Appeal No 486 of 1962
Appeal by special leave from the judgment and decree dated September 24 1959 of the Patna High Court in Miscellaneous judicial Case No 318 of 1957
AV Viswanatha Sastri and P K Chatterjee for the appellants
K N Rajagopal Sastri and R N Sachthey for the respondent
March 27
The judgment of the Court was delivered by HIDAYATULLAH J
This is an assessee s appeal by special leave of this Court against an order of the High Court of Patna answering in favour of the Department the question whether in the circumstances of the case the amount of Rs 51000 being the value of high denomination notes encashed by the assessee has been validly taxed as profits from some undisclosed business
The original assessee Rai Bahadur H P Banerjee is dead
His son who was substituted in his place also died during the pendency of the proceedings in the High Court
The present appeal has been filed by the widow of the son and other legal representatives
Banerjee was the owner of several collieries in the Jharia Coal fields in the State of Bihar and 555 was also a contractor for raising coal
This matter relates to the assessment year 1946 47
For that year Banerjee was assessed on an income of Rs 128738
The assessment was then re opened under section 34 of the Indian Income Tax Act and was enhanced but subsequently on appeal it was reduced to a sum a little below the original assessment
The present assessment was made on a second re opening of the case under section 34 in the following circumstances
On January 22 1946 Banerjee encashed high denomination notes of the value of Rs 51000 
In his application under the Ordinance which demonetized high denomination notes Banerjee gave the reason for the possession of the notes as follows I am engaged in business as colliery proprie tor contractor under Messrs Kilburn  Co in the name and style of HP Banerjee  Son and also under the State Rly
Bokaro Swang Hazaribagh district in the name of Jharia Dhanbad Coal  Mica Mining Co  
For conducting the business and payment to labour I have to pay every week between 3040 thousand as I did not get payment for work done every week
I had to keep large sum of money to meet emergency   
It is neither profit nor part of profit it is very floating capital for purpose of conducing business
It is not an excess of profit
He stated that he had accounts with 1 Imperial Bank of India 2 Nath Bank Ltd jharia and 3 Central Bank of India Ltd Bhowanipore Branch but added that he did not remember exactly from which Bank the notes came into his possession as his transanctions were frequent
The notice which was issued to him under section 34 of the Income Tax Act was not questioned on any of the grounds which are usual in such cases
Banerjee s explanation 556 was not accepted
The Income Tax Officer pointed out that although his business was large and the withdrawals from the various banks were large and frequent he had not maintained a central account showing withdrawals from the banks and remittances made to his various businesses and that none of the books maintained by the assessee and produced by him contained a bank account
The Income Tax Officer found a discrepancy of nearly Rs 50000 in the statements filed by the assessee
He accordingly treated the high denomination notes as profits from some undisclosed source and assessed them as assessable income
Banerjee appealed to the Appellate Assistant Commissioner and further to the Tribunal
Both the authorities upheld the order of the Income Tax Officer
The assessee demanded a case which was refused but the High Court directed a statement of the case on the question already quoted
The High Court decided the question against the assessee and hence this appeal
The connection of the appellants is that since the Department had issued a notice under section 34 of the Income Tax Act it was incumbent on the department to establish that the amount in question was income which had escaped assessment
The appellants also contend that even if the assessee was required to prove the source of the high denomination notes he had sufficiently proved it by showing that he had large amounts on hand which were held for convenience in high denomination notes
The appellants thus submit that the burden if any upon the assessee was discharged in the case and the evidence being unrebutted the additional assessment could not be made
The appellant rely upon Kanpur Steel Co Ltd vs C 1
T 1 where according to the appellants the Allahabad High Court explained the nature of burden of proof in the way contended for by the appellants
They 1 557 claim that the Allahabad case applies to the facts here and point out that the said ruling was considered and approved by this Court in Lalchand Bhagat Ambica Ram vs Commissioner of Income Tax Bihar and Orissa 1
Other cases have been cited on behalf of the department
The cases involving the encashment of high denomination notes are quite numerous
In some of them the explanation tendered by the tax payer has been accepted and in some it has been rejected
The manner in which evidence brought on behalf of the tax payer should be viewed has of course depended on the facts of each case
