Burden of proof that the high denomination notes encashed on their demonetization constituted suppressed income of assessee, is on the Department

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Burden of proof that the high denomination notes encashed on their
demonetization constituted suppressed income of assessee, is on the Department

KANPUR STEEL CO. LTD vs. COMMISSIONER OF INCOME TAX

HIGH COURT OF ALLAHABAD

Bhargava & Upadhya, JJ.

Misc. Case No. 261 of 1950

18th February, 1957

(1957) 25 CCH 0042 AllHC

(1957) 32 ITR 0056

Legislation Referred to

Section 69

Case pertains to

Asst. Year 1947-78

Decision in favour of:

Assessee

Income from undisclosed sources—Burden of proof—Burden of proof that the high denomination notes encashed on their demonetisation constituted suppressed income of assessee, is on the Department—Assessee encashing 32 notes of Rs.  1000 on their demonetisation and explaining the IT authorities that it formed partof cash balance of Rs. 34,000—Tribunal, after examination of the accounts, holding that only seven notes could form part of that cash balance in the state of transactions performed by the assessee and making an addition of Rs. 25,000—Not justified in the facts and circumstances of the case

Held :

The Tribunal lost sight to the fact that the burden of proof lay upon the Department to show that the sum of Rs. 32,000. represented by the 32 high denomination currency notes of Rs. 1,000 each which were cashed by the assessee, represented suppressed income of the assessee from undisclosed sources. The burden was not on the assessee to prove how it had received those high denomination currency notes. Until the High Denomination BankNotes (Demonetisation) Ordinance, 1946, came into force, the high denomination currency notes could be used as currency as freely as notes of any lower denomination and no one had any idea that it would be necessary for him to explain the possession of high denomination currency notes. The use of high denomination currency notes depended upon convenience of the individual possessing them and upon the nature of the transaction that he may have to go through. It was only when the High Denomination Bank Notes (Demonetisation) Ordinance of 1946 came into force on the 12th of January, 1946 that it became necessary in this case for the assessee-company to explain its possession of those currency notes. The assessee-company had naturally not kept any statement indicating when it received each one of those currency notes, because at the time when it received them, it had no idea that it would be required to give such an explanation and, therefore, it was not in a position to prove how and when it came into possession of those currency notes. The assessee-company, however, gave an explanation which, it appears was fairly satisfactory and which the Tribunal has not found to be false. On 12th Jan., 1946, the assessee-company had a cash balance of Rs. 34,000 and odd and, consequently, there is the possibility that the assessee-company had 32 currency notes of Rs. 1000 each in its possession as part of that balance. This explanation was not accepted by the Tribunal but there are no satisfactory reasons for this view taken by the Tribunal. The Tribunal has taken into account a statement of sales relating to a few days just preceding the date on which  the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, came into force.The statement of sales for those dates, begin on 6th Jan., 1946 and end on 12th Jan., 1946. It  appears that such a statement was hardly relevant to the question which the Tribunal had to examine. It has been mentioned by the Tribunal that, according to the statement there was no single transaction on any of those dates in which sale proceeds exceeded Rs. 1,000. The highest amount of any one single transaction was Rs. 399-9-3. The Tribunal do not appear to have examined the entries to find out whether several of the sales of the same date might not be in favour of the same individual, so that one single payment may have been made for several bills and might have exceeded the sum of Rs. 1,000. Further, the Tribunal have not at all touched upon the possibility that, in case of payments for transactions amounting to several hundreds, such as Rs. 380 (which is a figure that occurs very frequently on these dates) the payer might have chosen to hand over currency notes of Rs. 1,000 asking for the return of the balance in notes of lower denomination. These entries could not, therefore, in any way, indicate that these 32 currency notes of Rs. 1,000 each could not have come into the hands of the assessee in the course of its business transactions and could not have formed part of its cash balance. The Tribunal has also referred to another statement of the cash balance of the assessee on each day beginning with 20th Dec., 1945 and ending on 12th Jan., 1946. The Tribunal noted from this statement that the cash balance of the assessee-company was steadily increasing. If the cash balance of the assessee-company was steadily increasing it would not be at all unreasonable to accept the explanation given by the assessee-company that, for the sake of convenience, the cash balance was being kept in high denomination currency notes. High denomination currency notes could be stored more easily and, at the time of accounting, they would have facilitated counting. Since the balance was increasing steadily, the assessee might not have felt it necessary to keep the balance in currency notes of low denomination in excess of Rs. 2,000 or so. It would thus appear that the Tribunal rejected the explanation of the assessee-company on surmises and their opinion, which is not based on any mate rial at all but on reasoning which is not necessarily correct, can hardly be acceptable. In this case, therefore, it cannot be said that the explanation given by the assessee-company was either unreasonable or wrong. When the assessee-company had given an explanation which was reasonable, the IT authorities could have been entitled to treat the sum of Rs. 32,000 as income from undisclosed sources only if there was some other material from which such inference could have been drawn. No other material has been mentioned by the Tribunal in their appellate judgment or in the statement of the case. It further appears that the Tribunal, in holding that seven high denomination currency notes of the value of Rs. 7,000 only could form part of the cash balance and the remaining currency notes could not do so, were acting on their surmises for which there was no basis and which had no support from any material on the record. In these circumstances, it must be held that there was no material for holding that the sum of Rs. 25,000 being the value of high denomination currency notes exchanged in pursuance of the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, represented income of the assessee-company from some undisclosed sources.—Mehta Parikh & Co. vs. CIT (1956) 30 ITR 181 (SC) :

TC42R.1608 relied on.

