Appeal No 81 of 1954
Appeal from the judgment and order dated the 10th March 1953 of the Bombay High Court in Income tax Reference No 35 of 1952
B J Kolah and I N Shroff for the appellant
G N Joshi Porus A Mehta and R H Dhebar for the respondent
May 10
The following Judgments were delivered
BHAGWATI J Two questions were referred by the Income tax Appellate Tribunal to the High Court of Bombay under section 661 of the Indian Income tax Act
1 Whether there is any material to justify the assessment of Rs 30000 Rupees thirty thousand from out of the sum of Rs 61000 Rupees sixtyone thousand for Income tax and Excess Profits Tax and Business Profits Tax purposes representing the value of high denomination notes which were encashed on the eighteenth day of January one thousand nine hundred and forty six and 2 Whether in any event by reason of the orders of the Revenue Authorities not having found at the alleged item was from alleged undisclosed business profits the assessment of Rs 30000 Rupees thirty thousand is in law justified for Excess Profits Tax and Business Profits Tax purposes The High Court answered the first question in the affirmative but refused to answer the second question being of the opinion that even though it had asked the Tribunal to refer that question under section 66 2 of the Act it had no jurisdiction to do so inasmuch as the appellants had not asked the Tribunal to refer 629 the second question and therefore no question arose of the Tribunal refusing to raise that question or to submit it for the decision of the High Court
The appellants area partnership firm doing business in Mill Stores at Ahmedabad
Their head office is in Ahmedabad and their branch office is in Bombay
The Governor General on 12th January 1946 promulgated the High Denomination Bank Notes Demonetisation Ordinance 1946 and High Denomination Bank Notes ceased to be legal tender on the expiry of 12th day of January 1946
Pursuant to clause 6 of the Ordinance the appellants on 18th January 1946 encashed high denomination notes of Rs 1000 each of the face value of Rs 6 1000
This was done in the calendar year 1946 being the account year corresponding with assessment year 1947 48
During the assessment proceedings for the year 1947 48 the Income tax Officer called upon the appellant to prove from whom and when the said high denomination notes of Rs 61000 were received by the appellants and also the bona fides of the previous owners thereof
After examining the entries in the books of account of the appellants and the position of the Cash Balances on various dates from 20th December 1945 to 18th January 1946 and the nature and extent of the receipts and payments during the relevant period the Income tax Officer came to the conclusion that in order to sustain the contention of the appellants he would have to presume that there were 18 high denomination notes of Rs 1000 each in the Cash Balance on 1st January 1946 and that all cash receipts after 1st January 1946 and before 13th January 1946 were received in currency notes of Rs 1000 each a presumption which he found impossible to make in the absence of any evidence
He therefore added the sum of Rs 61000 to the assessable income of the appellants from undisclosed sources
On appeal to the Appellate Assistant Commissioner the appellants produced before him affidavits of three persons to show that the appellants had received Rs 20000 in 1000 rupees currency notes on 28th 630 December 1945 Rs 15000 in 1000 rupees currency notes on 6th January 1946 and Rs 8500 in 1000 rupees currency notes making Rs 8000 on 8th January 1946 thus aggregating to Rs 43500 during the relevant period
The Appellate Assistant Commissioner did not accept the statements contained in the said affidavits and dismissed the appeal and confirmed the order of the Income tax Officer
An appeal was taken by the appellants before the Income tax Appellate Tribunal
The Tribunal after taking into consideration all the materials which bad been placed before the Appellate Assistant Commissioner including the said affidavits was of the opinion that if it was to accept the appellants  contention it would mean that practically every payment above Rs 1000 was received by the appellants in high denomination notes which was almost impossible
The Tribunal could not say that the appellants bad no high denomination notes with them
It accepted the books of account of the appellants but thought that the cash balance on 18th January 1946 could not have sixtyone high denomination notes
It came to the conclusion that the appellants appeared to have put in high denomination notes in the cash balance and taken the other notes away
It accepted the appellants  explanation only in regard to 31 notes and directed that the appellants  assessment for the year under reference be reduced by that amount and dismissed the rest of the appeal
The appellants applied to the Tribunal for stating a case and referring the first question of law to the High Court for its opinion under section 661 of the Act
The Tribunal rejected the said application holding that no question of law arose from its order
