M/S. Lakshmichand Baijnath vs The Commissioner Of Income-Tax, West Bengal

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 271-272 of 1955

Decision Date: 13 November 1958

Coram: P.B. Gajendragadkar, A.K. Sarkar, Venkatara AIyar

The case was styled M/S. Lakshmichand Baijnath versus The Commissioner of Income‑Tax, West Bengal and was decided by the Supreme Court of India on 13 November 1958. The judgment was authored by a bench consisting of P. B. Gajendragadkar and A. K. Sarkar, and references were also made to Bench members T. L. Venkatarama Aiyy ar. The official citation for the decision appears as 1959 AIR 341 and 1959 SCR Supl. (1) 415, with a later citator reference noted as R 1982 SC 760 (12). The matter concerned provisions of the Indian Income‑Tax Act of 1922, specifically section 25A, dealing with partitions of Hindu undivided families and the tax consequences of receipts arising in the accounting year of the assessment.

In the assessment year 1946‑47 the appellant, identified as a Hindu undivided family engaged in business, submitted a petition under section 25A asserting that a partition of the family had taken place on 24 April 1945. The appellant further contended that six sums of money totaling Rs 2,30,346, which were reflected in the accounts as proceeds from the sale of ornaments, represented the realised value of family jewels sold at the time of partition and that the proceeds had subsequently been invested in the business. The Income‑Tax Officer accepted that a partition had indeed occurred and that the family had been divided into five distinct groups, but rejected the appellant’s explanation for the receipt of the Rs 2,30,346. The officer concluded that the amount was not derived from the sale of family jewellery but constituted concealed profits of the business, and consequently included the sum in the assessable taxable income. Before the Appellate Tribunal the appellant advanced two principal arguments: first, that the order issued under section 25A by the Income‑Tax Officer should be regarded as having conclusively determined the fact of partition as well as the possession and division of the jewellery, thereby precluding the Department from disputing that the amount reflected the value of the family jewels; and second, that there was no evidentiary basis to show that the amount represented undisclosed business profits. The Court held that when a claim is made under section 25A, the Income‑Tax Officer’s enquiry is limited to ascertaining whether a partition has occurred and, if so, to defining the exact portions allotted to each member or group of members. Determinations concerning the quantum of income assessable under section 23(3) fall outside the scope of a section 25A inquiry, and any finding on that point would not be binding in subsequent assessment proceedings under section 23. The Court further affirmed that, having failed to satisfactorily explain the nature of the credit appearing in the business accounts, the Income‑Tax Officer was justified in drawing the inference that the amount represented taxable receipt.

The Court observed that because the assessee could not satisfactorily explain the true nature of a credit shown in its business accounts, the Income‑tax Officer was justified in drawing the inference that the credit actually represented a receipt of an assessable nature. The judgment arose out of Civil Appeals Nos 271‑272 of 1955, filed by special leave against the judgment and order dated 19 June 1953 of the Calcutta High Court in Income‑tax References Nos 6 and 7 of 1950. Counsel for the appellant were the lawyers representing the appellant, while the Solicitor‑General of India and other counsel appeared for the respondent. The judgment was delivered on 13 November 1958 by Justice Venkatarama Aiyar. The appellant was a Hindu undivided family carrying on business as piece‑goods merchants in Calcutta. The proceedings concerned the assessment of the family’s income for the year 1946‑47; the preceding year covered the period from 12 June 1944 to 24 April 1945. During the assessment the appellant filed a petition under section 25‑A of the Income‑tax Act, 1922, claiming that a partition of the family had taken place on 24 April 1945. On 27 May 1945 the Income‑tax Officer investigated both the fact of partition and the quantum of income chargeable to tax, and on 30 June 1945 he issued orders based on his findings. The Officer held that the partition was genuine and that the family had been divided into five groups. The dispute concerning income assessable under section 23 centred on six sums amounting to Rs 2,30,346 that were shown in the accounts as proceeds from the sale of ornaments. The appellant contended that at the time of partition the family jewels had been sold in six lots, the proceeds had been invested in the business, and the credits recorded in the books corresponded to those investments. The Income‑tax Officer rejected this explanation. He observed that while the appellant’s books indicated that ornaments had been sold, the purchaser’s accounts – those of Chunilal Damani – recorded a sale of gold. He further pointed out that the partition agreement (Exhibit A) listed a weight of 3,422 tolas of ornaments, whereas the purchaser’s records showed that only 3,133 tolas of gold had actually been sold. The appellant explained the discrepancy by stating that the jewels had descended through several generations and were not pure. The Officer rejected this rationale, noting that the purchaser’s accounts deducted only a negligible amount for impurities, thereby indicating that the material sold was essentially pure gold and not impure family jewels. He also remarked that the sales were recorded in round figures of 500 tolas and that “if the assessee had been taking

