Rejection of explanation that assessee mighy have changed high demonetization
currency note is not improper

ANIL KUMAR SINGH & ORS. vs. COMMISSIONER OF INCOME TAX
HIGH COURT OF CALCUTTA
S. Deb & Sabyasachi Mukharji, JJ.
IT Ref. No. 60 of 1964
17th April, 1969
(1969) 37 CCH 0139 KolHC
(1972) 84 ITR 0307
Legislation Referred to
Section 69A
Case pertains to
Asst. Year 1964-65
Decision in favour of:
Assessee Partly, Revenue Partly
Income from undisclosed sources Unexplained money Loan given in high
denomination notes by assessee Sum was given out of sale proceeds of a
property That the sale proceeds were received in high denomination notes was
evidenced by deed of conveyance Number of high denomination notes
compared Discrepancy of one note Explanation that either assessee or the
debtor who had cash in hand in notes might have changed one high denomination
note was not inherently improbableRejection of explanation improper
However, addition of another sum in the absence of similar evidence, was justified
Held :

It was necessary in this case for the Tribunal to consider whether the assessee had proved
that he had on the relevant date a large sum of money sufficient to cover the number of
notes encashed. It is an admitted position that the assessee sold the property in high
denomination notes. It is also an admitted position that out of this a large sum of money
was paid to the debtor. It has also to be borne in mind that the tallying was done with the
number of notes encashed by the debtor that is not the assessee itself, even though the
debtor was closely associated with the assessee. In those circumstances, the explanation
that either the assessee or the debtor who had cash in hand in notes might have changed
one high denomination note, is not inherently improbable. In view of the fact that the
assessee had received the money as consideration for the sale of property in high
denomination notes and that the bulk of which was paid as loan to the debtor that position
the assessee has established. The finding of the Tribunal so far as it sustained the addition
of Rs. 26,000 as income from undisclosed source, is proper and based on materials and
evidence, but so far as findings of the Tribunal sustain a further addition of a sum of Rs.
10,000 as income from undisclosed source it is improper, being based on improper rejection
of the assessee's explanation.—Sreelekha Banerjee vs. CIT (1963) 49 ITR 112 (SC) :
TC42R.1145 applied.

Conclusion :
The finding of the Tribunal that part of the sum represented income of the assessee from
undisclosed sources is valid but to the extent of an addition of a further sum it is invalid and
vitiated being based on improper rejection of materials on record.
Counsel appeared:
Dr. D. Pal with P. K. Pal & Miss M. Seal, for the Assessee : B. L. Pal with N. L. Pal, for the
Respondent
SABYASACHI MUKHARJI, J.
This reference arises out of assessment for the asst. yr. 1946- 47, for which the
corresponding accounting year was 1945-46, financial year ending on 31st of March, 1946.
The assessee originally was one Joynarain Singh, since deceased, who had been assessed in
the status of an individual for the aforesaid year under s. 23(3)/34 of the Indian IT Act,
1922. In response to a notice under s. 34 of the said Act, the assessee had filed a return
showing total income of Rs. 6,460. The ITO further found that during the accounting year
the assessee had encashed 21 high denomination notes of Rs. 1,000 each and 6 high
denomination notes of Rs. 10,000 each on 24th January, 1946, through the Allahabad Bank
Ltd. When the assessee was asked to explain the source of these notes the assessee stated
that 4 high denomination notes of Rs. 10,000 each totalling a sum of Rs. 40,000 were
received from one Vijoysingh Gobindjee of Bombay, being the sale proceeds of S. S.
