MCNAIR,J. - (1.) TWO references have been made to this Court under S. 66 of the IT Act. In reference No. 7 of 1942 the questions formulated are as follows : (1) When the assessee, required to explain the credit entry of Rs. 50,000 in this case, offers an explanation which is false or unbelievable, whether there is anything in law which casts the burden of proof on the ITO or the appellate authority to prove by positive evidence that they are items of revenue assessable to tax. (2) Whether in the circumstances of this case there was any material to hold that the sum of Rs. 50,000 credits appearing in the personal accounts of the proprietors of the business constitute assessable income.
(2.) IN Reference No. 8 of 1942 the same two questions are referred and the following further question which arose by reason of the penalty imposed on the assessee under S. 28(1)(c) of the Act is also referred, "whether in the facts and circumstances there is any material for the finding that the assessee had deliberately furnished inaccurate particulars of income of Rs. 50,000." The two references may be dealt with in one judgment. The assessee are an HUF who carry on business in ganji and than cloth. The assessment was made on 2nd March, 1938, in respect of the financial year 1937-38. The assessees in their return showed a sum of Rs. 50,000 as capital which was said to have been obtained from the sale of gold ornaments. The ITO accepted this item as capital pending enquiry and the assessment was made. On 3rd May, 1938, the ITO issued a notice under S. 34 of the Act and called for a further return. A return was made in the same form as previously.
(3.) SEC . 34 provides : "If for any reason income, profits or gains chargeable income tax has escaped assessment in any year or has been assessed at too low a rate, the ITO may, at any time within one year of the end of that year serve on the person liable to pay tax on such income, profits or gains, or, in the case of a company, on the principal officer thereof, 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 re-assess such income, profit 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". I have quoted S. 34 which was applicable to this assessment as that section stood prior to amendment. On 20th Sept., 1938, the ITO issued a notice under S. 23 of the Act which by sub-s. (2) provides that if the ITO has reason to believe that the return made under S. 22 is incorrect or incomplete he shall serve on the person who made the return a notice requiring him on a date to be therein specified either to attend at the ITO's office or to produce or cause to be there produced any evidence on which such person may rely in support of the return. Sub-s. (3) provides in effect that the ITO after hearing such evidence and such other evidence as he may require shall by an order in writing assess the total income of the assessee and determine the sum payable by him on the basis of such assessment. The ITO heard the appellants and their representatives, and after hearing them held that the whole sum of Rs. 50,000 represented profits or gains from undisclosed sources. Accordingly that sum of Rs. 50,000 was added back and the assessment was raised, and a further sum of Rs. 8,108 as tax was demanded. On 14th Oct., 1938, there was an order for payment of the enhanced sum, and on the same day the ITO passed an order for the payment of a penalty under the provisions of S. 28, which provides in effect that if the IT authorities are satisfied that an assessee has concealed the particulars of his income or has deliberately furnished inaccurate particulars of such income and has therefore returned it below its real amount, he may direct that the assessee shall in addition to the income- tax payable by him pay by way of penalty a sum not exceeding the amount of the income- tax which would have been avoided if the income as returned by the assessee had been accepted as the correct income. The IT authorities have in this instance directed that the maximum penalty should be imposed.;