Messrs Mehta Parikh and Co vs The Commissioner Of Income-Tax, Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 81 of 1954

Decision Date: 10 May 1956

Coram: Natwarlal H. Bhagwati, Sudhi Ranjan Das, T.L. Venkatarama Ayyar

In this case the petitioner, Messrs Mehta Parikh & Co., appealed against a demand made by the Commissioner of Income‑Tax, Bombay. The judgment was delivered on 10 May 1956 by a Bench consisting of Justice Natwarlal H. Bhagwati together with Justices Das, Sudhi Ranjan (Chief Justice), Aiyyar and T. L. Venkatarama. The report of the decision appears in the 1956 volume of the All India Reporter at page 554 and also in the Supreme Court Reports at page 626. The dispute concerned the application of the Indian Income‑Tax Act of 1922, specifically sections 62(2), 23(3) and 26‑A, which deal with income from undisclosed sources and the assessment of such income.

The assessee, a partnership firm, was assessed under sections 23(3) and 26‑A for the assessment year 1947‑48. During that assessment the Income‑Tax Officer required the firm to explain how it had come into possession of sixty‑one thousand‑rupee notes that the firm had subsequently encashed on 18 January 1946. Those notes had become invalid as legal tender on 12 January 1946 following the promulgation of the High Denomination Bank Notes (Demonetisation) Ordinance of 1946. The firm produced entries from its cash‑book covering the period from 20 December 1945 to the day of encashment, 18 January 1946. The Income‑Tax Officer examined those entries and accepted them as correct, but he made no further enquiry into the underlying transactions. The cash‑book showed that on 12 January 1946 the cash balance on hand was Rs 69,891‑2‑6.

To support its explanation the firm filed three affidavits before the Appellate Assistant Commissioner. The affidavits were signed by the persons who had actually made the payments recorded in the cash‑book. The affidavits sought to prove that Rs 20,000 recorded on 28 December 1945, Rs 15,000 recorded on 6 January 1946, and Rs 8,000 of a total Rs 8,500 recorded on 6 January 1946 were paid in thousand‑rupee notes. The Income‑Tax Officer and, subsequently, the Appellate Assistant Commissioner performed their own calculations and concluded that it was impossible for the firm to possess so many thousand‑rupee notes. They therefore held that the notes represented income from undisclosed sources and should be added to the assessable income of the partnership.

Neither the Appellate Assistant Commissioner nor the Income‑Tax Officer, who were present at the hearing of the appeal, called the deponents of the affidavits for cross‑examination with reference to their statements. The Appellate Tribunal, on appeal, accepted the assessee’s explanation for thirty‑one of the notes but rejected it for the remaining notes. The Tribunal also refused the firm’s request that the matter be referred to the High Court. Consequently, the assessee moved the High Court, which directed the Tribunal, under section 66(2) of the Act, to state its case for a final decision.

In answering the main question, the High Court held that the Tribunal’s finding was a factual finding or an inference drawn from that fact. The High Court also said that such a finding could not be said to be unreasonable or arbitrary. Later, the Supreme Court, by a per curiam decision, held that the High Court erred in refusing to interfere with the Tribunal’s finding. It observed that the Tribunal’s finding was unsupported by any evidence and therefore the appeal had to succeed. The Chief Justice and Justice Bhagwati explained that conclusions drawn from proved or admitted facts may be regarded as factual conclusions. However, they noted that deciding whether a particular inference may properly be drawn from those conclusions is a question of law. They added that when a fact‑finding authority acts without any evidence, or bases its view on facts that could not reasonably be entertained, the reviewing court may intervene. The Court cited Chunilal Ticamchand Coal Co. Ltd. v. Commissioner of Income‑tax, Bihar and Orissa ([1955] 27 I.T.R. 602). It also referred to Cameron v. Prendergast (Inspector of Taxes) ([1940] 8 I.T.R. (Suppl.) 75) and Bomford v. Osborne (H. M. Inspector of Taxes) ([1942] 10 I.T.R. (Suppl.) 27). It further cited Edwards (Inspector of Taxes) v. Bairstow and Another ([1955] 28 I.T.R. 579). The Court said that the High Court was mistaken in treating the Tribunal’s determination as a factual finding and in failing to apply the proper principles of interference. It observed that the cash‑book entries and the affidavits submitted in support of the appellants’ explanation were binding on the Revenue and could not be contested. These documents clearly showed that it was possible the appellants possessed the sixty‑one high‑denomination notes on the relevant date. The Court criticised the Tribunal’s approach, noting that although it accepted the appellants’ explanation for thirty‑one of the notes, it had no justification for excluding the remaining notes. The Tribunal offered no evidence that the excluded notes represented profits from undisclosed sources. Because the appellants had provided a reasonable explanation, the Tribunal could not, by applying a rule of thumb, discard it for the rest of the notes and act on mere speculation. Justice Venkatramana Ayyar observed that the Tribunal’s finding that high‑denomination notes valued at Rs 30,000 represented concealed profits of the appellants was unsupported by any evidence. He further held that this error of law made the finding liable to be set aside. He added that although holding many high‑denomination notes as cash for an extended period might appear suspicious, decisions must be based on legal evidence rather than on suspicion. The Court noted that the issue of whether the accounts were genuine was a question of fact and that a finding of genuineness bound both the Revenue and the appellant.

