Messrs. Lalchand Bhagat Ambical Ram v. The Commissioner of Income-Tax, Bihar & Orissa

These are two connected appeals with special

leave granted by this Court under Art. 136 of the

Constitution and arise out of the appellant's assessment to

Income-tax for the assessment year 1946-47 and Excess

Profits Tax for the chargeable accounting period January 9,

1945, to February 2, 1946.

The appellant is a Hindu undivided family carrying on

extensive business in grain as merchants and commission

agents. It is one of the premier grain merchants and

wholesalers of Sahibganj in the District of Santhal Parganas

in the State of Bihar. It has branches at Nawgachia in the

District of Bhagalpur and at Dhulian in the District of

Murshidabad in West Bengal.

The appellant filed its Income-tax Return for the assessment

year 1946-47 showing a loss of Rs. 46,415 in the business.

The Income-tax Officer, Patna, however, in the course of the

assessment noticed that the appellant had encashed high

denomination notes of the value of Rs. 2,9 1,000 on January

19, 1946. The Income-tax Officer asked for an explanation

which the appellant gave stating that these notes formed

part of its cash balances including cash balance in the

Almirah account. The cash balances of the appellant on

January 12, 1946, on which date the High Denomination Bank

Notes (Demonetisation) Ordinance, 1946, was promulgated were

Rs. 29,284-3-9 in its Rokar and Rs. 2,81,397-10-0 in the

Almirah account. The Almirah account was an account for

moneys withdrawn and kept at home. The appellant sought to

prove the fact that the high denomination notes eneashed by

it formed part of its cash balances from certain entries in

its accounts wherein the fact that moneys were received in

high denomination notes had been noted. Portions of these

entries to the effect that moneys had been received in high

denomination notes were found

by the Income-tax Officer to be subsequent interpolations

made by the appellant with a view to advance its case that

the cash balances contained the high denomination notes

encashed by it. The Income-tax Officer found that the

appellant's food grains licence at Nawgachia had been

cancelled for the accounting year for its failure to keep

proper stock accounts and that the appellant was prosecuted

under the Defence of India Rules but had been acquitted

having been given the benefit of doubt. The Income-tax

Officer also had regard to the fact that the appellant was a

speculator and that as a speculator the appellant could

easily have earned amounts far in excess of the value of the

high denomination notes encashed. He con. sidered that even

in the disclosed volume of business in the year under

consideration in the Head Office and in the branches, there

was possibility of his earning a considerable sum as against

which it showed a net loss of about Rs.46,000. The Income-

tax Officer also noticed that notwithstanding the fact that

the period was very favourable to food grains dealers, the

appellant had declared a loss for the assessment year 194445

up to 1946-47, though it had the benefit of a large capital

on hand. The Income-tax Officer further took into

consideration the circumstances that Nawgachia and Dhulian

were very important business centers and Sahibganj, the

principal place of business, had gained sufficient notoriety

for smuggling foodgrains and other commodities to Bengal by

country boats. Dhulian which was just on the Bengal, Bihar

border was also reported to be a great receiving centre for

such commodities. Having regard to all these circumstances,

the Income-tax Officer rejected the appellant's explanation

that the high denomination notes formed part of its cash

balances and treated the sum of Rs. 2,91,000 as the

appellant's secreted profits from business and included it

in its total income and assessed the appellant for the said

assessment year on the income of Rs. 1,39,117. Dealing with

the Excess Profits Tax assessment, he also held that the

said income was derived from the business of the appellant

and hence it was liable to excess profits tax also,

The appellant preferred an appeal to the Appellate Assistant

Commissioner against both these assessment orders and by his

orders dated February 28, 1951, the Appellate Assistant

Commissioner upheld the orders of the Income-tax Officer and

dismissed the appeals.

On further appeals from the said orders of the Appellate

Assistant Commissioner to the Income-tax Appellate Tribunal,

the Tribunal by its order dated April 29, 1952, dismissed

both the appeals as regards the Incometax as well as Excess

profits tax. Even though before the Income-tax Officer and

the Appellate Assistant Commissioner the case of the

appellant was that the account book which contained the

entries in regard to the receipts of moneys in high

denomination notes were genuine and correct, this position

was abandoned by the appellant before the Tribunal. Before

the Tribunal, the appellant stated that the said entries

were made in sheer nervousness after coming into force of

the High Denomination Bank Notes (Demonetization) Ordinance,

1946, on January 12, 1946, as the appellant did not know

that it had specific proof in its possession of having the

high denomination notes as part of its cash balances. The

Tribunal held that there was no other reason to suspect the

genuineness of the account books in which these

interpolations were made. If the entire account books were

fabricated to serve its purpose, there would be no need for

the appellant to make interpolations between the lines

already written in a different ink and in such an obvious

manner as to catch one's eye on the most cursory perusal.

