S.C.R. SUPREME COURT REPORTS 301

MESSRS. LALCHAND BHAGAT AMBICAL RAM

v.

THE COMMISSIONER OF INCOME-TAX,

BIHAR & ORISSA

(S. R. DAs, C.J., N. H. BHAGWATI, and

M. HIDAYATULLAH, JJ.)

Income-ta.<t-Assessment based on conjectures-Fact finding

authority acting without evidenc~-Power of court to interfere-High

Denomination Bank Notes (Demonetisation) Ordinance, z946

(Ordinance III of z946).

The appellant a Hindu undivided family carryii:ig on business

in grain kept its books of account according to the mercantile

system and maintained in its cash books two accounts : one

showing the cash balances from day to day

and the other known

as" Almirah account" wherein were kept large balances which

were not required for the day-to-day working of the business.

On January 12, 1946, on which date the High Denomination

Bank Notes (Demonetisation) Ordinance, 1946, was promulgated,

the cash balances of the appellant were Rs. 29,284 in its Rokar

and

Rs. 2,81,397 in the Almirah account. For the assessment

year 1946-47 the appellant filed its Income-tax Return showing a

loss of Rs. 46,415 in the business. The Income-tax Officer, in the

course of the assessment, noticed

that the appellant encashed

high denomination notes of the value of Rs.

2,91,000 on

January 19, 1946, and the explanation given by the appellant

was

that these notes formed part of its cash balances including

cash balance in the Almirah account,

but it was rejected by the

Income-tax Officer relying on the following circumstances:

(I) that the appellant's food grains licence had been cancelled for

the accounting year for its failure to keep proper stock accounts,

(2) that the appellant was prosecuted under the Defence of India

Rules

but had been acquitted having been given the benefit of

doubt,

(3) that the appellant was a speculator, and as such could

easily have earned amounts far in excess of the value of the high

denomination notes encashed,

(4) that notwithstanding the fact

that the period was very favourable to the food grains dealers

the appellant had declared a loss for the assessment year

1944·45

up to 1946-47, though it had the benefit of a large capital on hand,

and (5) that the appellant was one of the premier grain merchants

of Sahibganj, a place which had gained sufficient notoriety for

smuggling foodgrains. The Income-tax Officer came to the con­

clusion that the appellant had all these probable sources from

which it could have earned the sum of Rs. 2,91,000, and

accordingly. he treated the sum as the appellant's secreted profits

from business

and included it in its total income. The Appellate

Tribunal accepted the account books produced by the appellant

I959 May I4.

302 SUPREME COURT REPORTS [1960(1)]

x959 and examined the cash book and taking into consideration all the

circumstances which had been adverted to by the Income-tax

Lale/land Bhagat Officer took the view that the appellant might be expected to

Ambi&al Ram have possessed as part of its business cash balance of at least

v. . Rs. l,50,000 in the shape of high denomination notes on

Tlte Commissioner January 12, 1946, when the Ordinance was promulgated, but that

of Ineome-tru the nature of the source from which the appellant derived the

remaining 141 high denomination notes of Rs. l,ooo each remained

unexplained to its satisfaction.

It accordingly reduced the

amount considered as the secreted profits from Rs.

2,91,000 to

Rs. l,41,000. On reference, the High Court held that the finding

arrived

at by the Tribunal was one of fact and that it could not

be urged that it was based on no evidence.

On appeal to the

Supreme Court it was contended for the appellant that the finding

arrived

at by the authorities concerned, though it be one of fact,

was vitiated by reason

of the authorities indulging in conjectures,

suspicions and surmises and basing the same on no material

whatever which would

go to support the same, and that, in any

case, it was a preverse one which a reasonable body of men could

not have arrived

at on the material on the record.

Held, that the Tribunal had been influenced by the suspicions,

conjectures and surmises which were freely indulged in

by the

Income-tax

Officer, and had arrived at its conclusion, as it were

by a rule

of thumb, without any proper materials before it and

that its finding could not be sustained; that having accepted the

appellant's books of account it was not open to the Tribunal to

accept the explanation of the appellant in

part as to Rs.

l,50,000

and reject the same in regard to the sum of Rs. l,41,000.

Messrs. Mehta Parikh 0-Co. v. The Commissioner of Income­

tax, Bombay,

[1956]

S.C.R. 626 and Kanpur Steel Co. Ltd. v.

Commissioner of Income-tax, Uttar Pradesh, [1957] 32 I.T.R. 56,

relied on.

Where a Tribunal has acted without any e\'idence or upon a

view

of the facts which could not reasonably be entertained

o~

the facts found were such that no per.on acting judicially and

properly instructed as to the relevant law could have found, the

court is entitled to interfere.

Dhirajlal Girdharilal v. Commissioner of Income-tax, Bombay,

[1954] 26 I.T.R. 736; Dhakeswari Cotton Mills Ltd. v. Commissioner

of Income-tax, West Bengal, [1955] I S.C.R. 941; Messrs. Mehta

Parikh and Co. v. The Commisioner of Income-tax, Bombay, [1956]

S.C.R. 626 and Meenakshi Mills, Madurai v. Commissioner of

Income-tax, Madras, [1956] S.C.R. 691, followed.

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos.

679 and 680 of 1957.

Appeals by special leave from the judgment and

decree dated the January 5, 1955, of the Patna. High

Court, in M.J.C. Nos. 374 & 375 of 1952.