In these cases in which the assessee proved that he had on the relevant date a large sum of money sufficient to cover the number of notes encashed this Court and the High Courts in the absence of something which showed that the explanation was inherently improbable accepted the explanation that the assessee held the amount or a part of it in high denomination notes
In other words in such cases the assessee was held prima facie to have discharged the burden which was upon him
Where the assessee was unable to prove that in his normal business or otherwise he was possessed of so much cash it was held that the assessee started under a cloud and must dispel that cloud to the reasonable satisfaction of the assessing authorities and that if he did not then the Department was free to reject his explanation and to hold that the amount represented income from some undisclosed source
The case which is strongly relied upon by the assessee is Kanpur Steel Co Ltd vs C I T2
In that case 32 notes of Rs 1000 were encashed
It was claimed that they were part of the cash balance of the company which amounted to Rs 34000 odd
The Income Tax Officer examined the entries regarding sales preceding the encashment of the notes and 1 2 568 found that those sales brought in sums under Rs 1000 and could not have resulted in the accumulation of so many high denomination notes
The Tribunal then came to the conclusion that Rs 7000 only could have been held in high denomination notes
On a reference the Allahabad High Court held that the burden lay upon the Department to prove that Rs 32000 was suppressed income and there was no burden 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 be explained
The High Court also found that the explanation was fairly satisfactory because big notes might have been received even in small transactions and change taken and that the High Court could not make a conjecture how many notes could or could not have accumulated
It is contended before us that the burden in such cases lies as stated by the Allahabad High Court
On the other hand in Manindranath Das vs Commissioner of Income Tax Bihar  Orissa 1 the tax payer had encashed Notes of the value of Rs 28600 which he contended were his accumulated savings
His explanation was accepted in respect of Rs 15000 because 15 notes could be traced to a bank but was rejected in respect of the balance
The Patna High Court pointed out that if an assessee received an amount in the year of account it was for him to show that the amount so received did not bear the character of income and the tax payer in the case had failed to prove this fact in respect of the remaining notes
The Patna case finds support in A Govindaraju Mudaliar vs Commissioner of Income Tax Hyderabad 2 where it is laid down by this Court that if an assessee fails to prove satisfactorily the source and nature of an amount received by him during the accounting year the Income Tax Officer is entitled to draw the inference that the 1 2 1958 94 ITR 870 559 receipts are of an assessable nature
In that case the explanation of the assessee in respect of the amounts shown as credits for him in the account books of a firm of which he was a partner was rejected as un true
It was held that it was open to the Income Tax Officer and the Appellate Tribunal to hold that the amounts represented the concealed income of the assessee
From the last two cases it is plain that if there is receipt of an amount in the accounting year it is incumbent in the first instance upon the assessee to show that it does not bear the character of income
If be fails to do this the Income Tax Officer may hold that it represents income of the assessee either from the sources he has disclosed or from some undisclosed source
In applying this principle to the cases of encashment of high denomination notes there is some difficulty when the assessee has books of account which are accepted and in which there is a cash balance sufficient to cover the amount of high denomination notes
Each case must depend upon its own peculiar facts
A few illustrative cases may be noticed because they show some differences in the approach to the problem
In Chunilal Ticamchand Coal Co Ltd vs Commissioner of Income Tax Bihar and Orissa 1 high denomination notes of the value of Rs 68000 were encashed
Evidence showed that the assessee was in the habit of keeping large sums which he kept intact for emergencies and meeting the current needs from withdrawals from the banks
This explanation was supported by receipts and disbursement in the books of account
The explanation was rejected as to a part because the accounts did not mention the high denomination notes and further because such notes were hardly needed to pay wages to labourers
The Tribunal however held that the explanation might be true as to a part 1 560 and accepted it in respect of Rs 35000 rejecting it in respect of Rs 33000
The Patna High Court held that the explanation which was held to be reasonable as to a part must be good for the whole because there was no material on which it could be held that the balance constituted income from some undisclosed source to distinguish the case about the part rejected from the part accepted
In Mehta Parikh  Co vs Commsioner of Income Tax Bombay 1 high denomination notes of the value of Rs61000 were encashed