It was a pure question of fact, and a finding that the accounts were genuine bound both the Revenue authorities and the parties concerned. The judgment concerned a civil appellate matter identified as Civil Appeal No 81 of 1954, which was an appeal from a judgment and order dated 10 March 1953 issued by the Bombay High Court in Income‑tax Reference No 35 of 1952. Counsel representing the appellant were B J Kolah and I N Shroff, while the respondent was represented by G N Joshi, Porus A Mehta and R H Dhebar. The judgment was delivered on 10 May 1956, and the learned judge authoring the opinion was Justice Bhagwati.

Two questions had been referred by the Income‑tax Appellate Tribunal to the High Court of Bombay under section 66(1) of the Indian Income‑tax Act. The first question asked whether any material existed to justify the assessment of Rs 30,000 out of a total of Rs 61,000 for purposes of income‑tax, excess profits tax and business profits tax, the amount representing the value of high‑denomination notes that were encashed on 18 January 1946. The second question sought to determine whether, in any event, the assessment of Rs 30,000 could be justified in law for excess profits tax and business profits tax purposes on the ground that the revenue authorities had not found that the alleged amount originated from undisclosed business profits. The High Court answered the first question affirmatively, but declined to answer the second. The court held that although it had requested the Tribunal to refer the second question under section 66(2) of the Act, it lacked jurisdiction to do so because the appellants had not asked the Tribunal to refer that question; consequently, no issue arose regarding the Tribunal’s refusal to raise or submit the question to the High Court.

The appellants were a partnership firm engaged in the mill‑store trade at Ahmedabad, with its head office located in Ahmedabad and a branch office in Bombay. On 12 January 1946 the Governor‑General promulgated the High Denomination Bank Notes (Demonetisation) Ordinance, 1946, which declared that high‑denomination bank notes would cease to be legal tender after 12 January 1946. Pursuant to clause 6 of that ordinance, the appellants on 18 January 1946 encashed high‑denomination notes of Rs 1,000 each, amounting in face value to Rs 6,000. This transaction occurred in the calendar year 1946, which corresponded to the account year for assessment year 1947‑48. During the assessment proceedings for the year 1947‑48, the Income‑tax Officer required the appellant to demonstrate from whom and when the high‑denomination notes totalling Rs 61,000 had been received, and also to establish the bona fides of the previous owners of those notes. The officer examined the entries in the appellants’ books of account, the cash‑balance positions on various dates from 20 December 1945 to 18 January 1946, and the nature and extent of receipts and payments during the relevant period, and formed his conclusions accordingly.

