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1992 Supreme(Cal) 316
High Court Of Calcutta
Ajit Kumar Sengupta, K. M. Yusuf
JATIA INVESTMENT CO - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 88 Of 1985
Decided On : 08/06/1992
A.C.MOITRA, Bajoria.
Entries in the cash book, showing payments and receipts of cash, are not justified when there is no actual passing of cash.
Headnote:
INCOME TAX ACT, 1961 - S. 68 - Unexplained cash credit - Assessee-firm taking over liability of non-financial companies to proprietary concern in exchange for shares - No actual passing of cash - Entries in cash book showing payments and receipts - Whether addition of amount as unexplained cash credit justified.
Fact of the Case:
The assessee-firm, constituted by members of the Jatia family, purchased shares from three companies of the Jatia group. The consideration for the purchase was shown as paid out of a loan from a proprietary concern, GB and Co., belonging to one of the partners of the assessee-firm. The entries in the cash books of the assessee-firm, GB and Co., and the three companies showed a circulation of cash, with the assessee-firm becoming a debtor to GB and Co. in place of the three companies. The Income-tax Officer added Rs. 11.20 lakhs to the assessee's income as unexplained cash credit, holding that the transactions were recorded in the cash book through a circuit, but at no point in the circuit there was cash.
Finding of the Court:
The Tribunal upheld the addition, holding that the assessee's contention that the entries were only adjustment entries was not acceptable, as adjustment entries are not made through the cash book. The Tribunal also held that the purported motive of the entries being the reduction of loans of the three limited companies did not explain the whole matter, because the entries were cash entries.
Issues: 1. Whether the entries in the cash book, showing payments and receipts of cash, were justified when there was no actual passing of cash? 2. Whether the addition of Rs. 11.20 lakhs as unexplained cash credit was justified, considering that the assessee-firm took over the liability of the non-financial companies to GB and Co. in exchange for the shares?
Ratio Decidendi: 1. The entries in the cash book, showing payments and receipts of cash, were not justified when there was no actual passing of cash. The Income-tax Officer himself admitted that all the respective parties did not receive cash nor did pay cash as none had any cash for the purpose. 2. The addition of Rs. 11.20 lakhs as unexplained cash credit was not justified, considering that the assessee-firm took over the liability of the non-financial companies to GB and Co. in exchange for the shares. The effect and import of the transactions was that the assessee-firm took over the liability of the aforesaid non-financial companies to GB and Co. in exchange for the shares as aforesaid.
Final Decision: All the questions referred to the court were answered in the affirmative and in favour of the assessee and against the Revenue. There was no order as to costs.
( 1 ) IN this reference under Section 256 (1) of the Income-tax Act, 1961, the following questions of law have been referred to this court for the assessment year 1976-77 : "1. Whether, on the facts and in the circumstances of the case, the Tribunal's findings that the assessee had paid cash for purchase of shares and that it was not able to show how it was provided and that the concern from whom loan was taken did (not) have enough to lend the assessee are perverse and based on no materials and/or were arrived at by ignoring relevant materials ?
( 2 ) WHETHER, on the facts and in the circumstances of the case, the finding of the Tribunal that the Income-tax Officer was justified in drawing the conclusion that the assessee brought cash into the books of account for the purchase of shares but the source thereof was unexplained is vitiated being perverse and/or having been arrived at on a consideration of irrelevant materials and/or by ignoring relevant materials ?
( 3 ) WHETHER the order of the Tribunal upholding the addition of Rs. 11,20,000 as the assessee's income from undisclosed sources is vitiated on account of non-consideration of the various contentions advanced on behalf of the assessee and is perverse ?
( 4 ) WHETHER, on the facts and in the circumstances of the case, the sum of Rs. 11,20,000 could be treated as the assessee's income from the undisclosed sources ?"2. Shortly stated, the facts are that the assessee is a partnership firm. The firm was constituted under an instrument of partnership deed executed on April 20, 1975, with eleven partners. The accounts of the assessee showed that it borrowed Rs. 11,20,000 from Messrs. Gazanund Bissesswarlall and Co. , a proprietary concern of Shri J. M. Jatia, one of the partners. The money was invested in purchase of shares. 3. The Income-tax Officer examined the cash book and ledger of Messrs. Gazanund Bissesswarlall on April 23, 1975. 4. By examination of these books of account, the Income-tax Officer came to the conclusion that Guzanund Bissesswarlall had no cash balance to advance Rs. 11,20,000 to the assessee. The observations of the Income-tax Officer are contained in paragraphs 11, 12, 13 and 14 of his order. The Income-tax Officer came to the conclusion that the source of funds for the purchase of shares by the assessee was not explained, and, accordingly, assessed the sum of Rs. 11,20,000 as income from undisclosed sources.
( 5 ) THE Commissioner of Income-tax (Appeals) before whom it was urged that actually no cash had passed but the entries were mere adjustment entries, rejected the arguments of the assessee's counsel and confirmed the order of the Income-tax. Officer. His observations in paragraph 7 of his order are given below :"i am unable to accept the contentions of the learned representative because his submissions run counter to the original entries made in the cash book as well as the copies of accounts rendered by the relevant companies. On the other hand, the cash transactions are borne out in all hands. The basic entries provide the fundamental picture of all transactions. The book of primary entry reflects the credit side of affairs as it is maintained in the regular course of business at the time of real conduct of actual transaction. This can hardly be disapproved by some interpretation moved by extraneous considerations. So the original entries can hardly be dislodged from their original context by such interpretation, however ingenious and skilful it may be. In the above circumstances of the facts as recorded in the books of account, the Income-tax Officer/ Inspecting Assistant Commissioner's findings are, therefore, sustained. "
( 6 ) THE matter came up in appeal before the Tribunal and it was also argued that the companies had to reduce their indebtedness in view of rule 58a of the Companies Act. The Tribunal held as follows :"we have considered the rival submissions. The case sought to be made out in favour of the assesse