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 have to be presumed that the entire balance on January 1 1946 was held in 18 notes of Rs 1000 each and that all receipts up to  January 181946 when the notes were encashed were also in High denomination notes
The affidavits of persons who stated that they had paid amounts in Rs1000 notes were not accepted
The Tribunal accepted the explanation as to Rs31000 only
This Court held that if the account books were accepted and the deponents were not crossexamined on their affidavits the rejection of the explanation as to a part proceeded only on surmise and the finding that Rs30000 were income from some undisclosed source was based on no evidence
It may be pointed out that Venkatarama Ayyar J 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 vs Commissioner of Income Tax 2 high denomination notes of the value of Rs228000 were encashed
The assessee stated that he had inherited that amount from his father in 1942 and produced account books from 1926 to 1942
He did not produce earlier account books
The Tribunal found that the books were such as could be written at any time and did not contain full dealings even between 1926 and 1 2  561 1942 and there were no entries showing that any amount as such was received from business
The Tribunal however held that Rs128000 only was income from some undisclosed source
The assessee s appeal in this Court was dismissed because the rejection of the account books was held to be reasonable in the circumstances of the case
This Court observed that the partial rejection of the explanation by the Tribunal must be treated as a concession rather than a reasoned conclusion
We now come to Lalchand Bhagat s case which is strongly relied upon particulary as it has cited the Allahabad case so it is said with omplete approval
It is therefore necessary to examine it closely to see if there is such an approval
In that case 291 high denomination notes of the value of Rs291000 were encashed
The assessee was maintaining for a long time past two accounts one was known as Almirah Account and other Rokar Account
On the date the notes were encashed there was a balance of Rs281397 in the almirah account and Rs29284 in the rokar account
These two amounts between them were sufficient to cover the encashed notes
The explanation was that for the purposes of the business which was distributed in many 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 admittedly extensive and the almirah account had also existed for several years
Except in the previous year in which the high denomination notes were encashed even the numbers 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 of emergency and the assessee as a grain dealer could have secretly made money by smuggling grain and that he had once been prosecuted though acquitted
It was also said that the area where he did his business was 562 notorious for smuggling and also that he had speculated in the year and might easily have made profits though he had returned a loss from speculation
Emphasis was also laid upon the fact that in the year of account the numbers of the high denomination notes were written subsequently
The Tribunal accepted the two books of account as genuine and also that there was a balance of Rs310681 with the assessee
Before the Tribunal it was explained that in the year of account the numbers of the high denomination notes were inserted in the almirah account out of nervousness owing to the demonetization of the notes
The Tribunal accepted the explanation with regard to Rs 150000 and rejected it with regard to Rs141000
No reasons were given for distinguishing the good part of the explanation from the bad
This Court examined the reasons and held that except for the insertion of the numbers of notes in the book none of the other reasons had any probative value and that they were mere conjectures and surmises
This court pointed out that if the explanation for the interpolations was good for the acceptance of the explanation as to Rs150000 it must be held to be good also for the balance because there was nothing to distinguish between the two parts
This Court therefore pointed out that the main question about Rs141000 was whether there was any material to justify a different conclusion in respect of that amount and pointed to the following facts
The assessee had established the need for keeping a large sum on hand and had proved the almirah account as a genuine account
The almirah account contained the numbers of the high denomination notes in the years previous to the year relative to the assessment
In that year the numbers were inserted subsequently and this was the only substantial point against the assessee
This Court also pointed out that there were statements of banks and accounts 563 of the branches and of beparis showing that large amounts were received by the assessee which made up the amount in the almirah account
Between February 6 1945 and January 11 1946 when the notes were encashed sum above Rs 1000 received by the assessee aggregated to as much as rupees five lakhs
