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[1963] 50 ITR 1 (SC)

[1963] 50 ITR 1 (SC)

SUPREME COURT OF INDIA
Kale Khan Mohammad Hanif
v.
Commissioner of Income-tax*
S.K. DAS, A.K. SARKAR, K.C. DAS GUPTA
AND N. RAJAGOPALA AYYANGAR, JJ.
CIVIL APPEAL NOS. 151 AND 152 OF 1961
FEBRUARY 8, 1963

Section 147 of the Income-tax Act, 1961 [Corresponding to section 34 of the Indian Income-
tax Act, 1922] - Income escaping assessment - Position prior to 1-4-1989 - Assessment years
1945-46 and 1947-48 - Original assessments were completed after computing assessee's
total income by estimating his total sales and assessing gross profits on certain percentage
basis - Subsequently, certain cash credits in his accounts having escaped assessment, were
brought to tax in reassessment as income from undisclosed income – Whether taxing
authorities were not precluded from treating amounts of credit entries as income from
undisclosed sources simply because entries appeared in books of certain business whose
income had previously been computed on percentage basis - Held, yes - Whether, therefore,
cash credits in question could be assessed to tax as income from undisclosed sources in
addition to business income computed by estimate - Held, yes
Section 256 of the Income-tax Act, 1961 [Corresponding to section 66 of the Indian Income-
tax Act, 1922] - High Court - Reference to - Assessment years 1945-46 and 1947-48 - Whether
question as to whether a particular inference drawn by Tribunal is one of law or of fact is not
such question which can arise out of decision of Tribunal and question in that form cannot
be referred to High Court under section 66 of 1922 Act - Held, yes
FACTS

The assessee was a trader carrying on two businesses, namely, manihari (general merchandise) and bidis. For
each of the assessment years concerned, the assessee had submitted a return but as his accounts were not
found complete and reliable, the ITO had assessed the gross profits of the businesses on the basis of certain
percentages of the total sales which had also to be fixed by estimates. No question arose in these appeals as to
the correctness of those assessments.
Subsequently, while dealing with the assessment for the year 1948-49, the ITO noticed various credit entries
in the assessee's books of account which had all escaped his attention at the time of the assessment for the
years 1945-46 and 1947-48.
The ITO thereupon, with the sanction of the Commissioner re-opened the assessments in respect of these
years and after giving the assessee full opportunity to explain the nature of these entries made fresh
assessments under section 34 and, thereupon made additions in regard to the cash credits for both the years.
On second appeal, the Tribunal upheld the ITO's orders except in respect of the entries under the heads 'Ghar
Khata' and 'Muhammad Islam Khata', additions made in regard to which were deleted.
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On reference under section 66(2) of 1922 Act the High Court upheld the Tribunal's findings.
On appeal to the Supreme Court:
HELD