The Income‑tax Officer concluded that, in order to accept the appellants’ claim, he would have to presume that eighteen high‑denomination notes of Rs 1,000 each were present in the cash balance on 1 January 1946 and that every cash receipt received between 1 January 1946 and 13 January 1946 consisted of notes of Rs 1,000. He found that such a presumption could not be supported because there was no evidence to establish it. Consequently, the Officer added Rs 61,000 to the appellants’ assessable income, characterising the amount as income from undisclosed sources. The appellants appealed to the Appellate Assistant Commissioner. In support of their case, they produced affidavits of three individuals. The affidavits stated that the appellants had received Rs 20,000 in Rs 1,000 notes on 28 December 1945, Rs 15,000 in Rs 1,000 notes on 6 January 1946, and Rs 8,500 in Rs 1,000 notes—equivalent to Rs 8,000—on 8 January 1946, giving a total of Rs 43,500 received in the relevant period. The Appellate Assistant Commissioner rejected the statements contained in those affidavits, dismissed the appeal and confirmed the order made by the Income‑tax Officer. The appellants then appealed to the Income‑tax Appellate Tribunal. The Tribunal examined all material that had been placed before the Appellate Assistant Commissioner, including the three affidavits. The Tribunal held that accepting the appellants’ contention would imply that practically every receipt exceeding Rs 1,000 had been made in high‑denomination notes, a situation the Tribunal considered virtually impossible. The Tribunal could not conclude that the appellants possessed no high‑denomination notes. It accepted the appellants’ books of account but was of the view that the cash balance on 18 January 1946 could not have comprised sixty‑one high‑denomination notes. The Tribunal inferred that the appellants had introduced high‑denomination notes into the cash balance and removed other notes. It accepted the appellants’ explanation only with respect to thirty‑one notes and accordingly directed that the assessment for the year under reference be reduced by the amount represented by those thirty‑one notes, while dismissing the remainder of the appeal. The appellants thereafter applied to the Tribunal for a statement of case and for a reference of the first question of law to the High Court under section 66(1) of the Act. The Tribunal rejected the application, holding that no question of law arose from its order. The appellants then proceeded to the High Court under section 66(2) of the Act, seeking an order directing the Tribunal to state a case and refer the questions set out in their application. The High Court directed the Tribunal to state a case and to refer the two questions of law previously mentioned for decision under section 66(2). While stating the case and referring the questions, the Tribunal observed that the second question had not been urged before it at any stage.

Because the Tribunal had not dealt with the second question in its original order, that question was not addressed by the Tribunal. The High Court heard the reference and answered the first referred question in the affirmative, while it declined to answer the second referred question. In reaching its conclusion on the first question, the High Court observed that the materials before the Tribunal were sufficient to hold that the sum of Rs 30,000 represented income of the appellants from undisclosed sources. The Court noted that the Tribunal’s finding was a finding of fact grounded on the material before it, and even if it was characterized as an inference, that inference was drawn from the facts and evidence before the Tribunal. The High Court further stated that it was impossible to describe the inference as unreasonable, arbitrary, capricious, or one that no judicial tribunal could ever draw, and therefore it answered the first referred question affirmatively. Regarding the second referred question, the High Court held that the question had not been raised by the appellants in their application for reference under section 66(1) of the Act; consequently, the Court had no jurisdiction to direct the Tribunal to state a case on a legal issue that the appellants themselves had never asked to be referred. Although the High Court had previously directed the Tribunal, under section 66(2), to refer the said question, it concluded that it could not answer a question that it lacked jurisdiction to consider, and therefore it refused to answer the second question raised by the Tribunal. The appellants subsequently filed a petition for leave to appeal to this Court, and the High Court granted a certificate that the matter was fit for appeal, leading to the present appeal. It is also pertinent to note at the outset that the assessment of the appellants by the Income‑Tax Officer was made under section 23(3) and section 26‑A of the Act. The Income‑Tax Officer accepted the appellants’ books of account and limited his scrutiny to the question of whether, on 12 January 1946, the appellants possessed sixty‑one high‑denomination notes of Rs 1,000 each. The cash‑book entries covering the period from 20 December 1945 to 18 January 1946 were placed before the Officer; they showed that on 28 December 1945 Rs 20,000 were received from Anand Textiles, that there was an opening balance of Rs 18,395 on 2 January 1946, that Rs 15,000 were received on 7 January 1946 from Sushico Textiles, and that Rs 8,500 were received on 8 January 1946 from Manihen, widow of Shah Maneklal Nihalchand. Various other sums were also received by the appellants between 2 January 1946 and, inclusive of, 11 January 1946.