The Tribunal, however, examined the cash book and taking

into consideration all the circumstances which had been

adverted to by the Income-tax Officer held that the

appellant might be expected to have possessed as part of its

business cash balance of at least Rs. 1,50,000 in the shape

of high denomination notes on January 12, 1946, when the

Ordinance above-mentioned was promulgated. A copy of the

statement of large amounts received by the appellant from a

single constituent had been filed by the appellant which

showed that sums aggregating to Rs. 5,04,713 had been

received by the appellant in large amounts

exceeding Rs. 1,000 between February 6, 1945, and January

11, 1946. As to large payments made by the appellant, no

statement was filed, but the Tribunal examined the accounts

with a view to ascertain the payments which could have been

made in high denomination notes. The Tribunal came to the

conclusion that the nature of the source from which the

appellant derived the remaining 141 high denomination notes

of Rs. 1,000 each remained unexplained to its satisfaction.

It accordingly ordered that the addition made by the

authorities be reduced from Rs. 2,91,000 to Rs. 1,41,000.

The Income-tax Officer was also directed to make the

necessary consequential adjustment in the Income-tax

assessment based upon the result of the connected Excess

Profits Tax appeal. In regard to the Excess Profits Tax

appeal the Tribunal after taking into account the preceding

and succeeding assessments and the nature of the appellant's

business and the opportunities that it had to make

substantial business profits outside the books held that the

add back of Rs. 1,41,000 must be made to the business

profits disclosed by the appellant. Consequential relief

was accordingly given in the Excess Profits Tax appeal also.

The appellant thereafter applied to the Tribunal for stating

a case and raising and referring to the High Court the

following questions of law arising from the said order of

the Tribunal both as regards the Incometax and the excess

profits tax assessments :-

(1) " Whether there is any material to justify the

conclusion that Rs. 1,41,000 is secreted profit for the

purpose of assessment, this amount being a part of s.

2,91,000 and which was the amount represented by high

denomination notes encashed by the Petitioner.

(2) " Whether there is any material for a finding that the

sum of Rs. 1,41,000 is the secreted value of the high

denomination notes was business income liable to excess

profits tax."

By its order dated August 15, 1952, the Tribunal dismissed

these applications stating that the finding of the taxing

authorities was a pure finding of fact based

on evidence before them and that no question of law arose

out of the said order of the Tribunal.

The appellant thereupon made applications to the High Court

under s. 66(2) for directing the Tribunal to state a case

and raise and refer the said questions of law to the High

Court for its decision. By its order dated January 21,

1953, the High Court directed the Tribunal to state a case

and raise and refer the following question of law to the

High Court I for its decision in both the applications:-

Whether there is any material to support the finding of the

Appellate Tribunal that a sum of Rs. 1,41,000 is secreted

profit liable to be taxed in the hands of the assessee under

the Indian Incometax Act and under the Excess Profits Tax

Act "

The tribunal accordingly stated a case and raised and

referred the aforesaid question of law to the High Court.

The said Reference was heard by the High Court and judgment

was delivered on January 5, 1955, whereby the High Court

answered the referred question in the affirmative. The High

Court was of the opinion that the onus of proving the source

of the said amount was on the appellant which the appellant

did not discharge and that there was evidence before the

Tribunal to come to the conclusion it did. The finding

arrived at by the Tribunal was therefore a pure finding of

fact and it could not be urged that it was based on no

evidence. The High Court further held that as the appellant

itself claimed that the said amount of Rs. 2,91,000 formed

part of the cash balance of its business, the said profits

were profits of the business and as such liable to excess

profits tax.

The appellant then applied to the High Court for a

certificate under s. 66A (2) of the Income-tax Act for leave

to appeal to this Court. These applications were rejected

by the High Court on August 25, 1955, observing that it had

answered the question of law not on the academic principles

of onus but on the material from which it was open to the

Income-tax authorities to arrive at the conclusion at which

they arrived.

