G.K.MITTER, J. - (1.) THE question referred to this Court under s. 66(1) of the Indian IT Act is : "Whether on the facts and in the circumstances of the case, the ITO was justified in including the income from undisclosed sources in the reassessment for the year 1946-47 ?" THE facts are as follows :
(2.) THE assessee was a member of an HUF until October, 1944. By a deed of partition the assessee separated from his brothers and this deed which purported to give the entire family holding was accepted by the Revenue authorities. After the partition the first assessment year of the assessee was the year 1946-47. He did not produce any account books nor did he specify any mode of accounting but claimed to go by the Dewali year. THE Dewali year 2002 ended some time in November, 1945. THE assessee was assessed to an income of Rs. 2,800 in his business of broking and another sum of Rs, 2,000 from "other sources" because of the fact that he had encashed two one thousand rupee notes for the possession of which he failed to give any satisfactory explanation. This assessment was made on 22nd March, 1949. THEreafter the ITO came to know that the assessee held a money- lender's licence and had a money-lending business which he had failed to disclose. On 6th July, 1954, a notice under s. 34 of the IT Act was issued on the assessee by the ITO stating that he had reason to believe that the assessee's income assessable to income- tax for the asst. yr. 1946-47 had escaped assessment and it was, therefore, proposed to reassess the said income escaping assessment." On 10th Sept., 1954, the ITO issued a notice under s. 22 (4) for the asst. yr. 1946-47 (2002 Dewali) pursuant to notice under s. 34 calling upon the assessee to produce his books of account along with the books for the year 2002 Dewali and bank pass books. On 27th June, 1955, the assessee filed a duly verified list of debtors against some of whom he had filed suits while other had filed insolvency petitions. He did not however, disclose three specific debts the particulars whereof are as follows : Being asked to explain the source of these investments the assessee stated that they had come out of his ancestral funds. This was rejected by the ITO who estimated that the assessee had invested Rs. 1,50,000 in his said business and that income therefrom was Rs. 18,000. In appeal the AAC confirmed the said estimated with regard to money-lending business but reduced the income from undisclosed sources. THE ITO treated the financial year 1945-46 as the previous year for this assessment. The point now taken is that inasmuch as the Revenue authorities had stated in the notice under s. 34 that income for the Dewali year 2002 had escaped assessment it was not open to them to Sl. No. Name of the debtor Date of advance Amount 1. K. G. Marston 24-12-1945 500 2. M. A. Rashid 1-01-1946 10,000 3. D. Rajagopal Pillai 20-03-1946 900 take into account any investment which fell beyond that period. It will be noticed that the three specific debts which the assessee failed to disclose dt. from December 1945, onwards and they are not within the Dewali year 2002. The question which arises is whether on the basis of the notice which had stated that income for the Dewali year had escaped assessment it was open to the Revenue authorities to assess income which fell outside that year but during the financial year 1945-46. Under s. 34(1) of the Act as it stood at the relevant time "if in consequence of definite information which has come into his possession the ITO discovers that income, profits or gains chargeable to income-tax have escaped assessment in any year. . . the ITO may in any case in which he has reason to believe that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars thereof at any time within eight years, and in any other case at any time within four years of the end of that year, serve on the person liable to pay tax on such income, profits or gains a notice containing all or any of the requirements which may be included in a notice under sub-s. (2) of s. 22, and may proceed to assess or reassess such income profits or gains and the provisions of this Act shall so far as may be apply accordingly as if the notice were a notice issued under that sub-section." Under s. 22(4) "the ITO may serve. . . . on any person who has made a return under sub-s. (1) or upon whom a notice has been served under sub-s. (2) a notice requiring him on a date to be therein specified to produce.... such accounts or documents as the ITO may require." Further, under sub-s. (2) of s. 22 "in the case of any person whose total income is in the ITO's opinion, of such an amount as to render such person liable to income-tax, the ITO may serve a notice upon him requiring him to furnish, within such period not being less than thirty days, as may be specified in the notice a return in the prescribed form and verified in the prescribed manner setting forth (alone with such other particulars as may be provided for in the notice) his total income... during the previous year." "previous year" has been defined under s. 2(11) of the Act to mean "in respect of any separate source of income, profits and gains--(a) the twelve months ending on the 31st day of March next preceding the year for which the assessment is to be made or if the accounts of the assessee have been made up to a date within the said twelve months in respect of a year ending on any date other than the said 31st day of March, then at the option of the assessee the year ending on the day to which his accounts have been so made up."
