Demonetization special: No addition warranted when assessee submitted books of account showing relevant entries of payment being made to them which resulted in cash in its books and also submitted affidavits of payers,

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Demonetization special: No addition warranted when assessee submitted books
of account showing relevant entries of payment being made to them which
resulted in cash in its books and also submitted affidavits of payers,

MEHTA PARIKH & CO. vs. COMMISSIONER OF INCOME TAX
SUPREME COURT OF INDIA
S.R. Das, C.J.; Bhagwati & Venkatarama Ayyar, JJ.
Civil Appeal No. 81 of 1954
10th May, 1956
(1956) 24 CCH 0089 ISCC
(1956) 30 ITR 0181
Legislation Referred to
Section 69A
Case pertains to
Asst. Year 1947-48
Decision in favour of:
Assessee
Reference—Scope of jurisdiction of High Court—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 fats found are such that no person acting judicially and properly instructed as
to the relevant law would have come to the determination in question

Income from undisclosed sources—Encashment of high denomination notes—
Assessee encashing 61 notes of Rs. 1,000 each—ITO finding that assessee could
have only 18 notes maximum on the date of encashment—Assessee producing
affidavits before AAC to the effect that a sum of Rs. 43,000 were paid in 1000
rupee notes during the relevant period—Tribunal accepting the explanation as
regards 31 notes and holding Rs. 30,000 as assessee's undisclosed income—Not
justified— Cash book of assessee having been accepted, and deponents not having
been examined, there could not have been challenged by the Revenue and there
was no justification for accepting the explanation of assessee in part

Held :
PER BHAGWATI, J.
The cash book of the appellants was accepted and the entries therein were not challenged.
No further documents or vouchers in relation to those enties 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 AAC, nor
the ITO, who was present at the hearing of the appeal before the AAC, considered it
necessary to call for them in order to cross- examine them with reference to the statements made by them in their affidavits. Under these circumstances, it was not open to the Revenue to challenge the correctness of the cash entries or the statements made by those deponents in their affidavits. The Tribunal could not negative the possibility of the appellant being in possession of a substantial number of these high denomination currency notes. It, however, considered that it was impossible for the appellants to have had 61 such notes in the cash balance in their hands on 12th Jan., 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. 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 Tribunal had not indicated upon what material it held that Rs. 30,000 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. 61,000 and there was no justification for having accepted it in part and discarded it in relation to a sum of Rs. 30,000.—Chunilal Ticamchand Coal Co. Ltd. vs. CIT (1955) 27 ITR 602 (Pat) : TC42R.1614 impliedly approved; Mehta Parikh & Co. vs. CIT (1953) 24 ITR 207 (Bom) : TC42R.1806 reversed.
(Paras 8 to 11)

PER VANKATARAMA AYYAR, J. (SUPPLEMENTING)
The finding of the Tribunal that high denomination notes of the value of Rs. 30,000
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 accounts of the
appellant have been accepted by the Tribunal as genuine, and it is impossible to say, having regard to the case balance shown therein, that 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 a 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.

(Para 13)

Conclusion :
Cash book of assessee having been accepted, and deponents not having been examined,
these could not have been challenged by the Revenue and there was no justification for
accepting the explanation of assessee in part and treating 30 notes out of 61 notes of Rs.
1,000 denomination as income from undisclosed sources.
Counsel appeared:

R.J. Kolah & I.N. Shroff, for the Appellants : G.N. Joshi, Porus A. Mehta & R.H. Debar, for the Respondent