The Income‑Tax Officer observed that it was implausible for the assessee to have taken gold weighing exactly five hundred tolas on three of the six occasions, a pattern that suggested round‑figure transactions rather than the sale of old ornaments, whether broken or intact. He further noted the absence of any inventory listing the family jewels and the lack of any entry in the family accounts indicating which jewels were held by the family. On this basis, the officer concluded that the alleged sale of family jewels was fictitious and that the amount of Rs 2,30,346 represented concealed profits of the business; consequently, he added that sum to the taxable income and imposed an additional levy under the Excess Profits Tax Act.

The appellant challenged both orders before the Appellate Assistant Commissioner, who examined the matter in depth. The commissioner observed that the appellant had altered his explanation of the nature of the sales repeatedly. He highlighted a discrepancy of two hundred and eighty‑nine tolas between the weight indicated in the partition agreement (Exhibit A) and the weight recorded in the books of Chunilal Damani, the purchaser. The commissioner noted that the appellant’s earlier explanation to the Income‑Tax Officer attributed the difference to alloy and brass present in the jewels, whereas before the commissioner the appellant claimed the difference resulted from pearls and stones that had been removed, asserting that the remaining gold was pure. The commissioner rejected this claim, reasoning that jewels purportedly existing for three or four generations would reasonably contain a greater proportion of alloy than the purchaser’s accounts suggested. He also regarded the repeated sale of gold in round figures of two hundred and fifty or five hundred tolas as a circumstance that cast serious doubt on the appellant’s version. Accordingly, the commissioner affirmed the findings of the Income‑Tax Officer and dismissed the appeals.

Subsequently, the appellant appealed to the Appellate Tribunal and sought to rely on a proceedings book, which he claimed documented the actual breaking up of the family jewels and the sale of the separated gold to Chunilal Damani. Because this proceedings book formed the core of the appellant’s contention, the Tribunal considered it necessary to recount the facts contained therein. On 20 February 1945, the members of the family entered into an agreement (Exhibit A) to divide their joint property among the five branches of the family. Schedule B to that agreement listed the jewels to be divided, giving a total weight of approximately three thousand four hundred and twenty‑two tolas. The proceedings book purported to record the decisions taken by the family members to implement that agreement. Minutes of the meeting held on 23 February 1945 indicated that pearls and stones embedded in the jewels were to be removed and distributed among the members, and that a goldsmith named Inderban was engaged to break up the jewellery. Minutes of a subsequent meeting on 28 February 1945 recorded that the weight of the removed pearls, stones and copper, again expressed in round figures, amounted to two hundred and eighty‑nine tolas; deducting this from the original three thousand four hundred and twenty‑two tolas left three thousand one hundred and thirty‑three tolas of gold available for partition. The minutes further stated that this quantity of gold should be sold in the market and that the proceeds would be credited to the capital accounts of the business. Finally, minutes dated 21 April 1945 recorded that gold weighing three thousand one hundred and thirty‑three tolas had been sold and that the sale price had been entered into the accounts. If these minutes are authentic and accurately reflect the events, they would substantially support the appellant’s version of how the family jewels were handled and sold.