As the almirah account was not questioned by the Tribunal at all and out of that amount more than half was held to be in the shape of high denomination notes this Court posed the following question Was there any material on record which would legitimately lead the Tribunal to come to the conclusion that the nature of the source from which the appellant derived the remaining 141 high denomination notes of Rs 1000 remained unexplained
The Court therefore concluded If the entries in the books of account in regard to the balance in the Rokar and the balance in the Almirah were held to be genuine logically enough there was no escape from the conclusion that the appellant had offered reasonable explanation as to the source of the 291 high denomination notes of Rs 1000 each which it had encashed on January 19 1946
The case of assessee was thus accepted in toto
This Court did not hold that the assessee need not prove anything
As we have said earlier the burden of proof must depend on the facts of the case
One such fact may be the existence of a large floating cash balance on hand and taken with other facts may be sufficient to show that the high denomination notes constituted the whole or part of that balance
In the Allahabad case such a balance was proved and was accepted as to a part by the 564 Tribunal
The High Court held that the explanation was good for the whole of the amount of the notes
No doubt this Court in referring to that case summarised the reasons but it pointed out that it was not open to the Tribunal to make a guess as to the number of high denomination notes which could be accepted and cited the Allahabad case and some others in that connection
It seems to us that the correct approach to questions of this kind is this
If I here is an entry in the account books of the assessee which shows the receipt of a sum or conversion of high denomination notes tendered for conversion by the assessee himself it is necessary for the assessee to establish if asked what the source of that money is and to prove that it does not bear the nature of income
The Department is not at this stage required to prove anything
It can ask the assessee to bring any books of account or other documents or evidence pertinent to the explanation if one is furnished and examine the evidence and the explanation
If the explanation shows that the receipt was not of an income nature the Department cannot act unreasonably and reject that explanation to hold that it was income
If however the explanation is unconvincing and one which deserves to be rejected the Department can reject it and draw the inference that the amount represents income either from the sources already disclosed by the assessee or from some undisclosed source
The Department does not then proceed on no evidence because the fact that there was receipt of money is itself evidence against the assessee
There is thus prima facie evidence against the assessee which he fails to rebut and being unrebutted that evidence can be used against him by holding that it was a receipt of an income nature
The very words an undisclosed source show that the disclosure must come from the assessee and not form the Department
In cases of high denomination notes 565 where the business and the state of accounts and dealings of the assessee justify a reasonable inference that he might have for convenience kept the whole or a part of a particular sum in high denomination notes the assessee prima facie discharges his initial burden when he proves the balance and that it might reasonably have been kept in high denomination notes
Before the Department rejects such evidence it must either show an inherent weakness in the explanation or rebut it by putting to the assessee some information or evidence which it has in its possession
The Department cannot by merely rejecting unreasonably a good explanation convert good proof into no proof
It is within the range of these principles that such cases have to be decided
We do not think that the Allahabad view puts no burden upon the assessee and throws the entire burden on the Department
The case itself does not bear this out
If it does then it is not the right view
In the present case the assessee claimed that the high denomination notes were a part of the cash balance at the head office
The Income Tax Officer found that at first the cash on hand was said to be Rs 162022 but on scrutiny it was found to be wrong
Indeed the assessee himself corrected it before the Appellate Assistant Commissioner and stated there that the balance was Rs 121875
Ordinarily this would have prima facie proved that the assessee might have kept a portion of this balance in high denomination notes
But the assessee failed to prove this balance as books of the assessee did not contain entries in respect of banks
Though cash used to be received from banks and sent to the various places where works were carried on and vice versa no central account of such transfers was disclosed
There was also no account of personal expenses of the assessee and he had failed to prove why such large sums were kept on hand in one place when at each of the places where work was carried 566 on there were banks with which he had accounts
The Appellate Assistant Commissioner also went into the question and found that on the same day when the high denomination notes were encashed a sum of Rs 45000 was drawn by cheque
The next remittance immediately afterwards was of Rs 16000 to Bokaro but Rs 17000 were withdrawn a few days before to meet this expense