S.C.R SUPREME COURT REPORTS 303

R. J. Kolah and R. Patnaik, for the appellant.

A. N. Kripal and D. Gupta, for the respondent.

1959. May

14. The Judgment of the Court was

1959

Lalchcmd Bhagat

Ambical Ram

v.

delivered by The Commissioner

BHAGWATT .J.-These are two connected appeals of Income-tax

with special leave granted by this Court under Art. 136

of the Constitution and arise out of the appellant's

assessment

to Income-tax for the assessment year

1946-4 7

and Excess

Profits Tax for the chargeable

accounting period

January 9, 1945, to February 2, 1946.

The appellant is a

Hindu undivided family carrying

on extensive business in grain as merchants and

com­

mission agents. It is one of the premier grain merch­

ants and wholesalers of Sahibganj in the District of

Santhal Parganas in the State of Bihar. It has bran­

ches at Nawgachia in the District of Bhagalpur and at

Dhulian in the District of Murshidabad in West

Bengal.

The appellant filed its Income-tax Return for the

assessment year 1946-4 7 showing a loss of Rs. 46,415

in

the business. The Income-tax Officer,

Patna, how­

ever, in the course of the assessment noticed that the

appellant had encashed high denomination notes of

the value of Rs. 2,91,000 on January 19, 1946. The

Income-tax Officer asked for an explanation which

the appellant gave stating that these notes formed

part of its cash balances including cash balance in the

Almirah account. The cash balances of the appellant

on

January 12, 1946, on which date the High Denomi­

nation

Bank Notes (Demonetisation) Ordinance, 1946,

was promulgated were Rs. 29,284-3-9 in its

Rokar and

Rs.

2,81,397-10-0 in the Almirah account. TheAlmirah

account was an account for moneys withdrawn and

kept at home. The appellant sought to prove the fact

that the high denomination notes encashed by it for­

med part of its cash balances from certain entries in

its accounts wherein the fact that moneys were re­

ceived in high denomination notes had been noted.

Portions

of these entries to the effect that moneys had

been received in high denomination notes were found

Bhagwati ].

304 SUPREME COURT REPORTS [1960(1)]

z959 by the Income-tax Officer to be subsequent interpola-

Lalchana Bhagat tions made by the appellant with a view to advance

Ambical Ram its case that the cash balances contained the high

v. denomination notes encashed by it. The Income-tax

The Commissioner Officer found that the appellant's food grains licence·

0

! Incom•-t= at Nawgachia had been cancelled for the accounting

year for its failure to keep proper stock accounts and

BhagwaJi j.

that the appellant was prosecuted under the Defence

of India Rules but had been acquitted having been

given

the benefit of doubt. The

Income-tax Officer

also

had regard to the fact that the appellant was

a

speculator and that as a speculator the appellant could

easily

have earned amounts far in excess of the value

of the high denomination notes encashed. He

con­

sidered that even in the disclosed volume of business

in the year under consideration in the Head Office and

in the branches, there was possibility of his earning a

considerable sum as against which it showed a net

loss of about Rs. 46,000. The Income-tax Officer also

noticed

that notwithstanding the fact that the period

was

very favourable to food grains dealers, the

appel­

lant had declared a loss for the assessment year 1944-

45

up to 1946-47, though it had the benefit of a large

capital on hand. The Income-tax Officer further took

into consideration the circumstances that Nawgachia

and Dhulian were very important business centres and

Sahibganj, the principal place of business, had gained

sufficient notoriety for smuggling foodgrains

and other

aommodities to Bengal by country boats. Dhulian

which was

just on the

Bel)gal, Bihar border was also

reported

to be

a great receiving centre for such com­

modities. Having regard to all these circumstances,

the Income-tax Officer rejected the appellant's explan­

ation that the high denomination notes formed part of

its cash balances and treated the sum of Rs. 2,91,000

as the appellant's secreted profits from business and

included it in its total income and assessed the appel­

lant for the said assessment year on the income of

Rs.1,39,117. Dealing with the Excess Profits Tax

assessment, he also held that the said income was deri­

ved from the business of the appellant and hence it

was liable to excess profits tax also.

r

'

S.O.R. SUPREME COURT REPORTS 305

I959

Lalchand BhagaJ

Ambical Ram

v.

The appellant preferred an appeal to the Appellate

Assistant Commissioner against both these assessment

orders and by his orders dated

:February 28, 1951, the

Appellate Assistant Commissioner upheld the orders of

the Income-tax Officer and dismissed the appeals. The Commission,,

On further appeals from the said orders of the Appel-of Income-ta~

late Assistant Commissioner to the Income-tax Appel­

late Tribunal, the Tribunal by its order dated April 29,

1952, dismissed

both the appeals as regards the Income-

tax as well as Excess profits tax. Even though before

the Income-tax Officer and the Appellate Assistant

Commissioner

the case of the appellant was that the

account book which contained the entries in regard to

the receipts of moneys in high denomination notes were

genuine

and correct, this position was abandoned by

the appellant before the Tribunal. Before the Tribunal,

the appellant stated that the said entries were made in

sheer nervousness after coming into force of the High

Denomination Bank Notes (Demonetization) Ordinance,

1946,

on January 12, 1946, as the appellant did not

know

th<1t it had specific proof in its possession of

having the high denomination notes as part of its cash

balances.