The appellants thereupon applied to the High Court under section 662 of the Act for an order directing the Tribunal to state a case and refer the questions set out in the application
The High Court directed the Tribunal to state a case and refer the two questions of law set out hereinabove to it for its decision under section 662 of the Act
In stating the case and referring the said questions of law to the High 631 Court the Tribunal pointed out that the second question was not urged before the Tribunal at any stage and hence it was not dealt with by it in its original order
The reference was heard by the High Court and the High Court answered the first referred question in the affirmative but did not answer the second referred question
The High Court held that there were materials before the Tribunal to hold that the sum of Rs 30000 represented the income of the appellants from undisclosed sources and that the finding of the Tribunal was a finding of fact based on materials before it and even if it was an inference drawn by the Tribunal the inference was based on the facts and materials before the Tribunal
The High Court observed that it was impossible to say that the inference drawn by the Tribunal from the circumstances was an unreasonable inference or an arbitrary and capricious inference or an inference which no judicial tribunal could ever draw
It therefore answered the first referred question in the affirmative
As regards the second referred question the High Court held that question was not raised by the appellants in their application for reference under section 661 of the Act and therefore it bad no jurisdiction to ask the Tribunal to state a case on a particular question of law where the appellants themselves had never asked the Tribunal to refer such a question to the High Court and that even though it had directed the Tribunal under section 662 to refer the said question as it had no jurisdiction to ask the Tribunal to refer the said question it was not open to it to answer the second question which had been raised by the Tribunal at its instance and refused to answer it
On a petition made by the appellants for leave to appeal to this court the High Court granted a certificate that this was a fit case for appeal to this court and hence this appeal
It may be mentioned at the outset that the assessment of the appellants by the Income tax Officer was under section 233 and section 26 A of the Act
The 632 books of account of the appellants were accepted by the Income tax Officer and the only scrutiny made by the Income tax Officer was whether at the relevant date ie on 12th January 1946 the appellants had in their cash 61 notes of high denomination of Rs 1000 each
The cash book entries from 20th December 1945 up to 18th January 1946 were put in before the Income tax Officer and they showed that on 28th December 1945 Rs 20000 were received from the Anand Textiles and there was an opening balance of Rs 18395 on 2nd January 1946
Rs 15000 were received by the appellants on 7th January 1946 from the Sushico Textiles and Rs 8500 were received by them on 8th January 1946 from Manihen widow of Shah Maneklal Nihalchand
Various other sums were also received by the appellants from 2nd January 1946 up to and inclusive of 1 1 th January 1946 which were either multiples of Rs 1000 or were over Rs 1000 and were thus capable of having been paid to the appellants in high denomination notes of Rs 1000
There was a cash balance of Rs 69891 2 6 with the appellants on 12th January 1946 when the High Denomination Bank Notes Demonetisation Ordinance 1946 was promulgated and it was the case of the appellants that they had then in their custody and possession 61 high denomination notes of Rs 13000 which they encashed through the Eastern Bank on 18th January 1946
The appellants further sought to support their contention by procuring before the Appellate Assistant Commissioner the affidavits of Kuthpady Shyama Shetty General Manager of Messrs Shree Anand Textiles in regard to payment to the appellant is of a sum of Rs 20000 in Rs 1000 currency notes on 28th December 1945 Govindprasad Ramjivan Nivetia proprietor of Messrs Shusiko Textiles in regard to payment to the appellants of a sum of Rs 15000 in Rs 1000 currency notes on 6th January 1946 and Bai Maniben widow of Shah Maneklal Nihalchand in regard to payment to the appellants of a sum of Rs 8500 Rs 8000 thereout being in Rs 1000 currency notes on 8th January 1946
The appellants were not in a position to give further 633 particulars of Rs 1000 currency notes received by them during the relevant period as they were not in the habit of noting these particulars in their cash book and therefore relied upon the position as it could be spelt out of the entries in their cash book coupled with these affidavits in order to show that on 12th January 1946 they had in their cash balance of Rs 69891 2 6 the 61 high denomination currency notes of Rs 1000 each which they encashed on 18th January 1946 through the Eastern Bank
Both the Income tax Officer and the Appellate Assistant Commissioner discounted this suggestion of the appellants by holding that it was impossible that the appellants had on hand on 12th January 1946 the 61 high denomination currency notes of Rs 1000 each included in their cash balance of Rs 69891 2 6