In the minutes it was recorded that the pearls, stones and copper embedded in the family jewels were to be removed and divided among the members, and that a goldsmith named Inderban was engaged to break up the jewels for that purpose. The subsequent minutes of the meeting held on February 28, 1945 state that the weight of the pearls, stones and copper removed amounted, in round figures, to 289 tolas; consequently, after deducting this amount from the total jewel weight of 3 422 tolas listed in Exhibit A, the gold remaining for partition was calculated to be 3 133 tolas. Those same minutes further record that this quantity of gold was to be sold in the market and that the proceeds of such sale were to be credited to the capital accounts of the business. The final entry in the proceedings, dated April 21, 1945, likewise records that gold weighing 3 133 tolas was sold and that the sale price was entered in the accounts. If these minutes are genuine and accurately reflect what actually occurred, they would substantially support the appellant’s explanation of how he came into possession of the sum of Rs 2,30,346. Accordingly, the appellant applied to the Tribunal seeking to have the proceedings book admitted as evidence, contending that the book had been filed before the Income‑tax Officer but had not been taken into consideration by that Officer. The Tribunal then examined the question of whether the proceedings book had, in fact, been produced before the Income‑tax Officer. The appellant argued that the decision taken at the April 21, 1945 meeting, which forms the concluding portion of the book, had been translated into English at the request of the Income‑tax Officer, the original being in Hindi; that the translation was marked as Exhibit B and bore the Officer’s endorsement “Original produced”; and that, on this basis, the book must have been produced before the Officer. The Tribunal was not persuaded by this argument. It observed that the book itself had not been initialed by the Officer, and although the April 21, 1945 minutes were genuine, there was no certainty that, when shown to the Income‑tax Officer, they were contained in the particular book now produced; such minutes could equally have been placed in another book, and therefore the book submitted for admission was not proven to be the one that had been produced before the Officer. The Tribunal also expressed the view that the minutes of the earlier meetings could not have been shown to the Officer. Consequently, the Tribunal refused to admit the book as evidence and, relying on the other circumstances mentioned in the orders of the Income‑tax Officer and the Appellate Assistant Commissioner, held that the sum of Rs 2,30,346 was not the proceeds of the family jewels sold but rather secret profits earned by the appellant in his business. Another contention was subsequently raised.

In the proceedings that preceded the Tribunal, the appellant argued that the Income‑tax Officer, acting under section 25A after conducting an enquiry, had held that the partition it established was genuine. According to the appellant, the partition involved, among other assets, the division of family jewels weighing 3,422 tolas. The appellant therefore contended that the Officer’s finding meant that the family possessed the jewels identified in Exhibit A and that they had been divided as shown in Exhibit B. Because the officer’s order under section 25A had become final, the appellant submitted that the present question ought to be decided in its favour. The Tribunal rejected this submission, observing that the order under section 25A merely concluded that a partition existed within the family and did not address any of the issues that arose for determination in the assessment proceedings. Consequently, both the appellant’s and the respondent’s appeals were dismissed.

Following a decree of the Calcutta High Court dated 7 December 1950, issued under section 66(2) of the Act, the Tribunal was directed to consider two specific questions: (i) whether the Income‑tax Appellate Tribunal was bound by the Income‑tax Officer’s factual findings concerning the nature and division of the joint‑family assets ascertained in his enquiry under section 25A(l); and (ii) whether any material or evidence existed that would lawfully permit the taxing authorities to hold that the sum of Rs 2,30,346 represented undisclosed profits for the relevant accounting year. Judges Chakravarti, C. J., and Lahiri, J., heard the reference and, in their judgment dated 19 June 1953, answered the first question negatively and the second affirmatively. The appellant then filed an application under section 66A(2) seeking leave to appeal to this Court; that application was rejected, and the appellant subsequently filed the present appeals on the basis of leave granted under article 136. Counsel for the appellant put forward three principal contentions: first, that the Income‑tax Officer’s order under section 25A precluded the Department from arguing that the amount of Rs 2,30,346 did not represent the value of the family jewels; second, that the tax authorities’ finding that the sum constituted concealed business profits lacked legal evidentiary support and was perverse; and third, that there was no evidence showing the amount derived from business profits, and therefore it should not be taxed under the Excess Profits Tax Act. On the first point, the appellant relied on certain observations in the officer’s order, claiming they amounted to a decision that the family owned the jewels shown in Exhibit A and that only the proceeds from their sale had been divided.

