Case: Messrs. Lalchand Bhagat Ambical Ram Vs. The Commissioner Of Income-Tax, Bihar &amp; Orissa

2. The appellant is a Hindu undivided family carrying on extensive business in grain as merchants and commission agents. It is one of the premier grain merchants and wholesalers of Sahibganj in the District of Santhal Parganas in the State of Bihar. It has branches at Nawgachia in the District of Bhagalpur and at Dhulian in the District of Murshidabad in West Bengal.3. The appellant filed its Income-tax Return for the assessment year 1946-47 showing a loss of Rs. 46,415 in the business. The Income-tax Officer, Patna, however, in the course of the assessment noticed that the appellant had encashed high denomination notes of the value of Rs. 2,91,000 on 19-1-1946. The Income-tax Officer asked for an explanation which the appellant gave stating that these notes formed part of its cash balances including cash balance in the Almirah account. The cash balances of the appellant on 12-1-1946, on which date the High Denomination Bank Notes (Demonetisations) Ordinance, 1946 was promulgated were Rs. 29,284-3-9 in its Rokar and Rs. 2,81-397-10-0 in the Almirah account. The Almirah account was an account for moneys withdrawn and kept at home. The appellant sought to prove the fact that the high denomination notes encashed by it formed part of its cash balances from certain entries in its accounts wherein the fact that moneys were received in high denomination notes had been noted. Portions of these entries to the effect that moneys had been received in high denomination notes were found by the Income-tax Officer to be subsequent interpolations made by the appellant with a view to advance its case that the cash balances contained the high denomination notes encashed by it. The Income-tax Officer found that the appellants food grains licence at Nawgachia had been cancelled for the accounting year for its failure to keep proper stock accounts and that the appellant was prosecuted under the Defence of India Rules but had been acquitted having been given the benefit of doubt. The Income-tax Officer also had regard to the fact that the appellant was a speculator and that as a speculator the appellant could easily have earned amounts far in excess of the value of the high denomination notes encashed. He considered that even in the disclosed volume of business in the year under consideration in the Head Office and in the branches, there was possibility of his earning a considerable sum as against which it showed a net loss of about Rs. 46,000. The Income-tax Officer also noticed that notwithstanding the fact that the period was very favourable to foodgrain dealers, the appellant had declared a loss for the assessment year 1944-45 up to 1946-47, though it had the benefit of a large capital on hand. The Income-tax Officer further took into consideration the circumstances that Nawgachia and Dhulian were very important business centres and Sahibganj the principal place of business had gained sufficient notoriety for smuggling foodgrains and other commodities to Bengal by country boats. Dhulian which was just on the Bengal-Behar border was also reported to be a great receiving centre for such commodities, Having regard to all these circumstances, the Income-tax Officer rejected the appellants explanation that the high denomination notes formed part of its cash balances and treated the Sum of Rs. 2,91,000 as the appellants secreted profits from business and included it in its total income and assessed the appellant for the said assessment year on the income of Rs. 1,39,117. Dealing with the Excess Profits Tax assessment, he also held that the said income was derived from the business of the appellant and hence it was liable to excess profits tax also.4. The appellant preferred an appeal to the Appellate Commissioner against both these assessment orders and by his orders dated 28-2-1951, the Appellate Assistant Commissioner upheld the orders of the Income-tax Officer and dismissed the appeals.5. On further appeals from the said orders of the Appellate Assistant Commissioner to the Income-tax Appellate Tribunal, the Tribunal by its order dated 29-4-1952, dismissed both the appeals as regards the Income-tax as well as Excess profits tax. Even though before the Income-tax Officer and the Appellate Assistant Commissioner the case of the appellant was that the account book which contained the entries in regard to the receipts of moneys in high denomination notes were genuine and correct, this position was abandoned by the appellant before the Tribunal. Before the Tribunal, the appellant stated that the said entries were made in sheer nervousness after coming into force of the High Denomination Bank Notes (Demonetization) Ordinance, 1946 on 12-1-1946, as the appellant did not know that it had specific proof in its possession of having the high denomination notes as part of its cash balances. The Tribunal held that there was no other reason to suspect the genuineness of the account books in which these interpolations were made. If the entire account books were fabricated to serve its purpose, there would be no need for the appellant to make interpolations between the lines already written in a different ink and in such an obvious manner as to catch ones eye on the most cursory perusal. The Tribunal, however, examined the cash book and taking into consideration all the circumstances which had been adverted to by the Income-tax Officer held that the appellant might be expected to have possessed as part of its business cash balance of at least Rs. 1,50,000 in the shape of high denomination notes on 12-1-1946 when the Ordinance above-mentioned was promulgated. A copy of the statement a large amounts received by the appellant from a single constituent had been filed by the appellant which showed that sums aggregating to Rs. 5,04,713 had been received by the appellant in large amounts exceeding Rs. 1,000 between February 6, 1945 and 11-1-1946. As to large payments made by the appellant, no statement was filed but the Tribunal examined the accounts with a view to ascertain the payments which could have been made in high denomination notes. The Tribunal came to the conclusion that the nature of the source from which the appellant derived the remaining 141 high denomination notes of Rs. 1,000 each remained unexplained to its satisfaction. It accordingly ordered that the addition made by the authorities be reduced from Rs. 2,91,000 to Rs. 1,41,000. The Income-tax Officer was also directed to make the necessary consequential adjustment in the Income-tax assessment based upon the result of the connected Excess Profits Tax Appeal. In regard to the Excess Profits Tax appeal the Tribunal after taking into account the preceding and succeeding assessments and the nature of the appellants business and the opportunities that it had to make substantial business profits outside the books held that the add back of Rs. 1,41,000 must be made to the business profits disclosed by the appellant. Consequential relief was accordingly given in the Excess Profits Tax appeal also.6. The appellant thereafter applied to the Tribunal for stating a case and raising and referring to the High Court the following questions of law arising from the said order of the Tribunal both as regards the Income-tax and the excess profits tax"Whether there is any material to justify the conclusion that Rs.1,41,000 is secreted profit for the purpose of assessment, this amount being a part of Rs. 2,91,000 and which was the amount represented by high denomination notes encashed by the Petitioner.