The Tribunal held that there was no other

reason to suspect the genuineness of the account books

in which these interpolations were made. If the entire

account books were fabricated to serve

its purpose,

there would be no need for the appellant to make

interpolations between the lines already written in a

different

ink and in such an obvious manner as to

catch one's

eye on the most cursory perusal. The

Tribunal, however, examined the cash book and taking

into consideration all the circumstances which had

been adverted to by the Income-tax Officer held that

the appellant might be expected to have possessed as

part of its business cash balance of at least Rs. 1,50,000

in the s~ape of high de~omination notes on January 12,

1946,

when the Ordmance above-mentioned was

promulgated. A copy

of the statement of large

amounts received by the appellant from a single

constituent

had been filed by the appellant which

showed

that sums aggregating to .Rs. 5,04,713 bad

been

I'eceived by the appellant in large amounts

39

Bhag~ali ].

306 SUPREME COURT REPORTS [1960(1))

1959 exceeding Rs. 1,000 between February 6, 1945, and

L•lclia:,-Bhagat January 11, 1946. As to large payments made ?Y the

Ambical Ram appellant, no statement was filed, but the Tribunal

v. examined the accounts with a view to ascertain the

Tho Commissioner payments which could have been made in high deno-

0! Income·•= mination notes. The Tribunal came to the conclusion

Bhagwali J. that the nature of the source from which the appel­

lant derived the remaining 141 high denomination

notes

of Rs. 1,000 each remained unexplained to its

satisfaction. It accordingly ordered that the addition

made by the authorities be reduced from Rs. 2,91,000

to Rs.

1,41,000. The Income-tax Officer was also

directed

to make the necessary consequential

adjust­

ment in the Income-tax assessment based upon the

result of the connected Excess Profits Tax appeal. In

regard to the Excess Profits Tax appeal the Tribunal

after taking into account the preceding and succeeding

assessments

and the nature of the appellant's business

and the opportunities that it had to make substantial

business profits outside the books held that the add

back of Rs.

1,41,000 must be made to the business

profits disclosed

by the appellant. Consequential

relief was accordingly given

in the Excess

Profits Tax

appeal also.

The

appellant thereafter applied to the Tribunal for

stating a case and raising and referring to the High Court the following questions of law arising from the

said order of the Tribunal both as regards the Income­

tax and the excess profits tax assessments:-

(1) "Whether there is any material to justify the

conclusion that Rs. 1,41,000 is secreted profit for

the purpose of assessment, this amount being a part

of Rs. 2,91,000 and which was the amount represent­

ed by high denomination notes encashed by the

Petitioner.

(2) " Whether there is any material for a finding

that the sum of Rs. 1,41,000 is the secreted value of

the high denomination notes was business income

liable

to excess profits

tax."

By its order dated August 15, 1952, the Tribunal

dismissed these applications stating that the finding of

the taxing authorities was a pure finding of fact based

S.C.R. SUPREME COURT REPORTS 307

on evidence before them and that no question of law x959

arose out of the said order of the Tribu~al.. Lalclland Bllaglll

The appellant thereupon made apphcat10ns to the Ambical Ram

High Court under s. 66(2) for directing the Tribunal v. . .

to state a case and raise and refer the said questions of Th~ ~ommiss;oner

law to the High Court for its decision. By its order

0

ncome·"

dated January 21, 1953, the High Court directed the BTtagwlllif.

Tribunal to state a case and raise and refer the follow-

ing question

of law to the High

Court for its decision

in

both the applications:- " Whether there is any material to support the

finding of the Appellate Tribunal that a sum of

Rs. 1,41,000 is secreted profit liable to be taxed in

the hands of the assessee under the Indi:;m Income­

tax Act and under the Excess Profits Tax Act."

The tribunal accordingly stated a case and raised

and referred the aforesaid question of law to the High

Court.

The said Reference was· heard by the High Court

and judgment was delivered on January 5, 1955,

whereby

the High

Court answered the referred

question

in the affirmative. The High

Court was of

the opinion that the onus of proving the source of the

said amount was on the appellant which the appel­

lant did not discharge and that there was evidence

before

the Tribunal to come to the conclusion it did.

The finding arrived at by the Tribunal

WIJ1! therefore

a pure finding

of fact and it could not be urged that

it was based on no evidence. The High

Court further

held that as the appellant itself claimed that the said

amount of Rs. 2,91,000 formed part of the cash

balance

of its business, the said profits were profits of

the business and as such liable to excess profits tax.

The appellant

then applied to the High

Court for a

certificate under

s. 66A (2) of the Income-tax Act for

leave

to appeal to this

Court. These applications

were rejected

by the High

Court on August 25, 1955,

observing

that it had answered the question of law

not on the academic principles of onus but on the

material from which it was open to the Income-tax

authorities

to arrive at the conclusion at which they

arrived.

308 SUPREME COURT REPORTS [1960Cl))

z959 The appellant thereupon on October 22, 1955,

applied to this Court for special leave to appeal which

La~!~~!,.a;':!"' was gr.anted by this Court on November 28, 1955, in

v. both the appeals arising out of the assessment for

TAe Commissioner Income-tax as well as the excess profits tax. Both

of Income-tax the appeals arising out of these orders being Civil

Appeals Nos. 679 and 680 of 1957 are now before us.