The appellant thereupon on October 22, 1955, applied to this

Court for special leave to appeal which was granted by this

Court on November 28, 1955, in both the appeals arising out

of the assessment for Income-tax as well as the excess

profits tax. Both the appeals arising out of these orders

being Civil Appeals Nos. 679 and 680 of 1957 are now before

us.

The main question to determine in these two appeals is

whether there was any material to support the finding of the

Tribunal that the sum of Rs. 1,41,000 represented the

secreted profits of the appellant's business and as such

liable to be taxed in the hands of the appellant under the

Indian Income-tax Act and the Excess Profits Tax Act ? The

contention of the Revenue all throughout has been that it is

a finding of fact reached by the authorities competent in

that behalf and this Court should not interfere with

such findings of fact. The contention of the appellant on

the other hand, has been that even though it may be a

finding of fact to be reached by the authorities concerned

on the materials on the record before them, such finding is

vitiated by reason of the authorities indulging in

conjectures, suspicions and surmises and basing the same on

no material whatever which goes to support the same. It is

also contended that the finding reached by them is a

perverse one which a reasonable body of men could not have

arrived at on the material on the record.

The limits of our jurisdiction to interfere with finding of

fact reached by the courts or tribunals of facts have been

laid down by us in various decisions of this Court. In

Dhirajlal Girdharilal v. Commissioner of Income-tax, Bombay

(1) we observed that when a Court of fact arrives at its

decision by considering material which is irrelevant to the

enquiry, or acts on material, partly relevant and partly

irrelevant, where it is impossible to say to what extent the

mind of the Court was affected by the irrelevant material

used by it in arriving at its decision, a question of law

arises: Whether the finding of the Court of fact is not

vitiated by reason of its having

(1) [1954] 26 I.T.R. 736.

relied upon conjectures, surmises and suspicions not

supported by any evidence on record or partly upon evidence

and partly upon inadmissible material. We also observed in

Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax,

West Benyal (1) that an assessment so 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 on our part. In Messrs.

Metha Parikh and Co. v. The Commissioner of Income-tax,

Bombay(') this Court observed that the conclusions based on

facts proved or admitted may be conclusions of fact but

whether a particular inference can legitimately be drawn

from such conclusions may be a question of law. Where,

however, 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 were such that

no person acting judicially and properly instructed as to

the relevant law could have found, the Court is entitled to

interfere. In our decision in Meenakshi Mills, Madurai v.

Commissioner of Income-tax, – Madras (3) after discussing

the various authorities on the subject we laid down that:-

(3) A finding on a question of fact is open to attack under

S. 66(1) as erroneous in law when there is no evidence to

support it or if it is perverse."

The latest pronouncement of this Court in Omar Salay Mohamed

Sait v. The Commissioner of Income-tax, Madras (4)

summarises the position thus,:-

" We are aware that the Income-tax Appellate 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

(1) [1955] I S.C.R. 941. (3) [19561 S.C.R. 69i.

(2) [1956] S.C.R. 626. (4) C.A. No. 15 Of 1958 decided

on

March 5, 1959.

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 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 and 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."

It is in the light of these observations that we have to

determine the question arising before us in the present

appeals. It is clear on the record that the appellant

maintained its books of account according to the mercantile

system and there were maintained in its cash books two

accounts: one showing the cash balances from day to day and

other known as " Almirah account " wherein 'Were kept large

balances which were not required for the day-to-day working

of the business. Even though the appellant kept large

amounts in bank deposits and securities monies were required

at short notice at different branches of the appellant.

There were also collections made from various Beoparies or

-merchants and monies were also required for doing the grain

purchase work on behalf of the Government. These monies

were credited in the Almirah account which showed heavy cash

balances from time to time. In the books of account for

previous years it was the practice of the appellant to give

details of the notes of high denominations giving the

distinctive numbers of these notes received or paid

or at least other description e.g., " So many notes " of Rs.

