UPADHYA, J. - (1.) THE questions referred for the opinion of this court are : 1. Whether the proceedings under section 34 of the Income-tax Act are legal and valid ? 2. Whether there was material for the finding that rupees ten thousand out of forty-five thousands realised by the assessee by encashment of 45 high denomination notes on January 18, 1946, represented the income of the assessee liable to tax under the Indian Income-tax Act ?
(2.) THE assessee is a Hindu undivided family doing financing work and was the Government Treasurer at Shahjehanpur. THE original assessment for the year 1947-48 was made on an income of Rs. 12,588. THEreafter the Income-tax Officer started proceedings under section 34 of the Income-tax Act as he got information that the assessee had encashed high denomination notes for Rs. 45,000, on January 18, 1946, which date fell within the relevant previous year of the assessee. On being required to explain how he came by these notes, the assessee said that he had to maintain a large cash balance which was necessary because of the nature of his business and these included high denomination notes invariably. On January 11, 1946, when the Demonetisation Ordinance was promulgated, the assessees cash balance was Rs. 58,046. THE cash balance varied from day to day and on January 18, 1946, when the notes were encashed the cash balance was Rs. 65,619. THE cash balance was never below Rs. 50,000. THE Income-tax Officer, however, did not accept the assessees explanation that the notes formed part of his cash balance and added the sum of Rs. 45,000 to his total income and made an assessment. On appeal, the Appellate Assistant Commissioner maintained the assessment. On further appeal, the Appellate Tribunal reduced the addition by Rs. 35,000 but upheld the addition of Rs. 10,000 to the assessees total income. THE assessee then applied for a reference to this court and the questions mentioned above have been referred to us. We have been asked to take the second question first and we have no objection to do so. The assessee was a treasurer of the Government Treasury at Shahjehanpur at the relevant time and in the course of his business activities had to finance other business concerns in that city. It is not disputed that he maintained a large cash balance which was necessary for the purpose of his business. The Income-tax Appellate Tribunal in deciding the appeal observed : There is no doubt that in the course of business activities the assessee had during the year of account to handle various denominations of currency notes. It does not seem reasonable, however, that the cash balance of Rs. 58,000 odd included 45 notes of Rs. 1,000. On an estimate, we find that the assessee was in possession of 35 such notes on the day the Demonetisation Ordinance was promulgated. The balance of 10 notes are, in our opinion, from an undisclosed source. Having accepted that the assessee financed several businesses at Shahjehanpur and was the treasurer of the Government Treasury and having further accepted that in the course of business activities the assessee had to handle various denominations of currency notes and that the cash balance in hand was Rs. 58,000 and odd, it appears extremely difficult to appreciate how the Tribunal thought it necessary or proper to make an estimate of 35 notes at Rs. 1,000 each to have been contained in the cash balance. The Tribunal has given no reason whatever for its finding that the assessee possessed 35 notes of Rs. 1,000 each on the day the Ordinance was promulgated. This evidently is an arbitrary expression of its own guess, which cannot be accorded the status of a finding. Equally arbitrary is the other finding that the balance of 10 notes was from an undisclosed source. The persistent claim by assessees prior to 1939 that an independent body should be empowered to decide finally the appeals relating to taxation was responsible for the creation of the Income-tax Appellate Tribunal. This Tribunal is expected to function in a judicial manner. The Supreme Court and some other courts have had occasion to express the view that the Tribunal should act in a judicial manner, and it is only when proper findings are recorded by the Tribunal that its decision should be accepted as final findings of fact. After having heard learned counsel for the Department and after giving our best consideration to the matter we find ourselves quite unable to see any reason or basis for the so-called finding recorded by the Tribunal that the assessee was in possession of 35 notes on the day Ordinance was promulgated or that 10 notes were from some undisclosed source. These cannot be recognised as findings at all. The assessees business was not one in which large amount of petty notes might have been necessary for the purpose of business, and keeping money in large notes is evidently more convenient for counting, for making payments and for other purposes and no material has been placed before us to show that the explanation offered by the assessee was one which was inherently improbable or one which could not be accepted. The so-called estimated made by the Income-tax Appellate Tribunal was to our mind a mere guess. In fact there was no justification in the circumstances of the case for making an estimate at all. The assessee had a large cash balance which could very conveniently include the 45 high denomination notes encashed by him. The explanation offered by the assessee was not unreasonable and nothing has been said which could justify its being rejected as unreasonable. On the other hand the so-called estimate by the Tribunal is based on no reason and is purely arbitrary and cannot be upheld as legal.
(3.) IN Sri Sri Nilkantha Narayan Singh v. Commissioner of INcome-tax, AIR 1951 Pat 165 the assessee had encashed high denomination notes worth Rs. 95,000. The INcome-tax Officer rejected the assessees explanation about them and added the entire amount as income from an undisclosed source. The Appellate Tribunal felt satisfied that Rs. 11,000 (one note of Rs. 10,000 and another of Rs. 1,000) had been received from the Bengal Discount Co. Ltd. as the number of the notes were mentioned in a document but affirmed the addition of Rs. 84,000. The Patna High Court after examining the reason on which the Tribunal had based its decision held that there was no material for the inference that Rs. 84,000 represented the assessees income. The Tribunal had observed that (1) the assessee did not produce any home chest account though his explanation was that the notes were savings from his personal allowance, (2) that he could not save any money as there was a recital in a lease that he needed money to pay income-tax and road cess, and lastly (3) that the assessee was not in a position to say wherefrom the notes of Rs. 10,000 each were obtained and his failure to do so led to the conclusion that he was unwilling to disclose the source. The court held that there was no material to suggest that a home chest account was maintained and no adverse inference could be drawn because such account was not produced. The court noticed that the assessee had produced accounts for seven years before the Tribunal showing that the Raja had a balance of Rs. 18,400 and recital in the document, therefore, was not proved to be correct. The court further held that no onus could be thrown upon the Raja to indicate the source from each note to the value of Rs. 10,000 was received and no adverse inference ought to have been drawn by the Tribunal against the assessee. In Ganguly v. Commissioner of Income-tax the same Bench upheld the addition of Rs. 4,000 on the ground that while it was admitted that the assessee had encashed these notes he had produced no evidence in support of his explanation that the amount represented his savings. It was not pleaded that the notes formed part of the cash balance in the accounts. The court held that there was material on which the addition was justified. Raja Nilkanth Narayan Singhs case was distinguished by the Patna High Court in two later decisions, Manindra Nath Dash v. Commissioner of Income-tax, 1979 CrLJ 1465 and Tewary v. Commissioner of Income-tax, on the ground that the assessee had produced no evidence to support his explanation at all and the fact of the receipt of money by encashing the notes being proved or admitted, the onus was on the assessee to explain how he came to have the money. These again were not cases where the assessee had claimed that the notes formed part of his cash balance. ;