Cossipore ; 2 high denomination notes of Rs. 10,000, aggregating to Rs. 20,000, were
received from the currency office, Calcutta, and 20 high denomination notes of Rs. 1,000
each were received from one R. P. Shaw by cheque on Comilla Banking Corporation and
encashed through one Sudha Sankar Singh, the assessee's son, while the assessee had one
Rs. 1,000 note as cash in hand. The ITO accepted the assessee's explanation of Rs. 40,000 received as sale proceeds of S. S. Cossipore, but was unable to accept the assessee's explanation regarding the balance of Rs. 41,000, which was treated as the assessee'sincome from undisclosed sources. The ITO had also found that the assessee had lent a sum of Rs. 1,26,000, in the form of high denomination notes to M/s Singh & Co., through hiswife, Smt. Sadhana Devi. Shri Sudha Sankar Singh, the assessee's son was one of the partners of the said firm, M/s Singh & Co. The firm encashed these high denomination notes on the 19th January, 1946. The assessee's explanation was that these high denomination notes were part of the sale proceeds of his property at No. 3, Rustomjee Parsee Road, Calcutta, to M/s Indian Research Institute Ltd. for Rs. 1,53,000. The ITO examined the deed
of conveyance executed by the assessee in favour of the purchaser, the Indian Research
Institute, wherein it was recorded that the consideration money was received in the form of
Reserve Bank of India high denomination notes to the extent of Rs. 1,53,000. The numbers
of these notes were mentioned in the deed of conveyance. The ITO found that the said high
denomination notes were encashed by M/s Singh & Co. Out of the total loan money of Rs.
1,26,000, they tallied with the notes mentioned in the deed of conveyance only to the
extent of Rs. 1,10,000, and the ITO, accepted the source of the loan to the extent of Rs.
1,10,000. He did not accept the assessee's explanation as to the balance of Rs. 16,000,
which he also treated as the assessee's income from undisclosed sources. The total addition
from the encashment of the high denomination notes as income from undisclosed sources
as per order of the ITO amounted to Rs. 57,000, comprising the two sums of Rs. 41,000
and Rs. 16,000, mentioned hereinbefore.
The assessee preferred an appeal before the AAC. The AAC confirmed the order of the ITO.
2. There was a further appeal by the assessee to the Tribunal. The Tribunal in IT Appeal No.
3538 of 1952-53, considered a letter produced before it by the assessee written by the
official liquidator of Bharati Central Bank Ltd., stating that the assessee's son had withdrawn
Rs. 36,696 in high denomination notes and the assessee's case before the Tribunal was that
the number of high denomination notes mentioned in the letter of the official liquidator
should be compared with the number of the notes encashed by him and, to the extent to
which these numbers tallied, the source of high denomination notes should be considered as
proved.
The order contains the following observation :
"Further, the appellant has alleged that he received Rs. 20,000 from the currency office.
The appellant's contention is that he has not been able to get this confirmed by the currency
officer to whom he has written on this subject. The appellant would be entitled to produce
evidence on this point also before the AAC and we send the case back to him on this point
for re- decision, on the lines indicated above."
3. The assessee, namely, Joynarain Singh, died on the 26th October, 1954, and on 9th
March, 1961, the AAC called upon the legal representative of the assessee to give his
explanation. The AAC also asked for a report from the ITO for examining the record of the
Bharati Central Bank Ltd. (in liquidation). The ITO served a notice under s. 37 of the Indian
IT Act on the official liquidator, Bharati Central Bank Ltd. The official liquidator wrote on the
20th of September, 1961, that, apart from the true copy of the office copy of a letter dated
26th April, 1951, addressed to Sri Sudha Sankar Singh by Sri D. N. Guha Roy, the then
official liquidator of the bank, there was nothing else on the record and enclosed a copy of
the aforesaid letter. The said letter stated that Sri Sudha Sankar Singh encashed a cheque
for Rs. 36,696, against which he was paid by the bank 36 high denomination notes of Rs.
1,000 each giving the numbers of such notes. It was further mentioned in the said letter
that the details of the notes were written on the back of the cheque in question and
presumably the payment was made in G. C. notes of the said denomination and numbers.