The Court observed that the sums recorded in the appellants’ cash book for the period in question were either exact multiples of one thousand rupees or amounts exceeding one thousand rupees, and therefore each of those receipts could plausibly have been made in high‑denomination notes of one thousand rupees. On 12 January 1946, the date when the High Denomination Bank Notes (Demonetisation) Ordinance 1946 was issued, the appellants claimed to have a cash balance amounting to Rs 69,891‑2‑6 and to be in possession of sixty‑one one‑thousand‑rupee notes, which they subsequently presented for encashment at the Eastern Bank on 18 January 1946. To substantiate this claim, the appellants produced before the Appellate Assistant Commissioner affidavits from three third parties: Kuthpady Shyama Shetty, General Manager of Messrs Shree Anand Textiles, confirming a payment of Rs 20,000 in one‑thousand‑rupee notes on 28 December 1945; Govindprasad Ramjivan Nivetia, proprietor of Messrs Shusiko Textiles, confirming a payment of Rs 15,000 in one‑thousand‑rupee notes on 6 January 1946; and Bai Maniben, widow of Shah Maneklal Nihalchand, confirming a payment of Rs 8,500, of which Rs 8,000 was in one‑thousand‑rupee notes, on 8 January 1946. The appellants explained that they were unable to furnish a detailed breakdown of all one‑thousand‑rupee notes received during the relevant period because their cash book did not habitually record the denomination of each receipt. Consequently, they relied on the overall cash‑book entries together with the affidavits to demonstrate that the sixty‑one high‑denomination notes were included in the cash balance of Rs 69,891‑2‑6 on 12 January 1946 and were later encashed on 18 January 1946. Both the Income‑tax Officer and the Appellate Assistant Commissioner rejected this contention, holding that it was implausible for the appellants to have possessed the sixty‑one one‑thousand‑rupee notes within the stated cash balance on the specified date. Their reasoning was based on calculations that considered every receipt received by the appellants from 2 January 1946 onward, each receipt being either a multiple of one thousand rupees or an amount exceeding one thousand rupees. The cash book showed an opening balance of Rs 18,395‑6‑6 on 2 January 1946, which could account for eighteen such notes. Subsequent entries recorded receipts aggregating to more than Rs 45,000, again in multiples of one thousand rupees or amounts exceeding one thousand rupees, which could correspond to forty‑five additional one‑thousand‑rupee notes. In total, this accounting produced sixty‑three possible high‑denomination notes, leading the officials to conclude that it was impossible for the specific sixty‑one notes claimed to have been in the appellants’ possession on 12 January 1946.

In the case before the Income‑Tax Officer and the Appellate Assistant Commissioner, the officials held that it was impossible to accept the claim that every payment received by the appellants after 2 January 1946, whether in multiples of Rs 1,000 or exceeding that amount, had been made in high‑denomination notes of Rs 1,000 each. Their conclusion was based on a visualisation of this impossibility, and they consequently rejected the appellants’ contention. It must be noted, however, that beyond the arithmetic calculations of the amounts involved, no further examination of the entries in the appellants’ cash book was undertaken by either the Income‑Tax Officer or the Appellate Assistant Commissioner. The cash book was taken as accepted and its entries were not contested. No additional documents or vouchers supporting those entries were called for, and the presence of the deponents of the three affidavits was not deemed necessary by either official. The appellants argued that the affidavits of those parties were sufficient, and neither the Appellate Assistant Commissioner nor the Income‑Tax Officer, who attended the hearing of the appeal before the Assistant Commissioner, considered it necessary to summon the deponents for cross‑examination of the statements contained in their affidavits. Under these circumstances, the Revenue could not challenge the correctness of the cash‑book entries nor the statements made by the deponents in their affidavits. Consequently, the factual situation as it stood on 12 January 1946 had to be appreciated by taking the cash‑book entries and the affidavits filed before the Appellate Assistant Commissioner at their face value. Those entries showed that, starting from 18 high‑denomination notes in the cash balance on 2 January 1946, an additional 49 such notes had entered the appellants’ possession between 2 January and 12 January, bringing the total to 67 notes, of which 61 could have been encashed on 18 January 1946 through the Eastern Bank. A mere calculation performed by the Income‑Tax Officer or the Appellate Assistant Commissioner, without any further scrutiny, was insufficient to overturn the position taken by the appellants, which was supported by the cash‑book entries and the affidavits presented before the Assistant Commissioner. The Tribunal also erred in the same way. While it could not deny the possibility that the appellants possessed a substantial number of these high‑denomination notes, it nevertheless concluded that it was impossible for the appellants to have held all 61 notes in their cash balance on 12 January 1946. The Tribunal applied a rule‑of‑thumb approach, treating only 31 of the 61 notes as plausible and excluding the remaining 30 notes as not covered by the appellants’ explanation. This conclusion was based on pure conjecture and lacked any foundation in the evidence that had been placed on record.