The calculations
 which they made involved taking into account all payments received by the appellants from and after 2nd January 1946 which were either multiples of Rs 1000 or were over Rs 1000
There was a cash balance of Rs 18395 6 6 on band on 2nd January 1946 which could have accounted for 18 such notes
The appellants received thereafter as shown in their cash book several sums of monies aggregating to over Rs 45000 in multiples of Rs 1000 or sums over Rs 1000 which could account for 45 other notes of that high denomination thus making up 63 currency notes of the high denomination of Rs 1000 and these 61 currency notes of Rs 1000 each which the appellants encashed on 18th January 1946 could as well have been in their custody on 12th January 1946
This was however considered impossible by both the Income tax Officer and the Appellate Assistant Commissioner as they could not consider it within the bounds of possibility that each and every payment received by the appellants after 2nd January 1946 in multiples of Rs 1000 or over Rs 1000 was received by the appellants in high denomination notes of Rs 1000 each  It was by reason of their visualisation of such an impossibility that they negatived the appellants  contention
It has to be noted however that beyond there 82 634 calculations of figures no further scrutiny was made by the Income tax Officer or the Appellate Assistant Commissioner of the entries in the cash book of the appellants
The cash book of the appellants was raccepted and the entries therein were not challenged
No further documents or vouchers in relation to those entries were called for nor was the presence of the deponents of the three affidavits considered necessary by either party
The appellants took it that the affidavits of these parties were enough and neither the Appellate Assistant Commissioner nor the Incometax Officer who was present at the hearing of the appeal before the Appellate Assistant Commissioner considered it necessary to call for them in order to cross examine them with reference to the statements made by them in their a affidavits
Under these circumstances it was not open to the Revenue to challenge the correctness of the cash book entries or the statements made by those deponents in their affidavits
This being the position the state of affairs as it ob tained on 12th January 1946 had got to be appreciated having regard to those entries in the cash books and the affidavits filed before the Appellate Assistant Commissioner taking them at their face value
The entries in the cash books disclosed that taking the number of high denomination notes at 18 on 2nd January 1946 there came in the custody or possession of the appellants after 2nd January 1946 and up to 12th January 1946 49 further notes of that high denomination making 67 such notes in the aggregate out of which 61 such notes could be encashed by the appellants on 18th January 1946 through the Eastern Bank
A mere calculation of the nature indulged in by the Income tax Officer or the Appellate Assistant Commissioner was not enough without any further scrutiny to dislodge the position taken up by the appellants supported as it was by the entries in the cash book and the affidavits put in by the appellants before the Appellate Assistant Commissioner
The Tribunal also fell into the same error
It could 635 not negative the possibility of the appellant being in possession of a substantial number of these high deno mination currency notes
It however considered that it was impossible for the appellants to have bad 61 such notes in the cash balance in their hands on 12th January 1946 and then it applied a rule of the thumb treating 31 out of such 61 notes as within the bounds of possibility excluding 30 such notes as not covered by the explanation of the appellants
This was pure surmise and had no basis in the evidence which was on the record of the proceedings
The High Court treated this finding of the Tribunal as a mere finding of fact
The position in regard to all such findings of fact as to whether they can be questioned in appeal is thus laid down by the House of Lords in Cameron vs Prendergast Inspector of Taxes 1 Inferences from facts stated by the Commissioners are matters of law and can be questioned on appeal
The same remark is true as to the construction of documents
If the Commissioners state the evidence and hold upon that evidence that certain results follow it is open to the Court to differ from such a holding
To the same effect are the observations of the House of Lords in Bomford vs Osborne H M Inspector of Taxes 2 No doubt there are many cases in which Commissioners having had proved or admitted before them a series of facts may deduce therefrom further conclusions which are themselves conclusions of pure fact
But in such cases the determination in point of law is that the facts proved or admitted provide evidence to support the Commissioners  conclusions
The latest pronouncement of the House of Lords on this question is to be found in Edwards Inspector of Taxes vs Bairstow and Another3