Bha:wa/; J.

The main question to determine in these two appeals

is whether there was any material to support the

finding of the Tribunal that the sum of Rs. 1,41,000

represented the secreted profits of the appellant's

business and as such liable to be taxed in the hands

of the appellant under the Indian Income-tax Act and

the Excess Profits Tax Act ? Tl).e contention of the

Revenue all throughout has been that it is a finding of

fact reached by the authorities competent in that

behalf and this Court should not interfere with such

findings

of fact. The contention of the appellant on

the other hand, has been that even though it may be

a finding

of fact to be reached by the authorities

concerned on the materials on

the record before them,

such finding is vitiated by reason of the authorities

indulging

in conjectures, suspicions and surmises and

basing the same on no material whatever which

goes

to support the same. It is also contended that the find­

ing reached by them is a perverse one which a reason­

able body of men could not have arrived at on the

material on the record.

The limits of our jurisdiction to interfere with find­

ing of fact reached by the courts or tribunals of facts

have been laid down by us in various decisions of this

Court. In Dhirajlnl Girdharilnl v. Commissioner of

Income-tax, Bombay (

1

)

we observed that when a

Court

of fact arrives at its decision by considering material

which is irrelevant to the enquiry, or acts on material,

partly relevant and partly irrelevant, where it is

impossible to say to what extent the mind of the

Court was affected by the irrelevant material

used by it in arriving at its decision, a ques­

tion of law arises: Whether the finding of the

Court of fact is not vitiated by reason of its having

(I) [1954] 26 l.T.R. 736.

S.C.R. SUPREME COURT REPORTS 309

relied upon conjectures, surmises and suspicions not z959

supported by any evidence on record or partly upon L

1

,.

"" Bh "'

evidence and partly upon inadmissible material. We

11

;,,.~ical R:~

also observed in Dhakeswari Cotton .llfills Ltd. v. v.

Commissioner of Income-tax, West Benyal (

1

)

that an

The Commissi01Ur

assessment so made without disclosing to the assessee

0! Income-tu

the information supplied by the departmental rep-

Bnagwati ].

resentative and without giving any opportunity to

the assessee to rebut the information so supplied and

declining to take into consideration all materials

which

the assessee wanted to produce in support of

the case constituted a violation of the fundamental rules of justice and called for interference on our part.

In Messrs. Metha Parikh and Co. v. The Commissioner

of Income-tax, Bombay(~) this Court observed that the

conclusions based on facts proved or admitted may

be conclusions of fact but whether a particular in-

ference can legitimately be drawn from such conclusions

may be a question of law. Where, however, the fact

finding

authority has acted without any evidence or

upon a view of the facts which could not reasonably

be

entertained or the facts found were such that no

person acting

judicially and properly instructed as to

the relevant law could have found, the Court is en-

titled

to interfere. In our decision in M

eenakshi Mills,

Madurai v. Commissioner of Income-f,ax, Madras (

3

)

after discussing the various authorities on the subject

we

laid

down that :-

"

(3) A finding on a question of fact is open to

attack under S. 66(1) as erroneous in law when

there is no evidence to support it or if it is

perverse."

'l'he latest pronouncement of this Court in Omar Salay

.Mohamed Bait v. The Commissioner of Income-tax,

Madras(') summarises the position thus:-

"We are aware that the Income-tax Appellate

Tribunal is a fact finding Tribunal and if it arrives

at its own conclusions of fact after due conside­

ration of the evidence before it this Court will not

(r) (1955] 1 S.C.R. 941.

(2) [1956] S.C.R. 6i6.

(3) (1956] S.C.R. 691.

(4) C.A. No. I.5 of 1958 decided OD

March .5• 1959.

z959

Lalchand Bhagat

.A.mbical Ram

v.

T,,e Commissioner

of Ineom~-ta~

Bugwali J.

310 SUPREME COURT REPORTS [1960(1}]

interfere. It is necessary, however, that every fact

for and against the assessee must have been con­

sidered with due care

and the Tribunal must have

given its finding in a

manner which would clearly

indicate

what were the questions which a.rose for

determination,

what was the evidence pro a.nd

contra in regard to each one of them and what were

the findings reached on the evidence before it. The

conclusions reached by the Tribunal should not be

coloured

by any irrelevant considerations or matters

of prejudice a.nd if there are any circumstances

which required

to be

explained by the assessee, the

assessee should be given an opportunity of doing so.

On no account whatever should the Tribunal base

its findings

on suspicions,

conjectures or surmises

nor should

it a.ct on no evidence a.t all or on impro­

per rejection of material and relevant evidence or

partly on evidence and partly on suspicions, conjec­

tures

and surmises a.nd if it does anything of the

sort, its findings even though on questions of fa.ct

will be liable

to be set aside by this

Court."