In the matter before the Court, the Tribunal had treated a number of high‑denomination notes as not being covered by the appellants’ explanation. The Tribunal’s view was based on pure speculation and had no support in the evidence that formed the record of the proceedings. The High Court had accepted the Tribunal’s view as a simple finding of fact. However, the law on whether such findings of fact may be challenged on appeal was set out by the House of Lords in Cameron v. Prendergast (Inspector of Taxes). The House of Lords declared that inferences drawn from facts stated by the Commissioners were matters of law and therefore could be questioned on appeal. The same principle applied to the construction of documents, and when the Commissioners set out evidence and concluded that certain results followed, the Court was free to disagree with that conclusion. The House of Lords made a similar observation in Bomford v. Osborne (H. M. Inspector of Taxes), stating that although Commissioners may prove or admit a series of facts and then deduce further conclusions that are themselves pure facts, the legal determination is that the proved or admitted facts provide evidence to support the Commissioners’ conclusions. The most recent pronouncement on the issue was delivered in Edwards (Inspector of Taxes) v. Bairstow and Another. Viscount Simonds, at page 586, observed that even a pure finding of fact could be set aside if the Court was satisfied that the Commissioners had acted without any evidence or on a view of the facts that could not reasonably be entertained. Lord Radcliffe, at page 592, added that if a case contained something that was plainly bad law, it was obviously erroneous in law; but even where no such obvious error appeared, the facts found might be such that no properly instructed judicial officer could have reached the same conclusion. In those circumstances, the Court must intervene. Consequently, facts that are proved or admitted may serve as evidence for further conclusions, and those further conclusions, although they may be factual in nature, are nevertheless matters of law. The Court therefore retained the right to intervene whenever the fact‑finding authority acted without evidence, adopted a view of the facts that could not be reasonably entertained, or reached findings that no properly instructed judicial officer could have made.

In this case the Court observed that the High Court had correctly recognised the general principle that a court should not interfere with a finding of fact unless the finding is unsupported by evidence or is unreasonable, but that the High Court had applied that principle incorrectly to the facts before it. The High Court had attempted to examine the reasoning of the Tribunal by discarding the affidavit of Govindprasad Ramjivan Nivetia, which concerned a payment of Rs 15,000 made to the appellants in fifteen notes of Rs 1,000 each on 6 January 1946. By rejecting that affidavit the High Court reduced the aggregate sum of Rs 43,500 to Rs 28,500 and tried to justify the figure of Rs 31,000 that the Tribunal had arrived at. The Court described this approach as far‑fetched and contrary to the terms of the Tribunal’s order, because the Tribunal had given no indication at all of what it was thinking when it fixed the figure of Rs 31,000. In fact, the Tribunal had not identified any material on which it based the conclusion that Rs 30,000 should be treated as secret profit or as profit from undisclosed sources, and therefore the order was held to be bad. The appellants, on the other hand, had provided a reasonable explanation for possessing high‑denomination notes having a face value of Rs 61,000, and there was no justification for the Tribunal to accept part of that explanation and to discard the amount of Rs 30,000. The Court likened the present case to the decision of the Patna High Court in Chunilal Ticamchand Coal Co. Ltd. v. Commissioner of Income‑tax, Bihar and Orissa, and held that it should have been decided in the same manner in favour of the appellants. Consequently, the Court found that the High Court erred in answering the first referred question in the affirmative. The correct answer, according to the Court, should have been negative, holding that there were no materials to justify assessing Rs 30,000 out of the Rs 61,000 of high‑denomination notes for the purposes of income‑tax, excess profits tax and business profit tax. Because the first referred question is answered negatively, the basis for the excess profits tax and business profits tax disappears, rendering the second referred question purely academic. Accordingly, the appeal was allowed, the first referred question was answered in the negative, and the appellants were awarded costs both in this Court and in the High Court. The judgment was further supported by a concurring opinion that the Tribunal’s finding that the Rs 30,000 of high‑denomination notes represented concealed profits of the appellant was unsupported by any evidence and therefore erroneous in point of law.

The Court observed that the Tribunal’s order was open to being set aside, but it noted that the evidence on record had already been examined in exhaustive detail in the judgment that had just been delivered, and therefore there was no justification for re‑examining the same material. In order to summarize the matter, the Court explained that the Tribunal had accepted the appellant’s accounts as genuine and that, when the cash balance shown in those accounts was considered, it could not be demonstrated that the high‑denomination notes in question could not have been included in that balance. The Tribunal had further commented that it seemed improbable that a very large number of such notes would have remained as part of the cash on hand for an extended period, and the Court agreed that this circumstance appeared highly suspicious. However, the Court stressed that the Tribunal’s decision could not be based on mere suspicion; it had to rest on admissible legal testimony. For the respondent, counsel argued that the cash balance reflected in the books could not be taken as true because the appellant had sufficient opportunity to amend the accounts after the Ordinance was issued on 12 January 1946, given that the assessee’s accounting year followed the calendar year. The Court concluded that the authenticity of the accounts was a pure question of fact, and that a finding on a factual issue bound both the Revenue Department and the assessee alike.