(3.) IT will, therefore, be noticed the assessment being for the asst. yr. 1946-47 the previous year would end on 31st March, 1946, unless the assessee had exercised his option with regard to this source of income of the effect that his accounts had been made up to some other day within the 31st day of March, 1946, as claimed by him in this case for his business of broking on a date ending in November, 1945. The assessee did not exercise any option with regard to the money- lending business and never claimed before the ITO that he went by the Dewali year in respect of this source of income. He cannot therefore, complain if his income from money-lending had been computed for the year ending 31st March, 1946. This is the view taken by Sinha J. in the case of Sushil Chandra Ghose vs. ITO (1959) 35 ITR 379 (Cal). In that case the petitioner's assessment for the year 1945-46 was completed on 18th Aug., 1945. The petitioner there had declared his accounting year as beginning from May I of every year and ending on 30th April in the year following. According to this the asst. yr. 1945-46 would correspond to the accounting year of the assessee from 1st May, 1943, to 30th April, 1944. The petitioner was a director and a shareholder of a company which had resolved on February 28, 1945 that a sum of Rs. 60,395 was available in the shape of pre-incorporation assets purchased by the company against which there was no liability. This was distributed among the shareholders including the petitioner at the rate of Rs. 230 per share. According to the petitioner this was not income but a capital receipt and he had not disclosed it in his income-tax return. On 24th March, 1954, a notice was issued under s. 34 upon the petitioner stating that he had been under-assessed for the year ending 31st March, 1946, and directing him to file a return of total income for the year ending on that date. The petitioner thereupon filed a return but contended that the amount above- mentioned was not income or dividend and was not liable to payment of income-tax. On January 31, 1955 the ITO made the assessment order whereby the total income of the petitioner was reassessed at Rs. 70,808. On behalf of the petitioner it was contended that since he had declared his year of calculation to be from May to April 30 following the above income from the company would fall within "other sources" and the year of assessment therefor would not be the financial year but the year declared by the assessee. This was negatived by the learned judge who said that until the assessee declared his option with regard to the separate source of income the ordinary financial year would be applicable to his case. A similar view was taken by a Division Bench of the Patna High Court in CIT vs. P. Darolia and Sons (1955) 27 ITR 515 (Pat). In this case the assessee was an HUF which carried on the business of sale and manufacture of vermilion. The assessment year was 1947-48 and the corresponding accounting year was Dewali year commencing 4th Nov., 1945 and ending 24th Oct., 1946. In his return the assessee showed a gross profit of Rs. 8,814 and a net profit of Rs. 402 from the said business. The ITO rejected the account books of the assessee and estimated the net profit to be Rs. 10,877. He also noticed certain unexplained cash credits in the account books of the assessee. He rejected the explanation of the assessee with regard to the cash credits and treated the amount of Rs. 15,000 shown therein as secret profits from an undisclosed source. These entries relating to cash credits were all dt. November, 1945. The assessee preferred an appeal to the AAC which was dismissed. Before the Tribunal it was argued on behalf of the assessee that the amount of Rs. 15,000 should not be taxed in the asst. yr. 1947-48, as there could be no previous year for the undisclosed income except the financial year 1945- 46. This was accepted by the Tribunal and confirmed by the High Court on a reference under s. 66. Before the High Court it was contended on behalf of the Revenue that the Tribunal had gone wrong in holding that the amount of Rs. 15,000 was income derived by the assessee from a source different from the business in vermilion and that the same should have been treated as undisclosed profit for the accounting year corresponding to the period from 4th Nov., 1945, to 24th Oct., 1946, and not the financial year 1945-46 on the ground that the onus being on the assessee to give an explanation as to the source and nature of the cash credit it was open to the IT authorities to presume that the cash credit was income from the same source of business namely that in vermilion. This was rejected by the High Court which held that the principle was well-established in respect of an amount of cash received during the accounting year that the burden of proof was upon the assessee to show positively the source and nature of the receipt and in the absence of an adequate explanation the Revenue authorities were entitled to draw the inference that the receipts were of an income nature and liable to be taxed. The High Court went on to observe that there was no presumption in such a case that the cash receipt was income of the same business for which the assessee kept regular books of account. According to the High Court the question was really a question of fact to be decided upon the materials furnished in each particular case. The High Court further held that in respect of the amount of Rs. 15,000 there was no account maintained by the assessee and no option exercised on his part as to the year of accounting and in the absence of any such system of accounting as also in the absence of the exercise of any option on his part the only course open to the IT authorities was to take the financial year ending on 31st March, 1946, as the previous year for the amount of Rs. 15,000.;