1,000 each. In the assessment year, however, this practice

does not appear to have been followed but entries continued

to be made of monies thus received from the banks, different

branches, Beoparees etc., without any such details being

filled therein. A statment of these cash balances viz., the

balance in the Rokar and the balance in the Almirah from

September 1, 1945, to January 31, 1946 was filed before the

Income-tax authorities and this statement showed that apart

from the balance in the Rokar the balance in the Almirah

rose from Rs. 1,36,397-10-0 on September 1, 1945, to Rs.

1,97,397-10-0 on September 30, 1945, to Rs. 2,23,397-10-0 on

October 13, 1945, to Rs. 2,65,397-10-0 on November 27, 1945,

to Rs. 2,91,397-10-0 on December 29, 1945, and remained at

Rs. 2,81,397-10-0 on January 10, 1946. The balance in the

Rokar fluctuated considerably but on the relevant date January

10, 1946, it stood at Rs. 26,092-10-9.It was Rs. 24,976-13-3

on January II, 1946, and Rs. 29,284-3-9 on January 12, 1946,

when the High Denomination Bank Notes (Demonetization)

Ordinance, [1946, was promulgated. These entries showed

that there was with the appellant on on January 12, 1946, an

aggregate sum of Rs. 3,10,681-13-9 and it was highly

probable that the High Denomination notes of Rs. 2,91,000

were included in this sum of Rs. 3,10,681-13-9. The books

of account of the appellant were not challenged in any other

manner except in regard to the interpolations relating to

the number of high denomination notes of Rs. 1,000 each

obviously made by the appellant in the accounts for the

assessment year in question in the manner aforesaid and even

in regard to these interpolations the explanation given by

the appellant in regard to the same was accepted by the

Tribunal. Even though the Income-tax Officer made capital

out of the interpolations and subsequent insertions in the

books of account and styled the evidence furnished by them

as created or manipulated evidence thus discounting the

story of the appellant in regard to the source of these high

denomination notes, the Tribunal

was definitely of opinion that there was no other reason to

suspect the genuineness of the account books in which these

interpolations were found. As a matter of fact the Tribunal

accepted these books of account as genuine and worked up its

theory on the basis of the entries which obtained in these

books of account. The Tribunal had before it the statement

of large amounts received by the appellant from the banks,

different branches of the appellant and its Beoparees or

merchants which showed that between February 6, 1945, and

January 11, 1946, amounts exceeding Rs. 1,000 aggegrating to

Rs. 5,04,713 had been received by the appellant. Even

though large amounts may have been paid out by the appellant

in this manner between the said dates, the entries of the

balance in Rokar and the balance in Almirah showed that on

January 12, 1946, the balance in Rokar was Rs. 26,234-3-9

and the balance in Almirah was Rs. 2,81,397-10-0 the total

cash balance thus aggregating to Rs. 3,10,681-13-9. Nobody

had any inkling of the promulgation of the High Denomination

Bank Notes (Demonetization) Ordinance, 1946, on January 12,

1946, and if in the normal course of affairs and situated as

the appellant was, the appellant kept these large cash

balances in High Denomination Notes of Rs. 1,000 each, there

was nothing surprising or improbable in it. If the

appellant had to disburse such large sums of monies at short

notices at the different branches of the appellant and also

to its Beoparees apart from financing the Government for

grain purchase work which it used to carry on, it would be

convenient for it to handle these large sums of monies in

high denomination notes of Rs. 1,000 each and the most

natural thing for it to do was to keep these cash balances

in as many high denomination notes as possible. The

Tribunal in fact took count of this position and after

giving due weight to all the circumstances arrived at the

conclusion that the appellant might be expected to have

possessed as part of its business cash balance at least Rs.

1,50,000 in the shape of high denomination notes on January

12, 1946, when the Ordinance above mentioned was

promulgated. This conclusion

of the Tribunal could only be arrived at on the basis that

the entries in the books of account in regard to the balance

in Rokar and the balance in Almirah were correct and

represented the true state of affairs, in spite of the

interpolations and -subsequent insertions which had been

made to bolster up the true case.