Section twenty‑five‑A required the Income‑tax Officer to determine whether a partition of the family had occurred and, if so, to specify the exact portions allocated to each member or group. The question of how much of the family’s income was assessable to tax under section twenty‑three sub‑paragraph three lay outside the investigative scope of section twenty‑five‑A. That provision had been inserted by the Indian Income‑tax (Amendment) Act, 1928, to rectify a defect that existed in the original 1922 statute. Before the amendment, when a joint family became divided before assessment, no undivided family existed to be taxed and members could not be taxed because the income was exempt under section fourteen sub‑paragraph one. Consequently, a joint family that divided at the time of assessment escaped taxation entirely because neither the undivided entity nor its members could be taxed. Section twenty‑five‑A therefore deemed the family to remain undivided until an order under that section was officially made. When such an order was finally issued, it apportioned the tax on the total family income among the divided members, while making each of them jointly liable for the whole tax liability. The amount of tax due depended on the income assessment conducted under section twenty‑three, and the order under section twenty‑five‑A did not alter that assessment. In the case, the order under section twenty‑five‑A did not expressly state that the family possessed the jewels listed in Exhibit A or that those jewels had been sold for cash as the appellant claimed. Nor could such a finding be inferred from the order, given the limited purpose of the proceedings under section twenty‑five‑A. Furthermore, the order under section twenty‑three sub‑paragraph three, which held that the sum of Rs 2,30,346 did not represent the value of the family jewels, was issued on the same date by the same officer.

The second issue before the Court concerned whether the amount of Rs 2,30,346 represented the sale price of family jewels or constituted concealed profits from a business. That question was purely factual, and any adverse finding could be challenged only through a reference under section sixty‑six if the finding was unsupported by evidence or deemed perverse. To resolve that factual dispute, the Court needed to examine the material presented in the proceedings, including the valuation of the jewels and any accounts indicating business activity. If the records showed that the amount derived from the conversion of the jewels into cash, the sum would be attributable to the family’s inheritance rather than to any commercial enterprise. Conversely, if evidence indicated that the amount originated from trading or manufacturing activities, it would be classified as undisclosed profit and therefore taxable under the relevant provisions. The statutory mechanism for reviewing such a factual finding was provided by section sixty‑six, which allowed a reference only when the assessment was unsupported by evidence or was manifestly unreasonable. Accordingly, the Court emphasized that any challenge must satisfy the stringent criteria of section sixty‑six and could not be based merely on a difference of opinion regarding the facts.