It is in the light of these observations that we have

to <let.ermine the question a.rising before us in the

present appeals. It is clear on the record that the

appellant maintained its books of account according to

the mercantile system and there were maintained in

its cash books two accounts : one showing the cash

balances from

day to day and other known as " Almirah account " wherein were kept large balances

which were

not required for the day-to-day working

of the business. Even though the appellant kept large

a.mounts

in bank deposits and securities monies were

required

at short notice at different branches of the

appellant. There were also collections made from

various Beoparies

or merchants and monies were also

required for doing

the grain

purchase work on behalf

of the-Government. These monies were credited in

the Almirah account which showed heavy cash balan­

ces from time

to time. In the books of account for

previous years

it was the practice of the appellant to

give details of the notes of high denominations giving

the distinctive numbers of these notes received or paid

S.C.R. SUPREME COURT REPORTS 311

or at least other description e.g., " So many notes " of z959

Rs. 1,000 each. In the assessment year, however, Lalchand Bhagat

this practice does not appear to have been followed Ambical Ram

but entries continued to be made of monies thus v.

received_ from the banks, different branches, Beoparees The Commissioner

etc., without any such details being filled therein. A of lncome·lair

statment of these cash balances viz., the balance in the Bhagwatif.

Rokar and the balance in the Almirah from Septem-

ber l, 1945, to January 31, 1946, was filed before the

Income-tax authorities and this statement showed that

apart from the balance in the Rokar the balance in

the Almirah rose from Rs. 1,36,397-10-0 on Septem-

ber l, 1945, to Rs. 1,97,397-10-0 on September 30, 1945,

to Rs. 2,23,397-10-0 on October 13, 1945, to

Rs. 2,65,397-10-0 on November 27, 1945, to

Rs. 2,91,397-10-0 on December 29, 1945, and remained

at Rs. 2,81,397-10-0 on January 10, 1946. The balance

in

the Rokar :fluctuated considerably but on the

relevant date January

10, 1946, it stood at

Rs. 26,092-10-9. It was Rs. 24,976-13-3 on January 11,

1946,

and Rs. 29,284-3-9 on January 12, 1946,

when

the High Denomination Bank Notes (Demoneti-

zation) Ordinance, 1946, was promulgated. These

entries showed

that there was with the appellant on

on January 12, 1946, an aggregate sum of

Rs.

3,10,681-13-9 and it~ was highly probable that the

High Denomination notes of Rs. 2,91,000 were includ-

ed

in

this sum of Rs. 3,10,681-13-9. The books of

account of the appellant were not challenged in any

other manner except in regard to the interpolations

relating

to the number of high denomination notes of

Rs.

1,000 each obviously made by the appe,llant ip. the

accounts for the assessment year in question in the

manner aforesaid and even in regard to these interpo-

lations

the explanation given by the appellant in

regard

to the same was accepted by the Tribunal.

Even though the Income-tax Officer made capital out

of the interpolations and subsequent insertions in the

books of account and styled the evidence furnished by

them as created or manipulated evidence thus. dis-

coi.mting the story of the appellant in regard to the

source of these high denomination notes, the Tribunal

312 SUPREME COURT REPORTS [1960(1))

z959 was definitely of opinion that there was no other

L l ha d Bh

, reason to suspect the genuineness of the account

a c n aga. b k · h" h h · t 1 t• "

Ambical Ram oo s m w IC t ese m erpo a ions were iound. As a

v. matter of fact the Tribunal accepted these books of

The Commissioner account as genuine and worked up its theory on the

of Income-la• basis of the entries which obtained in these books of

account. The Tribunal had before it the statement

Bhagwati]. of large amounts received by the appellant from the

banks, different branches of the appellant and its

Beoparees or merchants which showed that between

February 6, 1945, and January 11, 1946, amounts

exceeding Rs. 1,000 aggegrating to Rs. 5,04,713 had

been received by the appellant. Even though large

amounts may have been paid out by the appellant in

this manner between the said dates, the entries of the

balance in Rokar and the balance in Almirah showed

that on January 12, 1946, the balance in Rokar was

Rs. 29,234-3-9

and the balance in Almirah was

Rs.

2,81,397-10.0 the total cash balance thus aggre­

gating to Rs. 3,10,681-13-9. Nobody had any inkling

of the promulgation of the High Denomination Bank

Notes (Demonetization) Ordinance, 1946, on January

12, 1946, and if in the normal course of affairs and

situated as the appellant was, the appellant kept these

large cash balances in

High Denomination Notes of

Rs.

1,000 each, there was nothing surprising or impro­

bable in it.

If the appellant had to disburse such large

sums

of monies at short notices at the different branches

of the appellant and also to its Beoparees apart from

financing

the Government for grain purchase work

which it used to carry on, it would be convenient for

it to handle these large sums of monies in high

deno­

mination notes of Rs. 1,000 each and the most natural

thing for it to do was to keep these cash balances in

as many high denomination notes as possible. The

Tribunal in fact took count of this position and after

giving due weight to all the circumstances arrived at

the conclusion that the appellant might be expected

to have possessed as part of its business cash balance

at least Rs. 1,50,000 in the shape of high denomin­

ation notes on January 12, 1946, when the Ordinance

above mentioned was promulgated. This conclusion

S.C.R. SUPREME COURT REPORTS 313

,

of the Tribunal could only be arrived at on the basis I959

that the entries in the books of account in regard to

Lalchand Bhagat

the balance in Rokar and the balance in Almirah were Ambical Ram

correct and represented the true state of affairs, in v.

spite of the interpolations and subsequent insertions The Commissioner·

which had been made to bolster up the true case.

0

! Income-ta:r

If these were the materials on record which would Bhagwati J.

lead to the inference that the appellant might be

expected to

have possessed as part of its cash balance

at least Rs.