Conclusion :

Burden of proof that the high denomination notes encashed on their demonetisation constituted suppressed income of assessee, is on the Department.

Counsel appeared:

Dr. N. P. Asthana, for the Assessee : J. Sarup, for the Revenue

BY THE COURT

The following two questions have been referred for our opinion in compliance with the  order of this Court dt. 5th Feb., 1953, under s. 66(2) of the Indian IT Act : " 1. The assessee company having followed the mercantile method of accounting whether the commission of Rs. 15,432 having been received in the subsequent accounting year, relevant for the asst. yr. 1948-49, could be brought to tax as accrued income in the asst.

  1. 1947-48? Whether there was any material to hold that the sum of Rs. 25,000 being the value of the high denomination notes exchanged in pursuance to the demonetization ordinance was an income of the assessee company from some undisclosed source ? "
  1. The assessee is a private limited company known as the Kanpur Steel Company Limited which, in addition, was carrying on the work of sole agency of the Aira Sugar Factory and was receiving a commission of one per cent on the sales of sugar of that factory. The assessment year in question is 1947-48 and the relevant accounting period is from 8th Nov., 1945, to 27th Oct., 1946. No commission was received by the assessee company during the relevant accounting year. Subsequently, however, a sum of Rs. 15,432 was received by the company, as commission accrued upon the sales for the period relevant to the assessment year in question, on 17th March, 1947. This amount was shown by the assessee company as income relating to the subsequent asst. yr. 1948-49. The ITO, however, held that this income had accrued to the assessee during the previous year corresponding to asst. yr. 1947-48 and, consequently, added it to the income for that year and included it in the assessment.
  1. A second point, that cropped up before the ITO, related to the encashment of 32 high

denomination currency notes of Rs. 1,000 each by the assessee company on 12th Jan.,

1946, when the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, came

into force. The ITO called upon the assessee to explain how those 32 currency notes of Rs.

1,000 each came into possession of the assessee. The assessee claimed that the currency

notes represented part of his cash balance which, on 12th Jan., 1946, stood at the figure of

Rs. 34,313-1-9. The ITO rejected this explanation and, consequently, held that the amount

of Rs. 32,000 represented by those currency notes of Rs. 1,000 each to be suppressed

income of the assessee from some undisclosed source. The assessee appealed

unsuccessfully before the AAC. When the appeal came up before the Tribunal, the assessee

again failed on both the points but the Tribunal held that there was a possibility that seven

high denomination currency notes of the value of Rs. 7,000 could represent part of the cash

balance and, consequently, reduced the amount, which had been added back to the income

of the assessee, to that extent. The Tribunal thus upheld the adding back of the sum of Rs.

25,000. The assessee then applied to the Tribunal under s. 66(1) of the Indian IT Act to

make a reference to this Court. That application was rejected. When the assessee moved

this Court, this reference was called for and, consequently, the Tribunal have sent a

statement of the case after framing the two questions mentioned above.

  1. With regard to the first question, it has become unnecessary for us to enter into any

discussion, as Dr. N. P. Asthana, appearing for the assessee company, made a statement

that he would not press this question, particularly, in view of the facts that emerged during

the discusion after the scrutiny of the statement of the case submitted by the Tribunal and

in view of the fact that the sum of Rs. 15,432, had not been included in the income of the

assessee for the subsequent asst. yr. 1948-49 and had only been included during the asst.

  1. 1947-48. Consequently, we consider it unnecessary to express any opinion on this

question but, in view of the concession of the learned counsel, the Tribunal will be entitled

to proceed on the basis that this point is decided against the assessee.

  1. So far as the second question is concerned, it appears that the Tribunal lost sight of the

fact that the burden of proof lay upon the Department to show that the sum of Rs. 32,000,

represented by the 32 high denomination currency notes of Rs. 1,000 each which were

cashed by the assessee, represented suppressed income of the assessee from undisclosed

sources. The burden was not on the assessee to prove how it had received those high

denomination currency notes. Until the High Denomination Bank Notes (Demonetisation)

Ordinance, 1946, came into force, the high denomination currency notes could be used as

currency as freely as notes of any lower denomination and no one had any idea that it

would be necessary for him to explain the possession of high denomination currency notes.