The ITO reported that out of the details of the aforesaid notes given by the then official
liquidator, the numbers of 21 high denomination notes of Rs. 1,000 each tallied with those
which were encashed by the assessee himself. But, as the cheque was drawn by Sudha

Shankar Singh in favour of Sri Sew Nath Singh who had encashed the same on 7th April,
1945, and nothing had been produced to prove that the proceeds of this cheque was
actually given to the assessee and the assessee had failed to furnish the date of the receipt
of the cheque from Sri R. P. Shaw and to prove in what context the cheque for Rs. 38,877
was received and when this cheque was given to Sri Sudha Sankar Singh for encashment,
the assessee's explanation did not admit of any verification. He further reported that no
particulars regarding 6 high denomination notes of Rs. 1,000 each were furnished and as
such the verification of its numbers did not arise at all. So far as the balance of Rs. 16,000
was concerned, the ITO did not accept the assessee's explanation that he received one high
denomination note of Rs. 10,000, in exchange for smaller denomination notes from
Rameshwar Prasad Shaw of No. 37, Circular Road, Calcutta, and Rs. 6,000 was cash in
hand, as neither the books of account nor any other evidence was produced in support of
such contentions.
4. When the matter came up for further hearing before the AAC, the above remand report
submitted by the ITO was considered. It was contended on behalf of the legal
representative of the assessee that, as the assessee was dead, it was not possible to throw
any light on the balance of the 15 high denomination notes out of the 36 high dinomination
notes received from the bank on the encashment of the cheque. The AAC agreed with the
ITO that, in the absence of any books of account of the assessee and as the assessee had
never disclosed the receipt of Rs. 36,696 from Sri R. P. Shaw on account of loading and
unloading contract in his assessment for 1946-47, the entire amount of Rs. 36,000 was
required to be included in the assessment of the assessee as income from undisclosed
sources. So far as the high denomination notes of Rs. 20,000 received from the currency
office as alleged by the assessee, the ITO had reported that the assessee was unable to
produce any evidence before him and on a reference being made to the currency officer he
was informed that no record showing the names and adresses of the persons to whom the
high denomination notes were issued was maintained by that office. It was admitted on
behalf of the legal representative of the assessee that he was unable to prove the numbers
of the notes from the records of the currency office. The AAC also upheld the addition of this
sum of Rs. 20,000 as the assessee's income from undisclosed sources. He, therefore,
confirmed the addition of Rs. 57,000 on account of high denomination notes as the
assessee's income from undisclosed sources.
5. The matter came up in appeal for final hearing before the Tribunal. The Tribunal was
unable to accept the assessee's case that he had changed one Rs. 10,000 rupee note for
another but was unable to recall the details. Further, the Tribunal was also unable to accept
that the assessee had Rs. 6,000 in cash in one thousand rupee notes. As the assessee
himself had claimed before the Tribunal on the earlier occasion that he would be able to
procure confirmation from the currency office as to the high denomination notes of the face
value of Rs. 20,000 and such confirmation could not be produced, the Tribunal observed
there was no reason to interfere with the assessment of this amount as the assessee's
income from undisclosed sources. The Tribunal further accepted the contents of the letter
from Sri Guha Roy, the then official liquidator, produced from the records of the bank. As
this letter gave the details of the numbers of the notes paid in exchange for the cheque, the
Tribunal accepted the assessee's explanation as to Rs. 21,000 received from the bank in
high denomination notes which were ultimately encashed by the assessee. In the result, the
Tribunal allowed the appeal in part and reduced the addition of Rs. 57,000 as the assessee's
income from undisclosed sources by Rs. 21,000.
6. There was an application made under s. 66(1) of the Indian IT Act, 1922, to refer certain
questions of law to this High Court. The Tribunal refused to do so. On an application being

made to this Court the Tribunal was directed under s. 66(2) of the Indian IT Act, 1922, to
refer to this Court the following question :
"Whether the finding of the Tribunal that rupees thirty six thousand realised by the assessee
by encashment of high denomination notes re-presented the income of the assessee from
undisclosed sources is vitiated by reason of its having relied upon suspicions and surmises
not supported by any evidence on the record or upon partly inadmissible materials ?"