Viscount Simonds observed at page 586 For it is universally conceded that though it is 1 19408ITRSuppl7581
2 1942 10 ITR Suppl 27 34
3 636 a pure finding of fact it may be set aside on grounds which have been stated in various ways but are I think fairly summarised by saying that the court should take that course if it appears that the Commissioners have acted without any evidence or upon a view of the facts which could not reasonably be entertained
and Lord Radcliffe expressed himself as under at page 592 If the case contains anything ex facie which is bad law and which bears upon the determination it is obviously erroneous in point of law
But without any such misconception appearing ex facie it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal
In those circumstances too the court must intervene
It follows therefore that facts proved or admitted may provide evidence to support further conclusions to be deduced from them which conclusions may themselves be conclusions of fact and such inferences from facts proved or admitted could be matters of law
The court would be entitled to intervene if it appears that the fact finding authority has acted without any evidence or upon a view of the facts which could not reasonably be entertained or the facts found are such that no person acting judicially and properly instructed as to the relevant law would have come to the determination in question
The High Court recognised this position in effect but went wrong in applying the true principles of interference with such findings of fact to the present case
The attempt which was made by the High Court to probe into the mind of the Tribunal by trying to discard the affidavit of Govindprasad Ramjivan Nivetia in regard to the payment of Rs 15000 to the appellants in 15 currency notes of Rs 1000 each on 6th January 1946 and thus reducing the aggre gate sum of Rs 43500 to Rs 28500 and justifying the figure of Rs 31000 arrived at by the Tribunal was really far fetched and contrary to the terms of 637 the tribunal  s order itselfthe Tribunal not having given any inkling whatever of what was at the back of its mind when it fixed upon the figure Rs 31000
Really speaking the Tribunal had not indicated upon what material it held that Rs 30000 should be treated as secret profit or profits from undisclosed sources and the order passed by it was bad
The appellants had furnished a reasonable explanation for the possession of the high denomination notes of the face value of Rs 61000 and there was no justification for having accepted it in part and discarded it in relation to a sum of Rs 30000
The case was analogous to the one before the Patna High Court in Chunilal Ticamchand Coal Co Ltd vs Commissioner of Income tax Bihar and Orissa1 and should have been similarly decided in favour of the appellants
For the reasons indicated above we are of the opinion that the High Court was in error in answering the first referred question in the affirmative
It ought to have answered it in the negative and held that there were no materials to justify the assessment of Rs 30000 from out of the sum of Rs 61000 for Income tax and Excess Profits Tax and Business Profit Tax purposes representing the value of the high denomination notes which were encashed on 18th January 1946
In view of the above it is not necessary for us to go into the question whether the High Court ought to have answered the second referred question also
The answer to the first referred question being in the  negative the very basis for Excess Profits Tax and Business Profits Tax disappears and the second referred question becomes purely academical
The result therefore is that the appeal is allowed and the first referred question is answered in the negative
The appellants will have their costs here as well as in the High Court
VIMNKATARAMA AYYAR J
I agree to the order just proposed but I prefer to rest my decision on the 1 638 ground that the finding of the Tribunal that high denomination notes of the value of Rs 30000 represented the concealed profits of the appellant is not supported by any evidence and is in consequence erroneous in point of law and liable to be set aside
The evidence on record has been exhaustively reviewed in the judgment just delivered and there is no need to traverse the same ground again
To put the matter in anut shell the accounts of the appellant have been accepted by the Tribunal as genuine and it is impossible to say having regard to the cash balance as shown therein that the notes in question could not have been included therein
The Tribunal observes that it is unlikely that so many high denomination notes would have been held as part of the cash on hand for such a large number of days
That no doubt is highly suspicious but the decision of the Tribunal must rest not on suspicion but on legal testimony
For the respondent Mr Joshi con
tended that the cash balance shown in the books could not be accepted as true because the appellant had ample time to rewrite the accounts as the Ordinance was issued on 12th January 1946 and the year of account of the assessee was the Calendar year