If these were the materials on record which would lead to

the inference that the appellant might be expected to have

possessed as part of its cash balance at least Rs. 1,50,000

in the shape of high denomination notes on January 12, 1946,

when the Ordinance was promulgated, was there any material

on record which would legitimately lead the Tribunal to come

-to the conclusion that the nature of the source from which

the appellant derived the remaining 141 high denomination

notes of Rs. 1,000 each remained unexplained to its

satisfaction. If the entries in the books of account in

regard to the balance in Rokar and the balance in Almirah

were held to be genuine, logically enough there was no

escape from the conclusion that the appellant had offered

reasonable explanation as to the source of the 291 high

denomination notes of Rs. 1,000 each which it encashed on

January 19, 1946. It was not open to the Tribunal to accept

the genuineness of these books of account and accept the ex-

planation of the appellant in part as to Rs. 1,50,000 and

reject the same in regard to the sum of Rs. 1,41,000-0-0.

Consistently enough, the Tribunal ought to have accepted

the' explanation of the appellant in regard to the whole of

the sum of Rs. 2,91,000 and held that the appellant had

satisfactorily explained the encashment of the 291 high

denomination notes of Rs. 1,000 each on January 19, 1946.

The Tribunal, however, appears to have been influenced by

the suspicions, conjectures and surmises which were freely

indulged. in by the Income-tax Officer and the Appellate

Assistant Commissioner and arrived at its own conclusion, as

it were, by a rule of thumb holding without any proper

materials before it that the appellant might be expected to

have possessed as part of its business, cash balance at

least Rs. 1,50,000 in the shape of high denomination notes

on January 40

12, 1946,- a mere conjecture or surmise for which there was

no basis in the materials on record before it.

The Income-tax Officer had indented in support of his

conclusion the surrounding circumstances, viz., that the

appellant was one of the premier Arhatdars and grain

merchants of Sahibgan1 with branches, doing similar

business, at Nawgachia and Dhullian and all these places

were very important business centres and Sahibganj, the

principal place of business, had gained sufficient notoriety

for smuggling foodgrains and other commodities to BenLal by

country boats, and Dhulian which was just on the Bihar-

Bengal border was reported to be a great receiving centre

for such commodities, that the foodgrains licence of the

appellant at Nawgachia was also cancelled during the

accounting year for not keeping proper stock accounts and

the appellant was prosecuted under the Defence of India

Rules but was given the benefit of doubt and was acquitted,

that the accounting year and the year preceding it as also

the year succeeding it were very favourable for the

foodgrain dealers but the appellant though he had large

capital in hand declared losses all through from 1944-45

assessment year up to 1946-47 assessment year, the loss

according to its books in the year under consideration being

to the tune of about Rs. 46,000, that the appellant was in

very favourable circumstances in which there was a pos-

sibility of its earning a considerable amount in the year

under consideration, that it also indulged in speculation (a

loss of about Rs. 40,000 shown in Nawgachia branch (in Kalai

account)), in which profit in a single transaction or in a

chain of transactions could exceed the amounts involved in

the high denomination notes, that even in the disclosed

volume of business in the year under consideration in the

Head Office and in branches there was possibility of its

earning a considerable sum as against which showed a net

loss of about Rs. 45,000 and that the appellant had all

these probable source or sources from which the appellant

could have earned the sum of Rs. 2,91,000 which was

represented by the high denomination notes of Rs. 1,000

The Appellate Assistant Commissioner also emphasized the

said aspect but based his conclusion mainly on the ground

that the appellant had failed to prove that the high

denomination notes had their origin in capital and not in

profit and held that the Income-tax Officer was justified in

treating the sum of Rs 2,91,000 as secreted profits.

This was the background against which the Tribunal came to

its own conclusion. Even though it recognised that it was

not improbable that when very large sums, say in excess of

Rs. 10,000 at a time were received, a fairly good portion

thereof consisted of high denomination notes and as high

denomination notes were valid tender and nobody could have

foreseen that they would be demonetised suddenly in January

1946, there was nothing out of the way in persons dealing

with tens of thousands of rupees and whose balances ran to

lakhs, being in possession of a fair proportion of their

balances in the shape of high denomination notes. While

recognizing this probability of the appellant having been in

possession of a fair proportion of its balances in the shape

of high denomination notes, the Tribunal unconsciously

though it was, fell into an error when it held that the

appellant might be expected to have possessed at least Rs.

1,50,000 in the shape of high denomination notes as part of

its cash balance, thus treating the remaining Rs. 1,41,000

in the high denomination notes of Rs. 1,000 each as outside

the purview of these cash balances.