(2) Whether there is any material for a finding that the sum of Rs. 1,41,000 is the secreted value of the high denomination notes was business income liable to excess profits tax.By its order dated 15-8-1952, the Tribunal dismissed these applications stating that the finding of the taxing authorities was a pure finding of fact based on evidence before them and that no question of law arose out of the said order of the Tribunal8. The appellant thereupon made applications to the High Court under S. 66 (2) for directing the Tribunal to state a case and raise and refer the said questions of law to the High Court for its decision. By its order dated 21-1-1953, the High Court directed the Tribunal to state a case and raise and refer the following question of law to the High Court for its decision in both thethere is any material to support the finding of the Appellate Tribunal that a sum of Rs. 1,41,000 is secreted profit liable to be taxed in the hands of the assessee under the Indian Income-tax Act and under the Excess Profits Tax Act.The Tribunal accordingly stated a case and raised and referred the aforesaid question of law to the High Court.10. The said Reference was heard by the High Court and judgment was delivered on 5-1-1955, whereby the High Court answered the referred question in the affirmative. The High Court was of the opinion that the onus of proving the source of the said amount was on the appellant which the appellant did not discharge and that there was evidence before the Tribunal to come to the conclusion it did. The finding arrived at by the Tribunal was therefore a pure finding of fact and it could not be urged that it was based on no evidence. The High Court further held that as the appellant itself claimed that the said amount of Rs. 2,91,000 formed part of the cash balance of its business, the said profits were profits of the business and as such liable to excess profits tax.The appellant then applied to the High Court for a certificate under S. 66A (2) of the Income-tax Act for leave to appeal to this Court. These applications were rejected by the High Court on 25-8-1955, observing that it had answered the question of law not on the academic principles of onus but on the material from which it was open to the Income-tax authorities to arrive at the conclusion at which they arrived.The appellant thereupon on 22-10-1955, applied to this Court for special leave to appeal which was granted by this Court on 28-11-1955, in both the appeals arising out of the assessment for Income-tax as well as the excess profits tax. Both the appeals arising out of these orders being Civil Appeals Nos. 679 and 680 of 1957 are now before us.

Reasoning: 20. This was the background against which the Tribunal came to its own conclusion. Even though it recognised that it was not improbable that when very large sums, say in excess of Rs. 10,000 at a time were received, a fairly good portion thereof consisted of high denomination notes and as high denomination notes were valid tender and nobody could have foreseen that they would be demonetised suddenly in January, 1946, there was nothing out of the way in persons dealing with tens of thousands of rupees and whose balances ran to lakhs, being in possession of a fair proportion of their balances in the shape of high denomination notes. While recognising this probability of the appellant having been in possession of a fair proportion of its balances in the shape of high denomination notes, the Tribunal unconsciously though it was, fell into an error when it held that the appellant might be expected to have possessed at least Rs. 1,50,000 in the shape of high denomination notes as part of its cash balance, thus treating the remaining Rs. 1,41,000 in the high denomination notes of Rupees 1,000 each as outside the purview of these cash balances.21. Unless the Tribunal had at the back of its mind the various probabilities which had been referred to by the Income-tax Officer as above it could not have come to the conclusion it did that the balance of Rs. 1,41,000 comprising of the remaining 141 high denomination notes of Rs. 1,000 each was not satisfactorily explained by the appellant.22. If the entries in the books of account were genuine and the balance in Rokar and the balance in Almirah on January 12, 1946, aggregated to Rs. 3,10,681-13-9 and if it was not improbable that a fairly good portion of the very large sums received by the appellant from time to time, say in excess of Rs. 10,000 at a time, consisted of high denomination notes, there was no basis for the conclusion that the appellant had satisfactorily explained the possession of Rupees 1,50,000 in the high denomination notes of Rs. 1,000 each leaving the possession of the balance of 141 high denomination notes of Rs. 1,000 each unexplained. Either the Tribunal did not apply its mind to the situation or it arrived at the conclusion it did merely by applying the rule of thumb in which event the finding of fact reached by it was such as could not reasonably be entertained or the facts found were such as no person acting judicially and properly instructed as to the relevant law could have found, or the Tribunal in arriving at its findings was influenced by irrelevant considerations or indulged in conjectures, surmises or suspicions in which event also its finding could not becancellation of the foodgrain licence at Nawgachia and the prosecution of the appellant under the Defence of India Rules was also of no consequence inasmuch as the appellant was acquitted of the offence with which it had been charged and its licence also wasthe conclusion of the Income-tax Officer was thus either perverse or vitiated by suspicions, conjectures or surmises the finding of the Tribunal was equally perverse or vitiated if the Tribunal took count of all these probabilities and without any rhyme or reason and merely by a rule of thumb, as it were, came to the conclusion that the possession of 150 high denomination notes of Rs. 1,000 each was satisfactorily explained by the appellant but not that of the balance of 141 high denomination notes of Rs. 1,000 each.It is, therefore, clear that the Tribunal in arriving at the conclusion it did in the present case indulged in suspicions, conjectures and surmises and 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, or the finding was, in other words, perverse and this Court is entitled to interfere.28. We are therefore of opinion that the High Court was clearly in error in answering the referred question in the affirmative. The proper answer should have been in the negative having regard to all the circumstances of the case which we have adverted to above.