It is well established that the onus of proving the source of a sum of money found to have been received by the
assessee is on him. If he disputes liability for tax, it is for him to show either that the receipt was not income
or that if it was, it was exempt from taxation under the provisions of the Act. In the absence of such proof, the
ITO is entitled to treat it as taxable income:
Questions can be referred under section 66 when they are questions of law which arise out of the facts found
by the Tribunal and which the Tribunal is said to have answered erroneously thereby unlawfully imposing a
burden of tax on an assessee. On questions of fact, the Tribunal is the final authority and such questions
cannot be referred to a High Court for its decision. Now the present question assumed that the Tribunal had
made an inference. Either that inference was one of fact or it was one of law. If it was of fact, no question with
regard to it could be referred to the High Court. If it was one of law, then a question whether the inference
could in law be drawn might be referred to the High Court. But the question whether the inference drawn by
the Tribunal was one of law or fact, which was the question here framed, was not a question which arose out
of the decision of the Tribunal nor one which the Tribunal had at all answered. It did not seem that a question
in this form could be referred under section 66. The High Court, however, answered the question by saying
that the inference was one of fact. If this was the correct view, then the matter ended there, for, as on questions
of fact the Tribunal was the final authority. If, on the other hand, the inference was one of law, then a question
may have been referred to the High Court as to whether the inference was justified in law. That was not done.
However, if the inference was treated as one of law, the Tribunal had drawn it lawfully.
As the question whether having regard to the fact that the ITO assessed the income on a percentage basis, he
was justified in treating the said sums as profits from an undisclosed source, the High Court rightly answered
the question in the affirmative.
The question would suggest that because the income from a disclosed source had been computed on the basis
of an estimate and not on the basis of the return filed in respect of it, an income represented by a credit entry
in the books of account of that source could not be held to be income from another and undisclosed source.
Why it could not be so held was not clear. The reason given in support of the suggestion was that if that
income was held to be income of an undisclosed source, the result would be double taxation of the same
income which the Act did not contemplate. Apparently, it was said that there would be double taxation
because it was assumed that the same income had once been earlier taxed on the basis of an estimate. This
reason was obviously fallacious, for if the income was treated as one from an undisclosed source which the
question postulates, it was not treated as income of the disclosed source which had previously been assessed
to tax and, therefore, there was in such a case no double taxation. It was not a case where the income sought
to be taxed was held to be undisclosed income of a disclosed source, the income of which source had
previously been taxed on the basis of an estimate. If it were so, the question of double taxation might have
been legitimately raised. That, however, is clearly not the case here as the question as framed itself showed.
The question as to the source from which a particular income is derived is one which has to be decided on all
the facts of the case. Hence the question whether income represented by an entry in the books of a business is
income of that business or of another business would have to be decided on the facts which showed the
business to which it belonged. But quite clearly the answer to that question would not depend on whether the
income from the first mentioned business had been computed on the basis of a return filed or of an estimate of
the income made by the taxing authorities. This, however, was what the question as framed suggested, and
that suggestion was wholly without foundation. Therefore, it could not be said that the taxing authorities were
precluded from treating the amounts of the credit entries as income from undisclosed sources simply because
the entries appeared in the books of a business whose income they had previously computed on a percentage
basis.
In the instant case, the ITO held the income represented by the credit entries to be income from undisclosed
sources, that is, neither from the manihari (general merchandise) nor from the bidi business of the assessee
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which he had disclosed. It was open to the assessee to raise the question that the finding that those amounts
were income received from undisclosed sources was not based on any evidence or was, for other reasons,
perverse. He did raise some questions of this type before the Tribunal for reference to the High Court but the
Tribunal did not think that those questions legitimately arose and did not refer them to the High Court. The
assessee accepted the decision of the Tribunal and did not move the High Court to direct a reference in regard
to those questions under section 66(2). Those questions, therefore, could not be raised at this stage.
The instant appeals were accordingly dismissed and the decision of the High Court was affirmed.
Note: Decision was in favour of revenue.
CASE REVIEW

A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807 (SC) followed & relied upon.
Seth Kalekhan Mahomed Hanif v. CIT [1958] 34 ITR 669 (MP) affirmed.
CASES REFERRED TO

Seth Kalekhan Mahomed Hanif v. CIT [1958] 34 ITR 669 (MP).

A.V. Viswanatha Sastri, Rameshwar Nath, S.N. Andley and P.L. Vohra for the Appellant. K.N. Rajagopal
Sastri, Gopal Singh and R.N. Sachthey for the Respondent.
JUDGMENT

Sarkar, J.—These are two appeals arising out of two assessment orders made under the Income-tax Act,
1922, respectively for the years 1945-46 and 1947-48. In each assessment case there was a reference of
certain questions to the High Court of Madhya Pradesh under section 66 of the Act and the present appeals
are against the High Court's answers to these questions.
The assessee is a trader carrying on two businesses, namely, manihari (general merchandise) and bidis. He
had also certain income from property but with this income we are not concerned in these appeals. For each
of the assessment years concerned, the assessee had submitted a return but as his accounts were not found
complete and reliable, the Income-tax Officer had assessed the gross profits of the businesses on the basis of
certain percentages of the total sales which had also to be fixed by estimates. No question arises in these
appeals as to the correctness of these assessments.
Subsequently, while dealing with the assessment for the year 1948-49, the Income-tax Officer noticed various
credit entries in the assessee's books of account which had all escaped his attention at the time of the
assessment for the years 1945-46 and 1947-48 earlier mentioned. These entries were as follows:

