Demonetization special cases: Assessee is not required to prove the source of receipt of high denomination notes

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Demonetization special cases: Assessee is not required to prove the source of
receipt of high denomination notes

LAKSHMI RICE MILLS vs. COMMISSIONER OF INCOME TAX
HIGH COURT OF PATNA
S.N.P. Singh. Actg. C.J. & S.K. Jha, J.
Tax Case No. 44 of 1970
15th April, 1974
(1974) 42 CCH 0104 PatHC
(1974) 97 ITR 0258
Legislation Referred to
Section 69A
Case pertains to
Asst. Year 1946-47
Decision in favour of:
Assessee
Income from undisclosed source—Undisclosed money—Encashment of high
denomination notes—Cash balance of the assessee shown in its books being
sufficient to cover the value of high denomination notes and accounts having been
accepted as genuine, high denomination notes could not be treated as income
from undisclosed sources—Assessee was not required to prove the source of
receipt of high denomination notes

Held :
While accepting the position that the assessee had on the 12th Jan., 1946, a cash balance
duly entered in its books of account a sum of Rs. 1,70,000 odd and accepting the
genuineness of the books of account of the assessee, the matter was decided, more or less, on the applicability of the doctrine of onus. The underlying current behind the order of the Tribunal as well as those of the subordinate assessing or appellate authorities seems to be that the assessee must in such cases prove the source of receipt of the high denomination notes. This, is not the correct position in law.—Sri Nilkantha Narayan Singh vs. CIT (1951) 20 ITR 8 (Pat) : TC38R.1087 followed.

It is a fundamental principle governing the taxation of any undisclosed income or secreted
profits that the income or the profits as such must find sufficient explanation at the hands of the assessee. If the balance at hand on the relevant date is sufficient to cover the value of the high denomination notes subsequently demonetised and even more, in the absence of any finding that the books of account of the assessee were not genuine, the source of
income is well disclosed and it cannot amount to any secreted profits within the meaning of
the law. What has to be disclosed and established is the source of the income or the receipt
of money, not the source of the receipt of the high denomination notes which were legal
tender at the relevant time. The Tribunal had erred in coming to the conclusion that the
cash balance of Rs. 1,70,038 did not include 140 high denomination notes when they were
presented on 22nd Jan., 1946 to the bank for encashment.—Lalchand Bhagat Ambica Ram
vs. CIT (1959) 37 ITR 288 (SC) : TC42R.1252, Kanpur Steel Co. Ltd. vs. CIT (1957) 32 ITR
56 (All) : TC42R.1809 and Bai Velbai vs. CIT (1963) 49 ITR 130 (SC) relied on; S.N.
Ganguly vs. CIT (1953) 24 ITR 16 (Pat) : TC42R.1180, Sreelekha Banerjee vs. CIT (1963)
49 ITR 112 (SC) : TC42R.1145, Sovachand Baid vs. CIT (1958) 34 ITR 650 (SC) :
TC42R.1415 and CIT vs. Manna Ramji & Co. 1973 CTR (SC) 210 : (1972) 86 ITR 29 (SC) :
TC13R.1378 distinguished.

Conclusion :
Cash balance of the assessee shown in its books being sufficient to cover the value of high
denomination notes and accounts having been accepted as genuine, high denomination
notes could not be treated as income from undisclosed sources.
Counsel appeared:
V. D. Narayan, Shambhu Sharan, K. N. Jain, C. C. Bharuka, C. B. Belwariar & H. N. Verma,
for the Petitioner : Tarkeshwar Prasad & Rameshwar Prasad, for the Revenue

S. K. JHA, J.:
A statement of case has been submitted to this Court under s. 66(1) of the Indian IT Act,
1922, by the Tribunal, Patna Bench, by an order dated the 15th July, 1969, referring the
following question of law for the opinion of this Court :

"Whether, in view of the fact that notes of Rs. 1,000 were legal tender on the date of
promulgation of the Ordinance (January 12, 1946), the Tribunal had erred in coming to the
conclusion that the cash balance of Rs. 1,70,038 did not include 140 high denomination
notes when they were presented on January 22, 1946, to the bank for encashment

The assessee is a registered firm, and the subject-matter of assessment covered by this
reference is the asst. yr. 1946-47 relating to the accounting period November 25, 1944, to
February 13, 1946, in accordance with the prevalent practice and manner regularly
employed by the assessee for maintaining its books of account.