The use of high denomination currency notes depended upon convenience of the individual

possessing them and upon the nature of the transaction that he may have to go through. It

was only when the High Denomination Bank Notes (Demonetisation) Ordinance of 1946

came into force on the 12th of January, 1946, that it became necessary in this case for the

assessee company to explain its possession of those currency notes. The assessee company

had naturally not kept any statement indicating when it received each one of those currency

notes, because, at the time when it received them, it had no idea that it would be required

to give such an explanation and, therefore, it was not in a position to prove how and when it

came into possession of those currency notes. The assessee company, however, gave an

explanation which, it appears to us, was fairly satisfactory and which the Tribunal has not

found to be false. On 12th Jan., 1946, the assessee company had a cash balance of Rs.

34,000 and odd and, consequently, there is the possibility that the assessee company had

32 currency notes of Rs. 1,000 each in its possession as part of that balance. This

explanation was not accepted by the Tribunal but we have not been able to find any

satisfactory reasons for this view taken by the Tribunal. The Tribunal has taken into account

a statement of sales relating to a few days just preceding the date on which the High

Denomination Bank Notes (Demonetisation) Ordinance, 1946, came into force. The

statement of sales for those dates, which begin on 6th Jan., 1946, and end on 12th Jan.,

1946, has been appended as Annexure ‘C' to the statement of the case. It appears to us

that such a statement was hardly relevant to the question which the Tribunal had to

examine. In order to find out whether there was any one transaction on any of those dates

when the assessee-company received a sum of Rs. 1,000 or more from one individual, the

account book, that should have been examined, was the cash book in which, on the receipt

side, there would have been entries of the various items of cash received by the assessee

company in the course of each day. The statement contained in Annexure ‘C' refers to bills

of each day but does not mention that they represented the cash amounts received on each

of those days. In fact, the mention in the annexure of numbers of bills would indicate that

the entries do not relate to cash sales. Cash might have been received by the assessee-

company on each day in respect of cash sales of that day as well as in payment of previous

credit sales. In the circumstances, we are constrained to hold that the IT authorities, in

relying on the entries relating to bills of each day, committed an error and no inference

should have been drawn from them. Further it appears to us that even the inferences drawn

are not justified. It has been mentioned by the Tribunal that, according to the statement

contained in Annexure’C' there was no single transaction on any of those dates in which sale

proceeds exceeded Rs. 1,000. The highest amount of any one single transaction was Rs.

399-9-3. The Tribunal do not appear to have examined the entries to find out whether

several of the sales of the same date might not be in favour of the same individual, so that

one single payment may have been made for several bills and might have exceeded the

sum of Rs. 1,000. Further, the Tribunal have not at all touched upon the possibility that, in

case of payments for transactions amounting to several hundreds, such as Rs. 380 (which is

a figure that occurs very frequently on these dates the payer might have chosen to hand

over currency notes of Rs. 1,000 asking for the return of the balance in notes of lower

denomination. These entries could not, therefore, in any way, indicate that these 32

currency notes of Rs. 1,000 each could not have come into the hands of the assessee in the

course of its business transactions and could not have formed part of its cash balance. The

Tribunal has also referred to another statement of the cash balance of the assessee on each

day beginning with 20th Dec., 1945, and ending on 12th Jan., 1946. The Tribunal noted

from this statement that the cash balance of the assessee company was steadily increasing.

If the cash balance of the assessee-company was steadily increasing it would not be at all

unreasonable to accept the explanation given by the assessee company that, for the sake of

convenience, the cash balance was being kept in high denomination currency notes. High

denomination currency notes could be stored more easily and, at the time of accounting,

they would have facilitated counting. Since the balance was increasing steadily, the

assessee might not have felt it necessary to keep the balance in currency notes of low

denomination in excess of Rs. 2,000 or so. It would thus appear that the Tribunal rejected

the explanation of the assessee-company on surmises and their opinion, which is not based

on any material at all but on reasoning which is not necessarily correct, can hardly be

acceptable. In this case, therefore, it cannot be said that the explanation given by the

assessee-company was either unreasonable or wrong. When the assessee company had

given an explanation which was reasonable, the IT authorities could have been entitled to

treat the sum of Rs. 32,000 as income from undisclosed sources only if there was some

other material from which such inference could have been drawn. No other material has

been mentioned by the Tribunal in their appellate judgment or in the statement of the case.

It further appears that the Tribunal, in holding that seven high denomination currency notes

of the value of Rs. 7,000 only could form part of the cash balance and the remaining

currency notes could not do so, were acting on their surmises for which there was no basis

and which had no support from any material on the record. In these circumstances, it must

be held that there was no material for holding that the sum of Rs. 25,000 being the value of

high denomination currency notes exchanged in pursuance of the High Denomination Bank

Notes (Demonetisation) Ordinance, 1946, represented income of the assessee company

from some undisclosed sources. This view of ours is in line with the decision of the Supreme

Court in Mehta Parika & Co. vs. CIT, (1956) 30 ITR 181 in which case their Lordships of the

Supreme Court also approved of a decision of the Patna High Court in Chunilal Ticamchand

Coal Co. Ltd. vs. CIT, (1955) 27 ITR 602 (Pat).

Let the record be returned with our opinion on the second question as expressed above. The

assessee company will be entitled to its costs from the Department which we assess at Rs.

250.

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