CHANDRA REDDY C.J. -
(1.) THE two questions on which the Tribunal, Hyderabad, was directed to state a case for the opinion of this Court under S. 66 (2) of the Indian IT Act were formulated in the following terms : "(1) Whether on the facts and circumstances of the case there is any material on which the Tribunal could find that a sum of Rs. 21,000 in the name of Kurma Rao is a fictitious credit and represented the income of the assessee from undisclosed sources ? and (2) Whether on the facts and in the circumstances of the case the proceedings initiated under S. 34 of the IT Act have been legally and validly initiated ?"
(2.) THE reference relates to the asst. yr. 1947-48, the corresponding accounting period being the financial year ended with 31st March, 1947. THE assessee is an HUF carrying on business in wholesale grains and pulses. For the relevant assessment year, the assessee was assessed on a total income of Rs. 2,28,658 of which the income from business amounted to Rs. 2,16,363. THE assessment was completed on 29th March, 1952. Some time later, it came to light that the assessee had introduced a spurious credit of Rs. 21,000 in the name of one of B. Kurma Rao on 16th March, 1947. This led the ITO to initiate proceedings under S. 34 (1) (a) of the Indian IT Act after obtaining the necessary approval of the CIT by a notice issued on 30th Aug., 1954. THE assessee submitted the same return as the earlier one asserting that the credit entry in the name of Kurma Rao was a genuine one and not a fictitious one.
Disbelieving the version of the assessee, the proper ITO included the sum of Rs. 21,000 in the assessment as his undisclosed income. It may be mentioned here that in support of his case the assessee filed a letter of Kurma Rao to the effect that he advanced a sum of Rs. 21,000 to the assessee in March, 1947, out of a cash legacy of Rs. 31,000 left by his mother as also from the savings effected by him while he was in military service. Support was sought for this statement from a letter of Kurma Rao's brother-in-law, Satyanarayana, wherein it was, inter alia, recited that after Kurma Rao's mother i.e., Satyanarayana's mother-in-law, died in 1942, the iron safe was opened in the presence of one Kalidasa, an employee of the shipyard, Visakhapatnam, his cousin brother, wherein they found a sum of about Rs. 30,000 cash and 200 tolas of gold, that the same was handed over to her only son, B. Kurma Rao, and that this sum of Rs. 30,000 was got by his mother-in-law as the only daughter of Sri Buttala Bullayya, who was a Government Revenue Inspector.
The ITO, not satisfied with this material, called upon the assessee to produce other documentary evidence to show that Kurma Rao inherited a sum of Rs. 30,000 from his mother and that he had capacity to lend a sum of Rs. 21,000 to the assessee.
(3.) THE assessee pleaded his inability to do so except filing the letters. THE ITO did not accept the story about this inheritance, as it was not supported by evidence of an acceptable kind especially having regard to the fact that there was no evidence of the depositor dealing with these monies in the past which could prove possession of these monies by him. He, accordingly, included the said amount in the assessable income as the assessee's own monies, out of undisclosed income. Dissatisfied with this order of assessment, the assessee went in appeal to the AAC. THE appellate authority felt that the source was duly proved and there was no reason to doubt the capacity of the lender. In this view of the matter, the appeal was allowed resulting in the deletion of Rs. 21,000 from the assessable income of the assessee.
The Department took the matter in appeal to the Tribunal from the order of the AAC. The Tribunal reversed the order of the AAC and restored that of the ITO, having come to the conclusion that the considerations relied on by the AAC were part of a collusive scheme adopted by the assessee to bring in its own monies in the scope of outside deposits and there was really no borrowing in 1947 from Kurma Rao and that it only represented the undisclosed profits of the assessee. The Tribunal remarked that the scheme adopted by the assessee was consistent with his past history, namely, introduction of spurious credit entries in the names of third parties. The Tribunal also thought that the fact that the depositor, Kurma Rao, admitted the deposit and also offered the interest allegedly received from the assessee for taxation in his hands was of no consequence, since in its view it was part of a collusive arrangement between them.;