N. H. Bhagwati, J. - (1.) 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 The Almirah account was an account for moneys withdrawn and kept at home.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 also.;