1,50,000 in the shape of high denomin-

ation notes

on January 12, 1946, when the Ordinance

was promulgated, was there

any material on record

which would legitimately lead the Tribunal

to come

to the conclusion that the nature of the source from

which

the appellant derived the remaining 141 high

denomination notes

of Rs.

1,000 each remained unex-

plained

to its satisfaction. If the entries in the books

of account in regard to the balance in Rokar and the

balance in Almirah were held to be genuine, logically

enough there was no escape. from

the conclusion that

the appellant had offered reasonable explanation as to

the source of the 291 high denomination notes of

Rs.

1,000 each which it encashed on January 19, 1946.

It was not open to the Tribunal to accept the genuine-

ness

of these books of account and accept the ex-

planation

of the appellant in part as to Rs.

1,50,000

and reject the same in regard to the sum of

Rs. 1,41,000-0-0. Consistently enough, the Tribunal

ought

to have accepted the explanation of the appel-

lant in regard to the whole of the sum of Rs.

2,91,000

and held that the appellant had satisfactorily explain-

ed

the encashment of the 291 high denomination

notes

of Rs.

1,000 each on January 19, 1946.

The Tribunal, however, appears to have been influ­

enced

by the suspicions, conjectures and surmises

which were freely indulged in

by the

·Income-tax

Officer and the Appellate Assistant Commissioner and

arrived at its own conclusion, as it were, by a rule of

thumb holding without anY, proper materials before it

that the appellant .might be expected to have possessed

as part of its business, cash balance at least Rs. 1,50,000

in the shape of high denomination notes on January

40

314 SUPREME COURT REPORTS [1960(1)]

r959 12, 1946,-a mere conjecture or surmise for which

there was no basis in the materials on record before it.

Lalchand Bhagat Th I Offi h d · f

Ambi,al Ram e ncome-tax cer a indented m support o

v. his conclusion the surrounding circumstances, viz., that

The Commissioner the appellant was one of the premier Arhatdars and

of Jn,om•·lax grain merchants of Sahibganj with branches, doin~

similar business, at Nawgachia and Dhullian and all

Bhagwati f. these places were very important business centres and

Sahibganj, the principal place of business, had gained

sufficient notoriety for smuggling foodgrains and other

commodities to Bengal by country boats, and Dhulian

which was just on the Bihar-Bengal border was

reported

to be a great receiving centre for such

com­

modities, that the foodgrains licence of the appellant

at Nawgachia was also cancelled during the account­

ing year for not keeping proper stock accounts and

the appellant was prosecuted under the Defence of .

India Rules but was given the benefit of doubt and

was acquitted, that the accounting year and the

year preceding it as also the year succeeding it

were very favourable for the foodgraindealers but the

appellant though he had large capital in hand declared

losses all

through from 1944-45 assessment year up to 1946-47 assessment year, the loss according to its books

in the year under consideration being to the tune of

about Rs. 46,000, that t.he appellant was in very

favourable circumstances in which there was a pos­

sibility of its earning a considerable amount in the year

under consideration, that it also indulged in specula­

tion (a loss of about Rs. 40,000 shown in Nawgachia

branch (in Kalai account)), in which profit in a single

transaction or in a chain of transactions could exceed

the amounts involved in the high denomination notes,

that even in the disclosed volume of business in the

year under consideration in the Head Office and in

branches there was possibility of its earning a con­

siderable sum as against which showed a net loss of

about Rs. 45,000 and.that the appellant had all these

probable source or sources from which

the appellant

could have earned the sum of Rs.

2,91,000 which was

represented

by the high denomination notes of Rs.

1,000

each.

S.C.R. SUPR€ME COURT R~PORTS 315

The Appellate Assistant Commissioner also empha-

1

959

sized the said aspect but based his conclusion mainly

Lalchand Bhaglll

.on the ground that the appellant had failed to prove Ambical Ram

that the high denomination notes had their origin in v.

capital and not in profit and held that the Income-tax The Commissioner

Officer was justified in treating the sum of Rs 2,91,000 of Income-tax

as secreted profits.

h b h h b

Bhafwati ].

This was t e ackground against whic t e Tri unal

came to its own conclusion.

Even though it

recog­

nised that it was not improbable that when very large

sums, say in excess

of Rs.

10,000 . at a time were

received, a fairly good portion thereof consisted o'fhigh

denomination notes and as high denomination notes

were valid tender

and nobody could have foreseen that

they

would be demonetised suddenly in January 1946,

there was nothing out of the way in persons dealing

with tens

of thousands of rupees and whose balances

ran to lakhs, being in possession of a fair proportion

of their balances in the shape of high denomination

notes. While recognising this probability

of the

appellant having been in possession of a fair

propor­

tion of its balances in the shape of high denomination

notes,

the Tribunal unconsciously though it was, fell

into

an error when it held that the appellant might

be expected

to have possessed at least Rs.

1,50,000 in

the shape of high denomination notes as part of its

cash balance, thus treating

the remaining Rs.

1,41,000

in the high denomination notes of Rs. 1,000 each as

outside the purview of these cash balances.

Unless

the Tribunal had at the back its mind the

various probabilities which had been referred to by

the Income-tax

Officer as above it could not have come

to the conclusion it did that the balance of Rs 1,41,000

comprising of the remaining 141 high denomination

notes of Rs. 1,000 each was not satisfactorily explained

by the appellant.