7. In cases of encashment of high denomination notes by the assessee, how the question
should be considered, have come up for consideration before the Supreme Court. In the
case of Lalchand Bhagat Ambica Ram vs. CIT (1959) 37 ITR 288 (SC) the Supreme Court
found that the entries in the rokar and the almirah account of the assessee was 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 was the subject-matter of the
litigation were included therein. The books of the assessee were not challenged in any other
manner except with respect to certain interpolations relating to the number of the high
denomination notes and the Tribunal had accepted these books of account as genuine and
had based its conclusion on the basis of the entries which appear in these books of account.
The Supreme Court was of the opinion that, in these circumstances, it was not open to the
Tribunal to accept the genuineness of these books of account and accept the explanation of
the assessee in part as to Rs. 1,50,000 and reject the same explanation with regard to the
sum of Rs. 1,41,000. There the Tribunal had considered the possibility of the assessee's
earning a considerable sum secretly as the period was favourable for the food-grain dealers
and the assessee was a food-grain dealer. Furthermore, the Tribunal relied on the fact that
the places of the business of the assessee had gained sufficient notoriety for smuggling
food-grains and other commodities. The Tribunal had also based its conclusion on the above
probability. In these circumstances, the Supreme Court was of the opinion that the said
circumstances relied on by the authorities were matters of pure conjecture, suspicion and
surmises : the notoriety for smuggling food-grains was merely a background of suspicion
and the appellant could not be held to have indulged in smuggling without any evidence.
The fact that there was cancellation of the food-grain licence and the prosecution of the
assessee, a fact on which the Tribunal had relied, was irrelevant inasmuch as the licence
was restored and the assessee was acquitted of the offence with which it was charged ; the
mere possibility of the assessee earning considerable amount in the relevant accounting
year was a matter of pure conjecture. The Supreme Court was also of the opinion that the
fact that the assessee indulged in speculation did not legitimately lead to the inference that
the profits in speculative transactions could exceed the value of the notes. The Supreme
Court was further pleased to observe that the assessment made without disclosing to the
assessee the information supplied by the departmental representative and without giving
any opportunity to the assessee to rebut the information so supplied and declining to take
into consideration all materials which the assessee wanted to produce in support of the case
constituted a violation of the fundamental rules of justice and called for interference by the
Court. In the case of Omar Salay Mohamed Sait vs. CIT (1958) 37 ITR 151 (SC) at p. 170,
the Supreme Court observed :
". . . . the Tribunal is a fact finding Tribunal and if it arrives at its own conclusions of fact
after due consideration of the evidence before it this Court will not interfere. It is necessary,
however, that every fact for and against the assessee must have been considered with due
care and the Tribunal must have given its finding in a manner which would clearly indicate
what were the questions which arose for determination, what was the evidence pro and
contra in regard to each one of them and what were the findings reached on the evidence
on record before it. The conclusions reached by the Tribunal should not be coloured by any

irrelevant considerations or matters of prejudice and if there are any circumstances which
required to be explained by the assessee, the assessee should be given an opportunity of
doing so. On no account whatever should the Tribunal base its findings on suspicions,
conjectures or surmises, nor should it act on no evidence at all or on improper rejection of
material and relevant evidence or partly on evidence and partly on suspicions, conjectures
or surmises, and if it does anything of the sort, its findings, even though on questions of
fact, will be liable to be set aside by this Court."
8. These and other cases relevant on the question of high denomination notes were duly
considered by the Supreme Court in the case of Sreelekha Banerjee vs. CIT (1963) 49 ITR
112 (SC). There the assessee, who was a colliery proprietor and a coal raising contractor,
had encashed on January 22, 1946, high denomination notes of the value of Rs. 51,000. In
his application under the Ordinance for encashment of the notes he had stated that for the
purpose of conducting his business and making payment to labour which was to the tune of
Rs. 30,000 to Rs. 40,000 every week, he had to keep large sums of money to meet an
emergency as he did not get payment for work done every week. His explanation before the
ITO that the high denomination notes formed part of the cash balance at his head office was
rejected by the ITO on the grounds : (1) that there was a discrepancy in the statements
filed by the assessee to prove the amount which the assessee claimed was the cash in hand
; (2) that although his business was large and the withdrawals from the banks which he had
in various banks were large and frequent, the assessee had not maintained a central
account showing withdrawals from the banks and remittances made to his various
businesses ; (3) that none of the books maintained by the assessee and produced by him
contained a bank account ; (4) that there was no account of the personal expenses of the
assessee ; and (5) that he failed to show why he kept large sums on hand at one place
when at each of the places where work was carried on there were banks with which he had
accounts. The AAC further found that the assessee had withdrawn a sum of Rs. 45,000 on
the day on which the high denomination notes were encashed and a further sum of Rs.
