1956 (5) TMI 4 - SC - Income Tax

Whether there is any material to justify the assessment of ₹ 30,000 (Rupees thirty thousand) from out of the sum of ₹ 61,000 (Rupees sixty-one thousand) (for income-tax and excess profits tax and business profits tax purposes) representing the value of high denomination notes which were encashed on the eighteenth day of January one thousand nine hundred and forty-six ? Whether in any event by reason of the orders of the Revenue Authorities not having found that the alleged item was from alleged undisclosed business profits the assessment of ₹ 30,000 (Rupees thirty thousand) is in law justified for excess profits tax and business profits tax purposes ? Held that - The High Court was in error in answering the first referred question in the affirmative. It ought to have answered it in the negative and held that there were no materials to justify the assessment of ₹ 30,000 from out of the sum of ₹ 61,000, for income-tax and excess profits tax and business profits tax purposes, representing the value of the high denomination notes which were encashed on 18th January, 1946. In view of the above it is not necessary for us to go into the question whether the High Court ought to have answered the second referred question also. The answer to the first referred question being in the negative, the very basis for excess profits tax and business profits tax disappears and the second referred question becomes purely academical. Appeal allowed.

Summary

Issues Involved:
1. Assessment justification of Rs. 30,000 from Rs. 61,000 high denomination notes encashed on January 18, 1946.
2. Legality of the assessment of Rs. 30,000 for excess profits tax and business profits tax purposes without a finding of undisclosed business profits by Revenue Authorities.

Detailed Analysis:

1. Assessment Justification of Rs. 30,000 from Rs. 61,000 High Denomination Notes Encashment:

The appellants, a partnership firm, encashed high denomination notes worth Rs. 61,000 on January 18, 1946, after the promulgation of the High Denomination Bank Notes (Demonetisation) Ordinance, 1946. During the assessment for the year 1947-48, the Income-tax Officer (ITO) scrutinized the appellants' cash book entries and cash balances from December 20, 1945, to January 18, 1946. The ITO concluded that it was impossible to presume the cash receipts were in high denomination notes without evidence, thus adding Rs. 61,000 to the assessable income from undisclosed sources.

The appellants presented affidavits before the Appellate Assistant Commissioner (AAC) to justify the receipt of high denomination notes, but the AAC dismissed the appeal, confirming the ITO's order. The Income-tax Appellate Tribunal (ITAT) partially accepted the appellants' explanation, reducing the assessment by Rs. 31,000 but maintaining Rs. 30,000 as unexplained.

The High Court, upon reference, affirmed the Tribunal's decision, stating that the Tribunal's inference was reasonable based on the evidence. However, the Supreme Court found that the Tribunal's decision to accept only part of the appellants' explanation and exclude Rs. 30,000 was based on surmise without evidence. The Supreme Court held that the appellants had provided a reasonable explanation for the possession of the high denomination notes and that the Tribunal's order lacked a clear basis in evidence. Consequently, the Supreme Court answered the first referred question in the negative, indicating no material justified the assessment of Rs. 30,000 from the encashed notes.

2. Legality of the Assessment of Rs. 30,000 for Excess Profits Tax and Business Profits Tax Purposes:

The High Court refused to answer the second referred question, citing a lack of jurisdiction as the appellants had not requested the Tribunal to refer this question initially. The Supreme Court, agreeing with the High Court's stance, noted that the second question became academic following the negative answer to the first question. Since the basis for excess profits tax and business profits tax assessment was invalidated, addressing the second question was unnecessary.

Conclusion:

The Supreme Court allowed the appeal, answering the first referred question in the negative and deeming the assessment of Rs. 30,000 unjustified. The appellants were awarded costs for both the Supreme Court and High Court proceedings. Venkatarama Ayyar, J. concurred, emphasizing that the Tribunal's finding lacked supporting evidence and was thus erroneous in law.