Unless the Tribunal had at the back its mind the various

probabilities which had been referred to by the Income-tax

Officer as above it could not have come to the conclusion it

did that the balance of Rs 1,41,000 comprising of the

remaining 141 high denomination notes of Rs. 1,000 each was

not satisfactorily explained by the appellant.

If the entries in the books of account were genuine and the

balance in Rokar and the balance in Almirah on January 12,

1946, aggregated to Rs. 3,10,681-13-9 and if it was not

improbable that a fairly good portion of the very large sums

received by the appellant from time to time, say in excess

of Rs. 10,000 at a time

consisted of high denomination notes, there was no basis for

the conclusion that the appellant had satisfactorily

explained the possession of Rs. 1,50,000 in the high

denomination notes of Rs. 1,000 each leaving the possession

of the balance of 141 high denomination notes of Rs. 1,000

each unexplained. Either the Tribunal did not apply its

mind to the situation or it, arrived at the conclusion it

did merely by applying the rule of thumb in which event the

finding of fact reached by it was such as could not

reasonably be entertained or the fact found were such as no

person acting judicially and properly instructed as to the

relevant law could have found, or the Tribunal in arriving

at its findings was influenced by irrelevant considerations

or indulged in conjectures, surmises or suspicions in which

event also its finding could not be sustained.

Adverting to the various probabilities which weighed with

the Income-tax Officer we may 'observe that the notoriety

for smuggling foodgrains and other commodities to Bengal by

country boats acquired by Sahibgunj and the notoriety

achieved by Dhulian as a great receiving centre for such

commodities were merely a background of suspicion and the

appellant could not be tarred with the same brush as every

Arhatdar and grain merchant who might have been indulging in

smuggling operations, without an iota of evidenec in that

behalf. The cancellation of the foodgrain licence at

Nawgachia and the, prosecution of the appellant under the

Defence of India Rules was also of no consequence inasmuch

as the appellant was acquitted of the offence with which it

had been charged and its licence also was restored. The

mere possibility of the appellant earning considerable

amounts in the year under consideration was a pure

conjecture on the part of the Income-tax Officer and the

fact that the appellant indulged in speculation (in Kalai

account) could not legitimately lead to the inference that

the profit in a single transaction or in a chain of transac-

tions could exceed the amounts, involved in the high

denomination notes,-this also was a pure conjecture or

surmise on the part of the Income-tax Officer. As regards

the disclosed volume of business in the year

under consideration in the Head Office and in branches the

Income-tax Officer indulged in speculation when he talked of

the possibility of the appellant earning a considerable sum

as against which it showed a net loss of about Rs. 45,000.

The Income-tax Officer indicated the probable source or

sources from which the appellant could have earned a large

amount in the sum of Rs. 2,91,000 but the conclusion which

he arrived at in regard to the appellant having earned this

large amount during the year and which according to him

represented the secreted profits of the appellant in its

business was the result of pure conjectures and surmises on

his part and had no foundation in fact and was not proved

against the appellant -on the record of the proceedings. If

the conclusion of the Income-tax Officer was thus either

perverse or vitiated by suspicions, conjectures or surmises

the finding of the Tribunal was equally perverse or vitiated

if the Tribunal took count of all these probabilities and

without any rhyme or reason and merely by a rule of thumb,

as it were, came to the conclusion that the possession of

150 high denomination notes of Rs. 1,000 each was

satisfactorily explained by the appellant but not that of

the balance of 141 high denomination notes of Rs. 1,000

each.

The position as it obtained in this case was closely

analogous to that which obtained in Messrs. Mehta Parikh &

Co. v. The Commissioner of Income-tax, Bombay (1). In that

case the assessee had to satisfactorily explain the

possession of 61 High Denomination Notes of Rs. 1,000 each

and the Tribunal came to the conclusion that the assessee

had satisfactorily explained the possession of 31 of these

notes and not of the remaining 30. The High Court had

treated the finding of the Tribunal as a finding of fact.