The short facts necessary for the disposal of this reference case may be stated as follows.
On august 17, 1946, the assessee filed its return for the relevant assessment year. On
November 7, 1946, the assessment proceedings were taken up by the ITO when the books
of account of the assessee were first examined. An order of assessment was made on
October 4, 1948. The assessee took up the matter in appeal to the AAC, who by his order
dated November 14, 1949, set aside the assessment order of the ITO and remanded the
case to him for reassessment. By an order dated January 27, 1958 (copy marked Annexure
"A" to the statement of the case ), the ITO passed an order of reassessment which was affirmed in so far as the present question is concerned by the AAC by his order dated October 31, 1965, (annexure "B" to the statement of the case). The assessee then went up in second appeal before the Tribunal, Patna Bench, which by its appellate order, dated December 22, 1967 (copy marked annexure "C" to the statement of the case), dismissed the assessee's appeal with regard to the question at issue.
2. The material facts giving rise to this reference are that on January 12, 1946, the Imperial
Government promulgated Ordinance No. 3 of 1946, known as the High Denomination Bank
Notes (Demonetisation) Ordinance, 1946, which was declared to have come into effect
forthwith. By the aforesaid Ordinance, all bank notes of the denomination of Rs. 1,000 or
above were declared to be not legal tender and a time-limit of ten days was set, and in
some cases two weeks, for the exchange of the demonetised notes from either the Reserve
Bank or the then Imperial Bank of India amongst other scheduled banks. On the date the
Ordinance was promulgated and came into effect, that is, on January 12, 1946, the
assessee had a cash balance of Rs. 1,70,038 in its books of account. On the 22nd of
January, 1946, within the time prescribed by law, the assessee deposited, according to it,
157 notes of the denomination of Rs. 1,000 each in the Imperial Bank of India. The
demonetised notes presented to the bank thus amounted in value to Rs. 1,57,000. This
amount of Rs. 1,57,000 was the subject-matter of controversy between the assessee and
the Revenue. The ITO held that Rs. 17,000, out of the abovementioned amount of Rs.
1,57,000, represented the 17,1,000—rupee notes which the assessee had shown to have
received from the Imperial Bank itself. The balance amount of Rs. 1,40,000, according to
the ITO, had not been sufficiently explained in so far as they were represented by
denomination of 1,000—rupee notes. The ITO, with whom the AAC in appeal also agreed,
held that the assessee had not discharged the burden of proving the source of 140 notes of
the denomination of Rs. 1,000 each. I must state here that the books of account of the
assessee were not challenged in so far as their genuineness was concerned, and the
Revenue all along proceeded upon the assumption that on January 12, 1946, the crucial
date, the assessee had a cash balance of Rs. 1,70,000 odd. The contention put forward on
behalf of the assessee all along was that this cash balance of Rs. 1,70,000 odd which it had
on that date covered the disputed amount of Rs. 1,40,000, for the notes of the
denomination of Rs. 1,000 were legal tender till the 12th of January, 1946, and the
assessee was well within the legal limits of its rights in converting notes of small
denomination to the notes of high denomination for the purpose of safe keeping and in the
interest of security. None-the-less, the contention or the explanation put forward on behalf
of the assessee was rejected both by the ITO and the AAC who concurrently held that the
assessee had not discharged the onus of proving the source of the high denomination notes.
When the appeal was pursued before the Tribunal, the Tribunal again rejected the
explanation put forward by the assessee, holding, inter alia, that :
(i) There was no custom or practice prevalent in the market for any merchant to keep the
number of the high denomination notes.
(ii) During the course of the business these notes were received in change for smaller notes
but since we are making a presumption against the assessee for not keeping on record of
flow in the business of notes, the position remained that the assessee has not been able to
prove that he received high denomination notes in exchange for other notes.
(iii) When there are high denomination notes tendered for encashment the onus is on the
assessee to prove the origin and source of these notes.
(iv) Where the assessee keeps a cash book the onus is to a considerable extent discharged
by the mere fact that there are sufficient cash balance on the dates earlier to the Ordinance.