6,005 a few days later and neither sum had been utilised by the assessee. The sum of Rs.
51,000 was brought to tax as income from undisclosed sources.
9. In view of these materials the Supreme Court came to the conclusion that there were
materials to show that the sum of Rs. 51,000 did not form part of the cash balance of the
assessee and the source of the money not having been satisfactorily proved, the
Department was justified in holding it to be assessable income of the assessee from some
undisclosed source.
10. The Supreme Court further observed if there was an entry in the books of the assessee
which showed receipt of a sum on conversion of high denomination notes tendered for
conversion by the assessee, it was necessary for the assessee to establish, if asked, what
the source of that money was and to prove that it did not bear the nature of income. The
Department at that stage was not required to prove anything. If the assessee gives an
explanation then the Department cannot unreasonably reject the explanation. If, however,
the explanation is unconvincing and one which deserves to be rejected, the Department can
reject the explanation and draw the inference that the amount represents income either
from the sources already disclosed by the assessee or from some undisclosed source. In
these circumstances, it cannot be said, the Supreme Court observed, that the Department
proceeded on no evidence, because the fact that there was receipt of money is itself
evidence against the assessee. There is prima facie evidence against the assessee which the
assessee fails to rebut.
At p. 115 of the report, Hidayatullah, J. (as His Lordship then was) observed :

"The cases involving the encashment of high denomination notes are quite numerous. In
some of them the explanation tendered by the taxpayer has been accepted, and, in some, it
has been rejected. The manner in which evidence brought on behalf of the taxpayer should
be viewed, has, of course, depended on the facts of each case. In those cases in which the
assessee proved that he had on the relevant date a large sum of money sufficient to cover
the number of notes encashed, this Court and the High Courts, in the absence of something
which showed that the explanation was inherently improbable, accepted the explanation
that the assessee held the amount or part of it in high denomination notes. In other words,
in such cases, the assessee was held, prima facie, to have discharged the burden which was
upon him. Where the assessee was unable to prove that in his normal business or
otherwise, he was possessed of so much cash, it was held that the assessee started under a
cloud and must dispel that cloud to the reasonable satisfaction of the assessing authorities,
and that if he did not, then, the Department was free to reject his explanation and to hold
that the amount represented income from some undisclosed source."
11. In the background of the above principles we have now to examine the order of the
Tribunal. The Tribunal has deleted the addition of Rs. 21,000 but has sustained the addition
of Rs. 36,000 as income from undisclosed source. One item in respect of which addition was
made on account of income from undisclosed source, which has been sustained by the
Tribunal, arises out of the loan transaction of Rs. 1,26,000 given by the assessee alleged to
be in high denomination notes to M/s Singh & Co. The assessee's explanation was that the
sum was given out of the sale proceeds of the property of the assessee at No. 3, Rustomjee
Parsee Road, Calcutta, to M/s Indian Research Institute Ltd. The conveyance was for the
sum of Rs. 1,53,000. The conveyance recorded that the consideration money was paid in
high denomination notes and the particulars of the said notes were mentioned in the deed
of conveyance. The ITO had compared the numbers of the high denomination notes
encashed by M/s Singh & Co. and the high denomination notes mentioned in the deed of
conveyance and he found that they tallied to the extent of Rs. 1,10,000. A sum of Rs.