If the entries in the books of account were genuine

and the balance in Rokar and the balance in Almirah

on

January 12, 1946, aggregated to Rs. 3,10,681-13-9

and if it was not improbable that a fairly good portion

of the very large sums received by the appellant

from time

to time, say in excess of Rs.

10,000 at a time

316 SUPREME COURT REPORTS [1960(1)]

I959 consisted of high denomination notes, there was no

Lalchcmd Bhagat basis for the conclusion that the appellant had satis­

Ambical Ram factorily explained the possession of Rs. 1,50,000 in,

v. the high denomination notes of Rs. 1,000 each leaving

The Commissioner the possession of the balance of 141 high denomina­

o/ Income-ta• tion notes of Its. 1,000 each unexplained. Either the

Bhagwati J. Tribunal did not apply it§ mind to the situation or it

arrived at the conclusion it did merely by applying the

rule of thumb in which event the finding of fact reach­

ed by it was such as could not reasonably be enter­

tained or the fact found. were such as no person acting

judicially and properly instructed as to the relevant

law could have found, or the Tribunal in arriving at

its findings was influenced by irrelevant considerations

or indulged in conjectures, surmises or suspicions in

which event also its finding could not be sustained.

Adverting to the various probabilities which weigh­

ed with the Income-tax Officer we may observe that

the notoriety for smuggling foodgrains and other

commodities to Bengal by country boats acquired by

Sahibgunj and the notoriety achieved by Dhulian as a

great receiving centre for such commodities were

merely a background

of suspicion and the appellant

could not be tarred with the same brush as every

Arhatdar and grain merchant who might have been

indulging

in smuggling operations, without an iota

of evidenec in that behalf. The cancellation of the

foodgrain licence at Nawgachia and the prosecution of

the appellant under the Defence of India Rules was

also

of no consequence inasmuch as the appellant1 was

acquitted of the offence with which it had been charged

and its licence also was restored. The mere possibility

of the appellant earning considerable amounts in the

year under consideration was a pure conjecture on the

part of the Income-tax

Officer and the fact that the

appellant indulged in speculation (in Kalai account)

could

not legitimately lead to the inference that the

profit in a single transaction or in a chain of

transac­

tions could exceed the amounts, involved in the high

denomination notes,-this also was a pure conjecture

or surmise on the part of the Income-tax Officer. As

regards

the disclosed volume of business in the year

S.C.R. SUPREME COURT REPORTS 317

under consideration in the Head Office and in branches I959

the Income-tax Officer indulged in speculation when

he

talked of the possibility oft.he appellant earning a Lalchand Bhagat

Ambical Ram

considerable sum as against which it showed a net loss v.

of about Rs. 45,000. The Income-tax Officer indicated The Commissioner

the probable source or sources from which the appel-of Income-tax

lant could have earned a large amount in the sum of

Rs. 2,91,000 but the conclusion which he arrived at in Bhagwati J.

regard to the appellant having earned this large

amount during the year and which according to him

represented

the secreted profits of the appellant in its

business was

the result of pure conjectures and

surmises on his part and had no foundation in fact

and was not proved against the appellant on the record

of the proceedings. If the conclusion of the Income-tax

Officer was thus either perverse or vitiated by suspi-

cions, conjectures

or surmises the finding of the Tribunal

was equally perverse

or vitiated if the Tribunal took

count

of aH these probabilities and without any rhyme

or reason and merely by a rule of thumb, as it were,

came

to the conclusion that the possession of

150 high

denomination notes

of Rs.

1,000 each was satisfactorily

explained

by the appellant but not that of the balance

of 141 high denomination notes of Rs.

1,000 each.

The position as it obtained in this case was closely

analogous

to that which obtained in

Messrs. J.V!ehta

Parikh & Go. v. The Commissioner of Income-tax,

Bombay (1). In that case the assessee had to satis­

factorily explain the possession of 61 High Denomi­

nation Notes of Rs. 1,000 each and the Tribunal

came to the conclusion that the assessee had satisfac­

torily explained the possession of 31 of these notes and

not of the remaining 30. The High Court had treated

the finding of the Tribunal as a finding of fact. It was

held

by this

Cpurt that the entries in cash-book and

the statements made in the affidavit in support of the

explanation, which were binding on the Revenue and

could not be questioned, clearly showed that it was

quite within the range of possibility that the assessee

had in their possession the 61 High denomination notes

o'n the relevant date and their explanation in that

(1) [1956) S.C.R. 626.

'

318 SUPREME COURT REPORTS [1960(1)]

r959 behalf could not be assailed by a purely imaginary

calculation of the nature made by the income-tax

Lalchand Bhagat

Ambical Ram Officer or the Appellate Assistant Commissioner. It

v. further held that the Tribunal made a wrong approach

The Commissioner and while accepting the assessee's explanation with

of lne'"!'•-••~ regard to 31 of the notes, it had absolutely no reason

to exclude the ;est as not covered by it in the absence

Bhagwati J. h d

of any evidence to show t at the exclu ed notes were

profits

earned by the assessee from undisclosed sources.

The assessee having given a reasonable explanation

the

TTibunal could not, by applying a rule of thumb

discard it so fa.r as the rest were concerned and act on

mere surmise.

In arriving at its decision this

Court

referred to the case of Ghunilal Ticamchand Goal Go.