(v) If the ITO wants to reject the books of account the onus is upon him to show that the
books are unreliable or not written in the ordinary course of the business.
(vi) After October 24, 1945, the assessee withdrew Rs. 2,70,000 from the bank, of which
Rs. 17,000 was in high denomination notes and the balance of Rs. 2,53,000 was not in high
denomination notes, and the assessee received Rs. 27,000 from other parties in notes, the
denomination of which is not known, although they were in sums of more than Rs. 1,000 in
each case.
3. Having thus recorded its findings, the Tribunal went on to hold that examining strictly
from the point of view of onus and legal rights, the assessee had not established by definite
evidence that it received Rs. 27,000 in high denomination notes and, therefore, the
assessee had not discharged the onus of showing that Rs. 27,000 was received in high
denomination notes. It was further held that, as regards the balance of Rs. 1,40,000, the
assessee had not been able to establish that it received these sums in high denomination
notes from the bank, and the assessee's theory that these notes were exchanged during the
course of the business into high denomination notes remained unproved ; and the assessee
had not discharged the onus of proving that this money came in the form of high
denomination notes.
4. Summing up the position, therefore, while accepting the position that the assessee had
on the 12th of January, 1946, a cash balance duly entered in its books of account a sum of
Rs. 1,70,000 odd and accepting the genuineness of the books of account of the assessee,
the matter was decided, more or less, on the applicability of the doctrine of onus. The
underlying current behind the order of the Tribunal as well as those of the subordinate
assessing or appellate authorities seems to be that the assessee must in such cases prove
the source of receipt of the high denomination notes. This, in my view, is not the correct
position in law. As has been held by an early decision of this Court in the case of Sri
Nilkantha Narayan Singh vs. CIT (1951) 20 ITR 8, 24 (Pat), where account books are
accepted by the fact-finding authorities as genuine and there was hence no material upon
which the Tribunal could reach the inference that the high denomination notes were not the
saving of the assessee and where the cash balance had not exceeded the amount of the
value of the high denomination notes subsequently demonetised, it was not necessary for
the assessee to explain the source of receipt of such high denomination notes covered by
the cash balance showed. It was held in that case on facts more akin to the facts of the
instant case thus :
"In my opinion, there is no onus thrown upon the Raja (the assessee) to indicate from whom each note to the value of Rs. 10,000 was received, and no adverse inference ought to have been drawn by the Tribunal against the assessee."
5. It is, in my view, a fundamental principle governing the taxation of any undisclosed
income or secreted profits that the income or the profits as such must find sufficient
explanation at the hands of the assessee. If the balance at hand on the relevant date is
sufficient to cover the value of the high denomination notes subsequently demonetised and
even more, in the absence of any finding that the books of account of the assessee were not genuine, the source of income is well disclosed and it cannot amount to any secreted profits within th e meaning of the law. What has to be disclosed and established is the source of the income or the receipt of money, not the source of the receipt of the high denomination notes which were legal tender at the relevant time. Reference in this connection and in support of the view that I have taken may be made to the case of Lalchand Bhagat Ambica Ram vs. CIT (1959) 37 ITR 288 (SC), where the Supreme Court held that the entires in the rokar and the almirah accounts of the assessee showed that that there was an aggregate cash balance of Rs. 3,10,681 and it was highly probable that high denomination notes of the value of Rs. 2,91,000, which amount was the subject-matter of dispute in that case, were included therein. In the case being dealt with by their Lordships of the Supreme Court, the books of the assessee were not challenged in any other manner except in regard to the  interpolations relating to the number of the high denomination notes, and the Tribunal had accepted these books of account as genuine and had worked up its theory on the basis of the entries which obtained in those books of account.
6. In such circumstances it was held by the Supreme Court that it was not open to the
Tribunal to accept the genuineness of those books of account and accept the explanation of
the assessee in part and reject the same in regard to the sum of Rs. 1,41,000. It was
further held on the facts and in the circumstances of that case which are, more or less, akin to the case with which we are dealing, that the circumstances relied on by the Revenue were matters of pure conjecture, suspicion and surmises. The conduct of the assessee in that case, the notoriety he had achieved as a smuggler and the other clandestine business activities were matters lending support to a strong suspicion, but it was held that howsoever strong the suspicion may be it would be still within the realm of conjecture and surmises to treat it as a ground for rejecting the explanation which may be probable. As a matter of fact, the facts of the present case stand on a stronger footing than the case of Lalchand Bhagat Ambica Ram (supra), which the Supreme Court was concerned with.