BHAGWATI, J.
Two questions were referred by the Tribunal to the High Court of Bombay under s. 66(i) of
the Indian IT Act :
(1) Whether there is any material to justify the assessment of Rs. 30,000 (Rupees thirty
thousand) from out of the sum of Rs. 61,000 (Rupees sixty-one 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 that the alleged item was from alleged undisclosed business profits the assessment of Rs. 30,000 (Rupees thirty thousand) is in law justified for excess profits tax and business
profits tax purposes ?
2. 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 s. 66(2) of the Act, it had no jurisdiction to do so inasmuch as the
appellants had not asked the Tribunal to refer 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.
3. The appellants are a 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 Jan., 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 Jan., 1946. Pursuant to cl. 6 of the Ordinance the appellants on 18th Jan., 1946 encashed high denomination notes of Rs. 1,000 each of the face value of Rs. 61,000. This was done in the calendar year 1946, being the account year corresponding with asst. yr. 1947-48.
During the assessment proceedings for the year 1947-48 the ITO called upon the appellants
to prove from who and when the said high denomination notes of Rs. 61,000 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 Dec., 1945 to 18th Jan., 1946 and the nature and extent of the
receipts and payments during the relevant period, the ITO came to the conclusion that in
order to sustain the contention of the appellants he would have to presume that there were
18th high denomination notes of Rs. 1,000 each in the cash balance on 1st Jan., 1946, and
before 13th Jan., 1946, were received in currency notes of Rs. 1,000 each, a presumption
which he found impossible to make in the absence of any evidence. He, therefore, added
the sum of Rs. 61,000 to the assessable income of the appellants from undisclosed sources.
4. On appeal to the AAC the appellants produced before him affidavits of three persons to
show that the appellants had received Rs. 20,000, in 1,000 rupees currency notes on 28
Dec., 1945 Rs. 15,000 in 1,000 rupees currency notes on 6th Jan., 1946, and Rs. 8,500 in
1,000 rupees currency notes (making Rs. 8,000) on 8th Jan., 1946, thus aggregating to Rs. 43,500 during the relevant period. The AAC did not accept the statements contained in the said affidavits and dismissed the appeal and confirmed the order of the ITO.
An appeal was taken by the appellants before the Tribunal. The Tribunal after taking into
consideration all the materials which had been placed before the AAC 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 the high denomination notes which was almost impossible. The Tribunal could not say that the
appellants had no high denomination notes with them. It accepted the books of accounts of
the appellants but thought that the cash balance on 18th Jan. 1946 could not have sixty-
one high denomination notes. It came to the conclusion that the high denomination notes in the cash balance and taken the other notes away. It accepted the appellants explanation
only in regards 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 refering the first question of
law to the High Court for it's opinion under s. 66(1) of the Act. The Tribunal rejected the said application holding that no question of law arose from it's order. The appellants thereupon applied to the High Court under s. 66(2) of the Act for an order of 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 hereinbefore to it for its decision under s. 66(2) of the Act. In stating the case and referring the said questions of law to the High 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.

5. 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.
30,000 represented the income of the appellants from undisclosed sources and that the
finding of the Tribunal was the finding of the fact based on materials before it and even if it
was inference drawn by the Tribunal, the inference was based on facts and materials before
the Tribunal. The High Court observed that it was impossible to say that the inference
drawn by the Tribunal form 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 referred question in the affirmative.

6. As regards the second referred question, the High Court held that the question was not
raised by the appellants in there application for the reference under the s. 66(1) of the Act
and therefore, it had 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 to
such a question to the High Court and that even though it had directed the Tribunal under s. 66(2) to refer the said question, as it had not jurisdiction to ask the Tribunal to refer the
said question, it was not open to it to answer the second question which has been raised by
the Tribunal at its instance and refused to answer it.

7. 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 ITO was
under the s. 23(3) and s. 26A of the Act. The books of account of the appellants were
accepted by the ITO and the only scrutiny made by the ITO was whether at the relevant date, i.e., on 12th Jan., 1946, the appellants had in their cash 61 notes of high
denominations of Rs. 1,000 each. The cash book entries from 20th Dec., 1945, up to 18th
Jan., 1946, were put before the ITO and they showed that on 28th Dec., 1945, Rs. 20,000
were received from the Anand Textiles and there was an opening balance of Rs. 18,395 on
the 2nd Jan., 1946. Rs. 15,000 were received by the appellants on 7th Jan., 1946 from the
Sushico Textiles and Rs 8,500, were received by them on 8th Jan., 1946 from Maniben,
widow of Shah Maneklal Nihalchand. Various other sums were also received by the
appellants from 2nd Jan., 1946, up to and inclusive of 11th Jan., 1946, which were either
multiples of Rs. 1,000 or were over Rs. 1,000 and were thus capable of having been paid to
the appellants in high denomination notes of Rs. 1,000. There was a cash balance of Rs.
69,891-2-6 with the appellants on 12th Jan., 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. 1,000, which they enchased through the Eastern Bank on 18th Jan., 1946. The
appellants further sought to support their contention by procuring before the AAC the
affidavits of Kuthpady Shyama Shetty, General Manager of M/s. Shree Anand Textiles, in
regard to payment to the appellants of a sum of Rs. 20,000 in Rs. 1,000 currency notes on
28th Dec., 1945, Govindprasad Ramjivan Nivetia, proprietor of M/s. Shusico Textlies, in
regard to payment to the appellants of a sum of Rs. 15,000 in Rs. 1,000 currency notes on
16th Jan., 1946, and Bai Maniben, widow of Shah Maneklal Nihalchand, in regard to
payment to the appellants of a sum of Rs. 8,500 (Rs. 8,000 thereout being in Rs. 1,000
currency notes) on 8th Jan., 1946. The appellants were not in a position to give further
particulars of Rs. 1,000 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 Jan., 1946, they had in their cash balance of Rs. 69,891-2-6, the 61 high denomination currency notes of Rs. 1,000 each, which they
encashed on 18th Jan., 1946, through the Eastern Bank.