It was held by this Court that the entries in cash-book and

the statements made in the affidavit in support of the

explanation, which were binding on the Revenue and could not

be questioned, clearly showed that it was quite within the

range of possibility that the assessee had in their

possession the 61 High denomination notes on the relevant

date and their explanation in that

(1) [1956] S.C.R. 626.

behalf could not be assailed by a purely imaginary

Calculation of the nature made by the income-tax officer or

the Appellate Assistant Commissioner. It further held that

the Tribunal made a wrong approach and while accepting the

assessee's explanation with regard to 31 of the notes, it

had absolutely no reason to exclude the rest as not covered

by it in the absence of any evidence to show that the

excluded notes were profits earned by the assessee from

undisclosed sources. The assessee having given a reasonable

explanation the Tribunal could not, by applying a rule of

thumb discard it so far as the rest were concerned and act

on mere surmise. In arriving at its decision this Court

referred to the case of Chunilal Ticamchand Coal Co. Ltd. v.

Commissioner of Income-tax, Bihar and Orissa (1) and stated

that the case before it should also have been similarly

decided by the High Court in favour of the assessee.

A decision of the Allahabad High Court reported in in Kanpur

Steel Co. Ltd. v. Commissioner of Incometax, Uttar

Pradesh(') may also be noted in this context. The assessee

there encashed 32 currency notes of Rs. 1,000 each on

January 12, 1946, when the High Denomination Bank Notes

(Demonetisation) Ordinance, 1946, came into force, and when

the Income-tax Officer called upon it to explain how these

currency notes came into its possession, the assessee

claimed that the notes represented part of its cash balance

which, on that date, stood at Rs. 34,313. The Income-tax

Officer rejected the explanation and assessed the amount of

Rs. 32,000 represented by these currency notes as suppressed

income of the assessee from some undisclosed source. The

Tribunal took into account the statement of sales relating

to a few days preceding the date of encashment and found

that the highest amount of any one single transaction was

only Rs. 399. The Tribunal also referred to another

statement of the daily cash balances of the assessee from

December 20, 1945, to January 12, 1946, and noted that the

cash balance of the assessee was steadily increasing. The

Tribunal, however, estimated that high denomination

(1) [1955] 27 I.T.R. 602.

(2) [1957] 32 I.T.R. 56.

currency notes to the value of Rs. 7,000 only could form

part of the cash balance of the assessee. It therefore

upheld the assessment to the extent of Rs. 25,000. On a

reference to the High Court it was held (1) that the burden

of proof lay upon the Department to prove that the sum of

Rs. 32,000 represented suppressed income of the assessee

from undisclosed sources, and the burden was not on the

assessee to prove how it had received these high

denomination currency 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 should be necessary for him

to explain the possession of high denomination currency

notes, the assessee had naturally not kept any statement

regarding the receipt of these currency notes, and it was

for the first time on January 12, 1946, when the Ordinance

came into force, that it became necessary for the assessee

to explain its possession of these currency notes and (ii)

that the explanation given by the assessee that the notes

formed part of the cash balance of Rs. 34,000 and odd was

fairly satisfactory and was not found by the Tribunal to be

false; the statement of sales was hardly relevant to the

question; the Department, in relying on the entries relating

to the bills of each day committed an error and no inference

should have been drawn from them; that any one single

transaction did not exceed Rs. 399 did not preclude the

possibility of payment in high denomination notes for such

transaction; therefore, the Tribunal rejected the

explanation of the assessee on surmises, and there was no

material for the Tribunal to hold that the sum of Rs. 25,000

represented suppressed income of the assessee from

undisclosed sources.

In arriving at the above decision the High Court referred to

the cases of Mehta Parikh & Co. v. Commissioner of Income-

tax, Bombay (1) and Chunilal Ticamchand Coal Co., Ltd. v.

Commissioner of Incometax, Bihar and Orissa (2).

It is, therefore, clear that the Tribunal in arriving at the

conclusion it did in the present case indulged in

(1) [1956) S.C,R. 626,

(2) [1955] 27 I.T.R. 6o2

suspicions, conjectures and surmises and acted without any

evidence or upon a view of the facts which could not

reasonably be entertained or the facts found were such that

no person acting judicially and properly instructed as to

the relevant law could have found, or the finding was, in

other words, perverse and this Court is entitled to

interfere.

We are therefore of opinion that the High Court was clearly

in error in answering the referred question in the

affirmative. The proper answer should have been in the

negative having regard to all the circumstances of the case

which we have adverted to above.

The appeals will accordingly be, allowed, the judgment and

order passed by the High Court will be set aside and the

referred question will be answered in the negative. The

appellant will be entitled to its costs of the reference in

the High Court and of these appeals in this Court as against

the respondent.

Appeals allowed.