7. Reference in this connection may also be made to a Bench decision of the Allahabad High
Court in the case of Kanpur Steel Co. Ltd. vs. CIT (1957) 32 ITR 56 (All), wherein it was
held that the burden of proof lay upon the Department to prove that the sum said to be
representing the suppressed income of the assessee was from undisclosed sources and the
burden was not on the assessee to prove how it had received the high denomination notes,
for, until the Demonetisation Ordinance came into force, high denomination currency notes
could be used 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.
Again, in the case of Bai Velbai vs. CIT (1963) 49 ITR 130 (SC), the principle was reiterated
by the Supreme Court, that, in the absence of materials to show that the sum in question
which was being sought to be treated as secreted profits did form part of the cash balance
and the source of the money had not been satisfactorily explained, the Department was
justified in holding it to be the assessable income of the assessee from some undisclosed
source. The crux of the matter is to explain or establish the source of the income or the
receipt of money and not the source of receipt of the high denomination currency notes.
8. Mr. Tarkeshwar Prasad, learned counsel appearing on behalf of the Department, placed
strong reliance on the cases of S. N. Ganguly vs. CIT (1953) 24 ITR 16 (Pat), Sreelekha
Banerjee vs. CIT (1963) 49 ITR 112 (SC), Sovachand Baid vs. CIT (1958) 34 ITR 650 (SC)
and CIT vs. Manna Ramji & Co. (1972) 86 ITR 29 (SC), in support of the proposition that
the source of receipt of the high denomination notes must be satisfactorily explained by the
assessee, who bore a heavy burden on him to discharge the obligation, in the absence of
which a presumption shall be drawn against the assessee in so far as the source of the
receipt of the money was concerned. I am afraid, none of the cases relied upon by learned
counsel for the Department supports this proposition of law. In the case of S. N. Ganguly
(1954) 24 ITR 16 (Pat), the amount encashed by the assessee did not find a place in the
books of account. As a matter of fact, the amount so encashed was in the name of the wife
of the assessee who was held to be none else than a mere name-lender for the husband. In
the case of Sovachand Baid (supra), the Tribunal did not accept the account books of the
assessee as genuine, and thus there was nothing to support the contention of the assessee that the cash balance, if any, had included the value of the high denomination notes. In the case of Sreelekha Banerjee (supra), which was being dealt with by the Supreme Court, the assessee's explanation before the ITO that the high denomination notes formed part of the
cash balance at hand was rejected as being untrue. So also in the case of Manna Ramji
(supra), the Supreme Court was not concerned with the case of the nature with which we
are dealing. The question in that case which arose for consideration was as to whether an
item of income was in the nature of capital income or revenue income. The principle
underlying that decision has therefore, in my view, no bearing upon the point at issue in the
instant case. Mr. Tarkeshwar Prasad, when confronted with this position, submitted that he
had placed reliance upon the case of Manna Ramji (supra), for the purpose of showing that
the matters with which we are concerned in the instant case were as much matters of fact
as were those which were being considered by the Supreme Court in that case and that,
therefore, in any event, learned counsel submitted, the finding of the Tribunal must be
treated as a finding of fact based upon certain materials discussed by the Tribunal in
rejecting the assessee's contention and that no question of law can be said to arise out of
the finding or the decision of the Tribunal. I am, however, definitely of the view that the
findings of the Tribunal based upon the observations or materials already quoted in detail at
an earlier place go to show that the so-called findings of fact, if any, are based upon placing
a wrong onus of proof and applying not the correct principles of law governing such cases.
On the facts as discussed by the Tribunal and the subordinate appellate or assessing
authorities, no tangible material has been brought on the record to take the shape of any
legal evidence for the purpose of recording a finding that the assessee's explanation was not worthy of acceptance. This by itself is a question of law arising from the Tribunal's decision.
9. For the foregoing reasons, I am of the view that the question referred to us by the
Tribunal must be answered in the affirmative, and I hold that on the facts and in the
circumstances of this case the Tribunal had erred in coming to the conclusion that the cash
balance of Rs. 1,70,038 did not include 140 high denomination notes when they were
presented on January 22, 1946, to the bank for encashment. This reference is accordingly
answered in favour of the assessee and against the Revenue. I also hold that the assessee
will be entitled to the costs of this hearing at a consolidated figure of Rs. 150 only.
S. N. P. SINGH, ACTG., C.J:

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