8. Both the ITO and the AAC discounted this suggestion of the appellants by holding that it
was impossible that the appellants had on hand on 12th Jan., 1946, the 61 high
denomination currency notes of Rs. 1,000 each, included in their cash balance of Rs.
69,891-2-6. The calculations, which they made involved taking into account all payments
received by the appellants from and after 2nd Jan., 1946, which were either multiples of Rs. 1,000 or were over Rs. 1,000. There was a cash balance of Rs. 18,395-6-6 on hand on 2nd Jan., 1946, which could have accounted for such notes. The appellants received thereafter as shown in their cash book several sums of monies of monies aggregating to over Rs. 45,000 in multiples of Rs. 1,000 or sums over Rs. 1,000, which could account for 45 other notes of that high denomination, thus making up 63 currency notes of the high
denomination of Rs. 1,000 and these 61 currency notes of Rs. 1,000 each, which the
appellants encashed on 18th Jan., 1946, could as well have been in their custody on 12th
Jan., 1946. This was, however, considered impossible by both ITO and the AAC as they
could not consider it within the bounds of possibility that each and every payment received
by the appellants after 2nd Jan., 1946, in multiples of Rs. 1,000 or over Rs. 1,000 was
received by the appellants in high denomination notes of Rs. 1,000 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 these calculations of figures, no further scrutiny
was made by the ITO or the AAC of the entries in the cash book of the appellants. The cash
book of the appellants was accepted and the entries therein were not challenged. No further documents or vouchers in relation to those entries were called for, nor was the presence ofthe 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 AAC, nor the ITO, who was present at the hearing of the appeal before the AAC, considered it necessary to call for them in order to cross-examine them with reference to the statements made by them in their affidavits. Under these circumstances, it was not open to the Revenue to challenge the correctness of the cash entries or the statements made by those deponents in their affidavits.

9. This being the position, the state of affairs, as it obtained on 12th Jan., 1946, had got to
be appreciated, having regard to those entries in the cash books and the affidavits filed
before the AAC, taking them at their face value. The entire in the cash books disclosed that,taking the number of high denomination notes at 18 on 2nd Jan., 1946, there came in the custody or possession of the appellants after 2nd Jan., 1946, and up to 12th Jan., 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 Jan., 1946 through the Eastern Bank. A mere calculation of the nature indulged in by the ITO or the AAC 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 AAC.

The Tribunal also fell into the same error. It could not negative the possibility of the
appellant being in possession of a substantial number of these high denomination currency
notes. It, however, considered that it was impossible for the appellants to have had 61 such
notes in the cash balance in their hands on 12th Jan., 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.
10. 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) (1940) 8 ITR (Suppl) 75 :
"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) (1942) 10 ITR (Suppl.) 27 :
"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 Commissioner's
conclusions."
The latest pronouncement of the House of Lords on this question is to be found in Edwards
(Inspector of Taxes) vs. Bairstow & Anr. (1955) 28 ITR 579 (HL) : TC12R.1061. Viscount
Simonds observed at page 586 :
"For it is universally conceded that, through it is 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.
11. 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. 15,000 to the
appellants in 15 currency notes of Rs. 1,000 each on 6th Jan., 1946, and thus reducing the
aggregate sum of Rs. 43,500 to Rs. 28,500 and justifying the figure of Rs. 31,000 arrived at
by the Tribunal was really far-fetched and contrary to the terms of the Tribunal's order
itself, the Tribunal not having given any inkling, whatever, of what was at the back of its
mind when it fixed upon the figure Rs. 31,000. Really speaking, the Tribunal had not
indicated upon what material it held that Rs. 30,000 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. 61,000 and there was no justification for having accepted it in part and
discarded it in relation to a sum of Rs. 30,000. The case analogous to the one before the
Patna High Court in Chunilal Ticamchand Coal Co. Ltd. vs. CIT (1955) 27 ITR 602 (Pat) :
TC42R.1614, and should have been similarly decided in favour of the appellants.
12. 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. 30,000
from out of the sum of Rs. 61,000 for income-tax and excess profits tax and business profits
tax purpose, representing the value of the high denomination notes which were encashed
on 18th Jan., 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 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.

VENKATARAMA AYYAR, J.
13. I agree to the order just proposed; but I prefer to rest my decision on the ground that
the finding of the Tribunal that high denomination notes of the value of Rs. 30,000
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 a nut-shell, the accounts of the
appellant have been accepted by the Tribunal as genuine, and it is impossible to say, having
regard to the case balance shown therein, that the notes in question could not have been
included therein. The Tribunal observes that is unlikely that so many high denomination
notes would have been held as part of the cash on hand for a 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 contended 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 Jan., 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 an much binding on the
Revenue as on the subject.

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