A withdrawal of Rs 8000 was made a day later and Rs 20000 were withdrawn ten days later to finance the business
It appears that the money on hand Rs 45000 was not touched at all but on January 30 1946 a further sum of Rs 6000 was withdrawn and not utilized which made up the sum of Rs 51000 for which the high denomination notes were encashed
On these facts the Tribunal came to the conclusion that the high denomination notes represented not the cash balance but some other money which remained unexplained and the Tribunal treatted it as income from some undisclosed source
The High Court held on the above facts and circumstances that there were materials to show that Rs 51000 did not form part of the cash balance and the source of money not having been satisfactorily proved the Department was justified in holding it to be assessable income of the assessee from some undisclosed source
In this conclusion the High Court was justified regard being had to the principles we have explained above
The argument that as this was a case under section 34 of the Income Tax Act it cast a special burden on the Department to show that this income had escaped earlier need not detain us
No doubt proceedings under section 34 can only be commenced under the conditions prescribed in the section but when the proceedings are validly commenced there is no difference between an ordinary assessment and an additional assessment under section 34 and the same rule 567 as to burden of proof governs the additional assessment
In our opinion this appeal has no substance it fails and is dismissed with costs
Appeal dismissed


Summary:
The assessee had encashed 51 high denomination notes of Rs 1000 each in january 1946
The assessee s explanation in his application for encashment of the notes was that he was a colliery proprietor and contractor that for conducting the business and for payment to labour which came to about Rs300001 to 40000 every week he had to keep large sums of money to meet emergency and that the sum of Rs 50000realised by encashment of the notes was neither profit nor part of profit but was floating capital for the purpose ofconducting business
The Income tax Officer did not accept this explanation and treated this amount as profit from some undisclosed 553 source and assessed it as assessable income
The assessee contended that the burden lay on the department to establish that the amount in question was income liable to tax and that the department had failed to establish this
Held that the department was justified in holding that Rs 51000 was assessable income of the assessee from some undisclosed source
It was not correct that the assessce was not required to prove anything and that the burden was entirely upon the department to prove that the amount received from the encashment of high denomination notes was income
The correct position is as follows
If there is an entry in the account books of the assessee which shows the receipt of a sum or conversion of the notes by the assessee himself it is necessary for the asscssee to establish if asked what the source of that money was and to prove that it did not bear the nature of income
The department is not at this stage required to prove anything
If tile business the state of accounts and dealing of the assewsee show that be might have for convenience kept the whole or part of a particular sum in high denomination notes the assessee prima facie discharges his initial burden
If the assessee does this the department cannot act unreasonably and reject that explanation to hold that it was income
If the explanation is unconvincing the department can reject it and draw the inference that the amount represents income either from the source already disclosed by the assessee or from some undisclosed source
Before the department rejects such evidence it must either show an inherent weakness in the explanation or rebut it by putting to the assessee some information or evidence which it has in its possession
The fact that there was receipt of money or conversion of notes is itself prima facie evidence against the assessee on which the department can Proceed in absence of good explanation
In the present case though cash used to be received from Banks and sent to the various places where works were carried on by the asscssee and vice versa no central account of such transfers was disclosed
There was also no account of personal expenses of the assessee and he failed to prove why such large sums were kept at hand in one place when at each of the places where work was carried on there were Banks with which he had accounts
Further though this large sum was kept on hand further cheques were drawn to meet current needs and this amount remained untouched
Kanpur Steel Co Ltd vs C I T  Lalchand Bhagat Ambica Ram vs Commissioner of Income tax Bihar and Orissa  Mahindranath vs
Commissioner of Income tax Bihar and Orissa 1955 554 27  A Govindarajulu Mudaliar vs Commissioner of Income tax Hyderabad 1958 34  Chunilal Ticamchand Coal Co Ltd vs Commissioner of Income tax Bihar and Orissa1955  Mehta Parikh  Co vs Commissioner of Income tax Bombay 1956 30 and Soyachand Baid vs Commissioner of Income tax 1958 34 1
T R 650 referred to