1945-46 Rs.
(i) Gold Khata ... 41,300
(ii) Ghar Khata ... 33,000
(iii) Mohammad Islam Khata ... 10,000
(iv) Muslim Bi Khata ... 11,000
Total ... 95,300
1947-48
(i) Ghar Khata credit under sale of ornaments ... 19,575
(ii) Yakub Manihar account Loan from Yakub Manihar ... 20,000
Total ... 39,575

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The Income-tax Officer thereupon, with the sanction of the Commissioner of Income-tax, re-opened the
assessments in respect of these years and after giving the assessee full opportunity to explain the nature of
these entries made fresh assessments under section 34. In the fresh assessments he added to the previously
estimated incomes the said sum of Rs. 95,300 in respect of the year 1945-46 and the said sum of Rs. 39,575
in respect of the year 1947-48, as he was unable to accept the explanation offered by the assessee in support
of his contention that the credit entries did not represent income.
The assessee appealed against these fresh assessments to the Appellate Assistant Commissioner but the
appeals were unsuccessful. He then appealed to the Income-tax Tribunal. The Tribunal found the assessee's
explanation with regard to the said entries for the amounts of Rs. 33,000 and Rs. 10,000 under the heads
"Ghar Khata" and "Muhammad Islam Khata" respective, acceptable and ordered their deletion from the
assessment for the year 1945-46, but otherwise maintained the orders of the Income-tax Officer. Thereafter,
under the orders of the High Court under section 66(2) of the Act made at the instance of the assessee, the
Tribunal framed six questions in each of the assessment cases and referred them to the High Court for its
decision. The questions framed were identical in the two cases excepting as to one minor matter in question
No. 6 which made no difference and the reference in the two cases were heard together. These questions were
answered by the High Court against the assessee and hence, the present appeals by the assessee.
As we have said, there were six questions in each case which were for all practical purposes in identical terms
and the questions in the two cases, therefore, need not be discussed separately. Of these six questions it is
unnecessary to deal with the first three, for two of these had been abandoned in the High Court and the High
Court's answer to the third was not challenged in this court.
The first question that arises for discussion is question No. 4, which was in these terms:
"Whether the burden of proving the source of the cash credits is on the assessee ?"
It seems to us that the answer to this question must be in the affirmative and that is how it was answered by
the High Court. It is well established that the onus of proving the source of a sum of money found to have
been received by the assessee is on him. If he disputes liability for tax, it is for him to show either that the
receipt was not income or that if it was, it was exempt from taxation under the provisions of the Act. In the
absence of such proof, the Income-tax Officer is entitled to treat it as taxable income: see A. Govindarajulu
Mudaliar v. Commissioner of Income-tax [1958] 34 ITR 807 (SC) . We come now to question No. 5, which is
as follows:
"If so, then whether in the absence of satisfactory proof as to the source of credits the inference of the
Tribunal that these credits are the assessee's income from some undisclosed sources is an inference of
factor an inference of law ?"
We confess we find it difficult to see the point of this question. Questions can be referred under section 66 of
the Act when they are questions of law which arise out of the facts found by the Tribunal and which the
Tribunal is said to have answered erroneously thereby unlawfully imposing a burden of tax on an assessee.
On questions of fact, the Tribunal is the final authority and such questions cannot be referred to a High Court
for its decision. Now the present question assumes that the Tribunal has made an inference. Either that
inference is one of fact or it is one of law. If it is of fact, no question with regard to it can be referred to the
High Court. If it is one of law, then a question whether the inference could in law be drawn might be referred
to the High Court. But the question whether the inference drawn by the Tribunal is one of law or fact, which
is the question here framed, is not a question which arises out of the decision of the Tribunal nor one which
the Tribunal has at all answered. It does not seem to us that a question in this form can be referred under
section 66. The High Court, however, answered the question by saying that the inference was one of fact. If
this is the correct view, then the matter ends there, for, as we have said, on questions of fact the Tribunal is the
final authority. If, on the other hand, the inference is one of law, then a question may have been referred to the
High Court as to whether the inference was justified in law. That was not done. We may, however, add that if
the inference is treated as one of law, in our view, the Tribunal had drawn it lawfully and this view would
receive support from A. Govindarajulu Mudaliar's case (supra).

