1. Income-tax and excess profits tax assessment — encashment of high-denomination notes after demonetization — dispute over whether notes constituted business cash balances or secreted profits. (Para 1 , 2 , 3 )
Back
Next 
1959 Supreme(SC) 116
SUPREME COURT OF INDIA
14th May, 1959.
S.R. DAS, C.J.I., N.H. BHAGWATI AND M. HIDAYATULLAH, JJ.
Messrs. Lalchand Bhagat Ambica Ram, Appellant
Versus
Commissioner of Income-tax, Bihar and Orissa, Respondent.
Civil Appeals Nos. 679 and 680 of 1957.
Advocate Appeared
Messrs. R. J. Kolah and R. Patnaik, Advocates, for Appellant; Messrs. A. N. Kripal and D. Gupta, Advocates, for Respondent.
Advocates:
A.N.KIRPAL, D.GUTPA, R.J.KOLAG, R.PATTANAIK
A.N.KIRPAL, D.GUTPA, R.J.KOLAG, R.PATTANAIK
Findings of fact by a Tribunal are perverse and subject to interference if based on conjectures, surmises, or suspicions rather than evidence. A reasonable explanation for possessing high denomination notes as part of genuine cash balances cannot be arbitrarily rejected using a "rule of thumb."
Headnote:(A) Indian Income-tax Act; Excess Profits Tax Act; High Denomination Bank Notes (Demonetisations) Ordinance, 1946 - Secreted profits - Possession of high denomination notes - Finding of fact - Perversity - A finding on a question of fact is open to attack as erroneous in law when there is no evidence to support it or if it is perverse (Para 14) - Findings based on suspicions, conjectures, or surmises, or acting on no evidence, or improper rejection of relevant evidence, are liable to be set aside (Para 14).
(B) Evidence - Books of account - Where books of account are accepted as genuine and show cash balances sufficient to cover the value of high denomination notes encashed, and the nature of the business makes the possession of such notes probable, the explanation provided by the assessee is reasonable - The Tribunal cannot, by applying a rule of thumb, accept the explanation in part and reject it in part without evidence of undisclosed sources (Paras 16, 24).
Facts of the case:
A Hindu undivided family engaged in the grain business encashed high denomination notes of a certain value. The assessee claimed these notes were part of its cash balances, including an account for moneys kept at home. The tax authorities rejected this explanation, citing interpolations in the account books and suspicions regarding smuggling and speculation in certain business centers, treating the amount as secreted profits. The Tribunal accepted the genuineness of the books of account but arbitrarily accepted the explanation only for a portion of the amount, treating the remainder as unexplained income.
Findings of Court:
The total cash balance on the date of the relevant ordinance was sufficient to include the high denomination notes. The suspicions regarding smuggling and speculation were pure conjectures without foundation in fact. The Tribunal's decision to accept the explanation only in part was based on a rule of thumb and lacked a rational basis.
Issues: Whether there was any material to support the finding of the Tribunal that a specific sum represented secreted profits liable to be taxed under the Indian Income-tax Act and the Excess Profits Tax Act.
Ratio Decidendi: A finding of fact is perverse if it is based on conjectures, surmises, or suspicions rather than evidence. If the books of account are genuine and the cash balance is sufficient to cover the high denomination notes, and the business nature justifies such possession, the explanation is reasonable. Such an explanation cannot be partially rejected based on an arbitrary rule of thumb in the absence of evidence of undisclosed income.
Result: Appeals allowed.
Legal Category Hierarchy
Table of Contents
2. Revenue asserts the finding of secreted profits is a finding of fact; appellant contends the finding is perverse and based on conjectures and surmises. (Para 13 )
3. The Tribunal accepted the account books as genuine but arbitrarily treated part of the cash balance as unexplained, influenced by the assessing officer's conjectures. (Para 15 , 16 , 17 , 18 , 20 , 21 , 22 , 23 )
4. Findings of fact are liable to be set aside if they are perverse, based on no evidence, or vitiated by suspicions, conjectures, and surmises. (Para 14 , 27 )
5. Appeals allowed — High Court judgment set aside — referred question answered in the negative. (Para 28 , 29 )
6. Under what circumstances can the Supreme Court interfere with a finding of fact reached by a Tribunal?
Interference is permissible if the finding is perverse, based on no evidence, or vitiated by conjectures, surmises, and suspicions. It also applies if the Tribunal relies on irrelevant material, ignores relevant evidence, or fails to provide a clear reasoning process for its conclusions. (Para 14 )
7. Can a Tribunal arbitrarily treat a portion of a cash balance as unexplained if the overall account books are accepted as genuine?
No. If the Tribunal accepts the genuineness of the account books and the assessee provides a reasonable explanation for the total cash balance, the Tribunal cannot use a rule of thumb to treat a portion as unexplained without specific evidence of undisclosed sources. (Para 16 , 22 , 24 )
8. Can general suspicions regarding smuggling or the possibility of earning profits be used to justify a finding of secreted profits?
No. General notoriety for smuggling or the mere possibility of earning undisclosed income through speculation are pure conjectures. Such suspicions cannot replace material evidence to support a finding that specific cash holdings represent secreted profits. (Para 23 )
Judgement
N. H. BHAGWATI J. : 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 9-1-1945 to 2-2-1946.
2. 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.
3. 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. 2,91,000 on 19-1-1946. 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 12-1-1946, on which date the High Denomination Bank Notes (Demonetisations) 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 encashed 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 considered 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 foodgrain dealers, the appellant had declared a loss for the assessment year 1944-45 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 centres 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-Behar 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 al