Ltd. v. Commissioner of Income-tax, Bihar and Orissa (')

and stated that the case before it should also have been

similarly decided

by the High

Court in favour of the

assessee.

A decision

of the Allahabad High

Court reported in

in Kanpur Steel Go. Ltd. v. Commissioner of Income"

tax, U ttar Pradesh(') may also be noted in this context.

The assessec there encashed 32 currency notes of

Rs. 1,000 each on January 12, 1946, when the High

Denomination Bank Notes (Demonetisation) Ordinance,

1946, came into force, and when the Income-tax Officer

called upon

it to explain how these currency notes

came

into its possession, the assessee claimed that the

notes represented part of its cash balance which, on

that date, stood at

Hs. 34,313. The Income-tax Officer

rejected the explanation and assessed the. amount of

Rs. 32,000 represented by these currency notes as

suppressed income of the assessee from some undisclos­

ed source. The Tribunal took into account the state­

ment of sales relating to a few days preceding the date

of encashment and found that the highest amount of

any one ~ngle transaction was only Hs. 399. The

Tribunal also referred to another statement of the

daily cash balances of the assessee from December 20,.

1945, to January 12, 1946, and noted that the cash

balance

of the assessee was steadily increasing. The

Tribunal, however, estimated that high denomination

{I)

[1955] '7 I.T.R. 602. (2) [1957] 32 I.T.R. 56.

S.C.R. SUPREME COURT REPORTS 319

currency notes to t.he value of Rs. 7,000 only could x959

form part of the cash balance of the assessee. It

Lalchand Bhagat

therefore upheld the assessment to the extent of Ambical Ram

Rs. 25,000. On a reference to the High Court it was v.

held (i) that the burden of proof lay upon the Depart-The Commissiomr

ment to prove that the sum of Rs. 32,000 represented

0! Income-ta"

suppressed income of the assessee from undisclosed

Bhagwati ].

sources, and the burden was not on the assessee to

prove how it had received these high denomination

currency

notes; for, until the Demonetisation Ordinance

came into force high denomination currency notes could

be used as freely as notes

of any lower denomination

and no one had any idea that it should be necessary

for

him to explain the possession of high denomination

currency notes,

the assessee had

naturally not kept any

statement regarding the receipt of these currency notes,

and it was for the first time on January 12, 1946, when

the Ordinance came into force, that it became necessary

for

the assessee to explain its possession of these

currency notes

and (ii) that the explanation given by

the assessee that the notes formed part of the cash

balance

of Rs.

34,000 and odd was fairly satisfactory

and was not found by the Tribunal to be false ; the

statement of sales was hardly relevant to the question;

the Department, in relying on the entries relating to

the bills of each day committed an error and no in-

ference should

have been drawn from them; that any

one single transaction did not exceed Rs. 399 did not

preclude the possibility of payment in high denomina-

tion notes for such transaction ; therefore, the Tribunal

rejected

the explanation of the assessee on surmises,

and there was no material for the Tribunal to hold

that the sum of Rs.

25,000 represented suppressed

income

of the assessee from undisclosed sources . • In arriving at the above decision the High Court

referred to the cases of Mehta Parikh & Co. v. Com­

missioner of f71iCome-tax, Bombay (

1

)

and Ohunilal

Tic.amchand Coal Co., Ltd. v. Commissioner of Income-

tax, Bihar and Orissa (

2

). •

It is, therefore, clear that the Tribunal in arriving

at the conclusion it did in the present case indulged in

(r) [1956) S.C.R. 626. (2) [195~] 27 I.T.R, 602,

320 SUPREME COURT REPORTS [1960(1))

'959 suspicions, conjectures and surmises and acted without

Lalchand Bhagat any evidence or upon a view of the facts which could

Ambicat Ram not reasonably be entertained or the facts found were

v. such that no person acting judicially and properly

The Commissioner instructed as to the relevant law could have found, or

of Income-ta• the finding was, in other words, perverse and this Court

is entitled to interfere. :.

Bhagwali f. We are therefore of opinion that the High Court was

z959

May r5.

clearly in error in answering the referred question in

the affirmative. The proper answer should have been

in the negative having regard to all the circumstances

of the case which we have adverted to above.

· The appeals will accordingly be allowed, the judg­

ment and order passed by the High Court will be set

aside and the referred question will be answered in the

negative. The appellant will be entitled to its costs of

the reference in the High Court and of these appeals in

this Court as against the respondent.

Appeals allowed.

THE

COMMISSIONER OF INCOME-TAX,

WEST BENGAL

v.

KALU BABU LAL CHAND

(S. R. DAS, C. J., N. H. BHAGWATT, and

M. HIDAYATULLAH, JJ.)

Income-tax-Income of the Hindu undivided fam'ily-Manager

of

the joint family using family funds for promoting company and

subsequently becoming managing director-Remuneration of

the

managing director-Whether taxable as income of the undivided

family.

R was

the karta of the Hindu undivided family which

became interested in a business concern which

~'as then being

carried on by others. With a view to taking over the said

business as a going concern, a company was floated \vith R

as one

of

the promoters. Pursuant to an agreement with the vendors

of

the business and in anticipation of the incorporation of the

company, Ron behalf of the company, took over the concern,

carried it on and supplied the finance at all stages out of the

joint family funds.

On December rg, 1930, the contemplated

company was incorporated under

the Indian

Companies Act as