as income and not knowing from what source the amount had come, can only assess it as income from an unknown and undisclosed source.
It is unrealistic to demand that he should find out that some source other than the disclosed ones in fact, existed and should indicate what that source is before he can permit himself to bring the amounts, under assessment as, undisclosed profits. It appears that the identical contention was advanced before a Bench of this Court and was rejected.
In the case of -- 'Lal Mohan Krishna v. Commissioner of Income-tax, West Bengal' : AIR1945Cal62 a sum of Rs. 50,000/-, credited : In the accounts, of the assessee as capital, was brought under assessment as income from an undisclosed source. Dealing with the contention of the assessee, similar to that advanced before us, McNair J., with whom Gentle J. agreed, observed as follows:
'On behalf of the assessees it is urged that the burden of proof is on the Income-tax authorities and that before they can arrive at the conclusion that a particular sum represents income,they must establish that fact by positive evidence. Section 6 of the Act, it is said, defines taxable income. One of the heads of income, namely,No. 6 is 'other sources'. It is argued that if an item is included by the Income-tax Officer as income from other sources, he must establish affirmatively what are these sources. This is a proposition which I am unable to accept'.
16. In the present case also, I must say thatthe assessee's contention is one which I am unable to accept. I can see no objection in law toto the view taken by the Tribunal that if theassessee's explanation regarding the sources fromwhich the credits under review were derived wasnot found satisfactory, it did not necessarilyfollow that such credits represented suppressedbusiness receipts. This was obviously an answerto the assessee's contention that if these cash,credits represented income receipts at all, theycould be only income receipts from the businessand from no other source.
The Tribunal pointed out that the conclusion insisted on by the assessee did not necessarily follow, because it could not be said that whatever amounts of the nature of receipts, which the assessee was found to be in possession of and the possession of which he could not satisfactorily explain, was liable, as a matter of law, to be attributed to the business and could not, either as a matter of fact or as a matter of law, be treated as income from some undisclosed source.
Indeed, if the assessee's contention be correct, there cannot possibly be any addition under the head, undisclosed income from other sources, if the assessee has some known sources of income and no other source is known, because in that event, according to the assessee's contention before us, suspected amounts, even if they are added as concealed profits, must be added as concealed profits derived from one or other of the known sources and if such sources be found to have no room for the amounts, they must be left out of the assessment altogether.
I can see no ground whatsoever for accepting that contention. In my view, the Tribunal did direct itself to the proper question at issue, and considered whether the sums in question could fairly be taken as part of the concealed profits of the business and having considered that matter it decided against the assessee and held that the amount should be restored as concealed profits from undisclosed sources.
17. The question which I have so long been discussing has been referred in the following terms:
'Whether on the above facts and circumstances of this case, the addition of Rs. 23,563/- as income from undisclosed sources is legally justified when an estimate of gross profit on the turnover was already made and the sum of Rs. 50,000/- added as suppressed income of the assessee from business'.
18. The answer to the question must, in my opinion, be in the affirmative.
19. As one of the two questions was of some difficulty, we direct that the Commissioner of Income-tax shall get half of his costs from the assessee.
20. I agree.