16,000 was, therefore, treated on this account as assessee's income from undisclosed
source. The assessee's explanation before the Tribunal was that one ten thousand rupee
note which the assessee received as sale price must have got changed before inclusion in
the loan to M/s Singh & Co. The Tribunal observed at p. 43 of the paper book :
"We are unable to accept that the assessee changed one ten thousand rupee note for
another but was unable to recall the details."
12. It was necessary in this case for the Tribunal to consider whether the assessee had
proved that he had on the relevant date a large sum of money sufficient to cover the
number of notes encashed in the words of the Supreme Court in the case of Sreelekha
Banerjee vs. CIT (supra). It is an admitted position that the assessee sold the property at
No. 3, Rustomjee Parsee Road, Calcutta, and got Rs. 1,53,000 in high denomination notes.
It is also an admitted position that out of this a large sum of money was paid to M/s Singh &
Co. In this context is the assessee's explanation that one note for rupees ten thousand got
changed, improbable ? The Tribunal, in our opinion, has not properly considered this aspect
of the matter bearing in mind the principles laid down by the Supreme Court. It has also to
be borne in mind that the tallying was done with the number of notes encashed by M/s
Singh & Co., that is not the assessee itself, even though it was closely associated with the
assessee. In those circumstances, the explanation that either the assessee or M/s Singh &
Co. who had cash in hand in notes might have changed one high denomination note, in our
opinion, is not inherently improbable. This aspect of the matter was not appreciated, in our
opinion, by the Tribunal. Mr. B. L. Pal, learned advocate for the Revenue, urges before us
that it was necessary for the assessee to establish that he had at the time of making this

loan to M/s Singh & Co. retained the money that the assessee had received as consideration
for the sale of the property. In view of the fact that the assessee had received the money,
as consideration for the sale of property in high denomination notes and that the bulk of
which was paid as loan to M/s Singh & Co., we are of the opinion that position the assessee
has established. In that view of the matter we are of the opinion that in so far as the
Tribunal was unable to accept the assessee's explanation, we are of the opinion that the
rejection of the assessee's explanation by the Tribunal was improper. The assessee further
contended that of this loan to M/s Singh & Co., Rs. 6,000 was paid in cash which the
assessee had with him. On this aspect of the matter the onus was on the assessee to
establish that the assessee had this amount of cash with the assessee and the assessee has
failed to discharge that onus to the satisfaction of the Revenue authority and the Tribunal.
This finding of the Tribunal is based on the evidence on record and cannot, in our opinion,
be interfered with by this Court under s. 66 of the Indian IT Act, 1922.
13. There was another addition of a sum of Rs. 20,000 and in respect of which the
assessee's explanation was that he had received two high denomination notes of Rs. 10,000
from the currency office at Calcutta. The assessee wanted an opportunity before the
Tribunal to prove that from the currency office and the Tribunal gave such an opportunity to
the assessee. In spite of that, the assessee was unable to adduce any evidence or
confirmation from the currency office regarding the high denomination notes of the face
value of Rs. 20,000. In these circumstances, the Tribunal, on the appreciation of evidence
properly, in our opinion, rejected this explanation of the assessee. In that view of the
matter we are of the opinion that the finding of the Tribunal so far as it sustained the
addition of Rs. 26,000 as income from undisclosed source, is proper and based on materials
and evidence, but so far as findings of the Tribunal sustain a further addition of a sum of Rs.
10,000 as income from undisclosed source it is improper, being based on improper rejection
of the assessee's explanation. We, therefore, answer the question by saying that the finding
of the Tribunal that a sum of Rs. 26,000 represented the income of the assessee from
undisclosed sources is valid but the finding of the Tribunal to the extent of a further sum of
Rs. 10,000 as income from undisclosed sources is invalid and vitiated being based on
improper rejection of the materials on record.
14. In this case the assessee had sufficient opportunity and had to a certain extent delayed
the matter. In that view of the matter the assessee will pay the costs of this reference to
the CIT.
S. DEB, J.