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We have now to deal with the last question, question No. 6, which, as framed in the case for the assessment
year 1945-46, is set out below:
"Whether having regard to the fact that the Income-tax Officer has assessed the income on a percentage
basis, he was justified in treating the said sums of Rs. 41,300 and Rs. 11,000 as profits from an
undisclosed source ?"
In the case for the assessment year 1947-48 the corresponding question was in identical terms except that the
figures mentioned in it were Rs. 19,575 and Rs. 20,000. The High Court answered the question in the
affirmative, and in our view rightly, for we do not think that any other answer is possible.
We are in some difficulty in appreciating the point of this question also. The question would seem to suggest
that because the income from a disclosed source has been computed on the basis of an estimate and not on the
basis of the return filed in respect of it, an income represented by a credit entry in the books of account of that
source cannot be held to be income from another and undisclosed source. We do not see why it cannot be so
held. It appears from the judgment of the High Court that the reason given in support of the suggestion was
that if that income was held to be income of an undisclosed source, the result would be double taxation of the
same income which the Income-tax Act does not contemplate. Apparently, it was said that there would be
double taxation because it was assumed that the same income had once been earlier taxed on the basis of an
estimate. This reason is obviously fallacious, for if the income is treated as one from an undisclosed source
which the question postulates, it is not treated as income of the disclosed source which had previously been
assessed to tax and, therefore, there is in such a case no double taxation. It is not a case where the income
sought to be taxed was held to be undisclosed income of a disclosed source, the income of which source had
previously been taxed on the basis of an estimate. If it were so, the question of double taxation might have
been legitimately raised. That, however, is clearly not the case here as the question as framed itself shows.
We concede that the question as to the source from which a particular income is derived is one which has to
be decided on all the facts of the case. Hence the question whether income represented by an entry in the
books of a business is income of that business or of another business would have to be decided on the facts
which showed the business to which it belonged. But quite clearly the answer to that question would not
depend on whether the income from the first mentioned business had been computed on the basis of a return
filed or of an estimate of the income made by the taxing authorities. This, however, is what the question as
framed suggests, and that suggestion is in our view wholly without foundation. Therefore, it cannot be said
that the taxing authorities were precluded from treating the amounts of the credit entries as income from
undisclosed sources simply because the entries appear in the books of a business whose income they had
previously computed on a percentage basis. That is why we think that the answer to the question as framed
must be in the affirmative.
As we have earlier said, the question as to the source from which a particular income is derived has to be
decided on all the facts of the case. In the present case, the Income-tax Officer held the income represented by
the credit entries to be income from undisclosed sources, that is, neither from the manihari (general
merchandise) nor from the bidi business of the assessee which he had disclosed. This view was upheld by the
Appellate Commissioner and by the Tribunal excepting as to two of the amounts earlier mentioned. It was
open to the assessee to raise the question that the finding that those amounts were income received from
undisclosed sources was not based on any evidence or was, for other reasons, perverse. It appears that he did
raise some questions of this type before the Tribunal for reference to the High Court but the Tribunal did not
think that those questions legitimately arose and did not refer them to the High Court. The assessee accepted
the decision of the Tribunal and did not move the High Court to direct a reference in regard to those questions
under section 66(2). Those questions, therefore, cannot be raised in this court. We have dealt with the
reference made on the basis that the finding that the amounts of the credit entries were income received from
undisclosed sources was disputed only on the ground that the income from the business had been computed
on the basis of an estimate. In the circumstances of the case we could not have done anything else.
These appeals fail and are dismissed with costs. There will be one set of hearing fees.
■■

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*In favour of revenue.

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