Whether the accounts are genuine or not is a pure question of fact and a finding on a question of fact is as much binding on the Revenue as on the subject


Summary:
The appellants a partnership firm assessed under sections 233 and 26 A of the Income tax Act were called upon by the Income tax Officer during the assessment year 1947 48 to explain how and when they came to possess 61 thonsand rupee currency notes which they had encashed on the 18th January 1946 after the promulgation of the High Denomination Bank Notes Demonetisation Ordinance of 1946 under which such notes ceased to be legal tender on the expiry of the 12th of January 1946
The assessees produced their cash book entries from the 20th December 1946 to the 18th January 1946 which were accepted as correct by the Income tax Officer who however made no further scrutiny of the accounts andthe entries showed that on the 12th of January 1946 the cash balance in hand was Rs 69891 2 6
The case of the appellants was that the said notes were a part of the cash balance and in further support of their case they filed before the Appellate Assistant Commissioner three affidavits by persons actually making the payments in respect of certain entries in the cash book to prove that Rs 20000 on the 28th December 1946 Rs 15000 on the 6th of January 1946 and Rs 8000 out of a sum of Rs 8500 on the 6th of January 1946 were paid in thousand rupee notes
The Income tax Officer and the Appellate Assistant Commissioner in appeal on a calculation of their own held that the possession by the appellants of so many thousand rupee notes was an impossibility and that these notes must represent income from undisclosed sources and as such be added to the assessable income of the appellants
Neither the Appellate Assistant Commissioner nor the Income tax Officer who was present at the hearing of the appeal called for the deponents in order to cross examine them with reference to their statement in the affidavits
The Appellate Tribunal on appeal accepted the explanation of the assesses in respect of 31 of the notes but not with regard to the rest and rejected their application for a reference of the matter to the High Court
The assessees moved the High Court and the Tribunal was directed under section 662 to state 627 a case for its decision
In answering the main question the High Court was of the opinion that the finding of the Tribunal was a finding of fact or an inference based on such finding and it was not possible to say that such finding or inference was unreasonable or arbitrary
Held per curiam that the High Court was in error in refusing to interfere with the finding of the Tribunal which was based on no evidence and the appeal must succeed
Per CJ and BHAGWATI J Conclusions based on facts proved or admitted may be conclusions of fact but whether a particular inference can legitimately be drawn from such conclusions may be a question of law
Where however the fact finding authority has acted without any evidence or upon a view of the facts which could not reasonably be entertained or the facts found were such that no person acting judicially and properly instructed as to the relevant law could have found the court is entitled to interfere
Chunilal Ticamchand Coal Co Ltd vs Commissioner of Income tax Bihar and Orissa 1955  applied
Cameron vs Prendergast Inspector of Taxes 1940 8 ITR Suppl 75 Bomford vs Osborne H M Inspector of Taxes 1942 10 ITR Suppl 27 and Edwards Inspector of Taxes vs Bairstow and Another 1955  referred to
The High Court was in error in treating the finding of the Tribunal as a finding of fact and failed to apply the true principles of interference applicable to such cases
The entries in cash book and the statements made in the affidavits in support of the explanation
which were binding on the Revenue and could not be questioned clearly showed that it was quite within the range of possibility that the appellants had in their possession the 61 high denomination notes on the relevant date and their explanation could not be assailed by a purely imaginary calculation of the nature made by the Income tax Officer or the Appellate Assistant Commissioner
The Tribunal made a wrong approach and while accepting the appelants  explanation with regard to 31 of the notes it had absolutely no reason to exclude the rest as not covered by it in absence of any evidence to show that the excluded notes were profits earned by the appellants from undisclosed sources
The appellants having given a reasonable explanation the Tribunal could not by applying a rule of thumb discard it so far as the rest were concerned and act on mere surmise
Per VENKATARAMA AYYAR J
The finding of the Tribunal that high denomination notes of the value Rs 30000 represented concealed profits of the appellants being unsupported by any evidence amounted to an error of law and was liable to be set aside
That so many notes of high denomination should have been held as part of 628 the cash for so long a time might be highly suspicious but decisions must be founded on legal testimony and not on suspicion
The question whether the accounts were genuine or not was a pure question of fact and a finding that they were genuine was binding both on the Revenue and the subject