In this case the appellant, through counsel, argued that the conclusion that the amount of Rs 2,30,346 represented concealed profits had been reached by the Income‑tax Officer and by the Appellate Assistant Commissioner after they disregarded material evidence contained in the proceedings book, and that the Appellate Tribunal had wrongly refused to admit that book as evidence. This allegation gave rise to two specific points of controversy. The first point concerned whether the proceedings book that was produced before the Tribunal was the same book that had been produced before the Income‑tax Officer. The second point concerned whether the minutes of the meeting held prior to 21 April 1945, which the appellant had relied upon before the Income‑tax Officer, had been taken into consideration. Whatever view might be taken on the first issue, the record makes it plainly clear that the minutes referred to in the second issue were not relied upon. On 27 May 1947 an enquiry was held on both the petitions filed under section 25A and on the quantum of income assessable under section 23(3). Exhibit D, an extract from the order sheet of the Income‑tax Officer, states that regarding credits amounting to Rs 2,30,346‑6‑3 in the account of Udoyaram Bhaniram, the representatives declared that, apart from the evidence already produced, they were unable to produce any further evidence. Specifically, they were unable to produce (i) the assessee’s account books showing the details of the amounts aggregating the said sum, (ii) sale statements rendered by Chunilal Damani, copies of which had been filed, (iii) the ledger of Chunilal Damani containing entries for the purchase of gold sold by the assessee’s family together with Surajrattan Bagri, the accountant of Chunilal Damani, and (iv) statements of Lakhmichand Bhiwaniwalla and Pannalal Bhiwaniwalla, members of the assessee’s family. This statement was signed by counsel for the appellant. From this passage it is evident that the proceedings book was not relied upon as evidence concerning the nature of the receipts that constituted the sum of Rs 2,30,346. The appellant had produced the proceedings book in support of his petition under section 25A to establish that a partition of the family property had been completed, and he relied solely on the minutes of the meeting held on 21 April 1945, which alone were translated into English and marked as Exhibit B. Moreover, the assessment order of the Income‑tax Officer under section 23(3) makes no reference to the minutes of meetings that occurred before 21 April 1945, nor were those minutes translated, unlike the record of the meeting dated 21 April 1945. The logical inference is that those earlier minutes were not relied upon by the appellant and therefore were not considered by the Officer. It is also noteworthy that the Officer’s order refers to the sale of ornaments, whether broken or unbroken, indicating that the narrative concerning the gold separated from the jewels, melted and sold in quantities of 250 or 500 tolas, was not part of the proceedings before him.

In this case the Court observed that the allegation that the jewels, after the pearls and stones had been removed, were melted and then sold in batches of either two hundred and fifty or five hundred tolas was an argument that had been presented before the Court, but that the same allegation had not been put before the Income‑tax Officer. It was further asserted that, in the appeal challenging the order of the Income‑tax Officer, the appellant had definitely taken the ground that the proceedings book had been produced before that Officer, and that the same point had been highlighted in a petition that was supported by an affidavit filed by the appellant. However, the order issued by the Appellate Assistant Commissioner did not address this point at all, and it was considered inconceivable that the Commissioner could have failed to consider the matter if it had actually been raised before him. The Court also noted that the appellant, although he had obtained a return of the proceedings book from the Income‑tax Officer, did not file that book before the Appellate Assistant Commissioner, nor did he move for its admission into evidence at the appellate stage. Apart from relying on the grounds that had been referred to the Court, the appellant apparently presented his case before the Appellate Assistant Commissioner on exactly the same lines on which he had pressed the argument before the Income‑tax Officer. In view of these facts the Court was unable to hold that the Appellate Tribunal had acted perversely or unreasonably in refusing to admit the proceedings book as evidence in the appeal. Moreover, the counsel for the appellant had not contended in the High Court that the Tribunal had acted illegally or unreasonably by refusing to admit the book. Consequently, the Court could not say that the Tribunal’s finding, based on an appreciation of the facts and circumstances already set out, was unsupported by evidence or was perverse. The position was therefore summed up as follows: the business accounts of the appellant showed certain sums credited, and the explanation offered by the appellant for the receipt of those amounts was rejected by all the Income‑tax authorities as untenable. Accordingly, the credited sums were treated as business receipts and were thus chargeable to tax. The Court then referred to the decision in V. Govindarajulu Mudaliar v. The Commissioner of Income‑tax, Hyderabad (1), which observed that there is ample authority for the proposition that where a taxpayer fails to prove satisfactorily the source and nature of certain cash amounts received during the accounting year, the Income‑tax Officer is entitled to infer that the receipts are of an assessable nature. The Court noted that this is precisely the approach taken by the Income‑tax authorities in the present case and found no ground to hold that their finding was open to attack as erroneous in law. Finally, the Court addressed the question raised that, even if the credits totalling Rs 2,30,346 were held to be concealed income, a levy of excess profits tax could not be imposed on them without a further finding that they represented business income, and that such a finding was absent. The Court held that when an amount is credited in business books, it is not an unreasonable inference to conclude that it is a receipt.

The Court observed that the amount under consideration represented a receipt arising from the appellant’s business activities in the relevant accounting year. Accordingly, the Court held that there was no justification for further examination of this issue because it did not fall within the matters expressly referred to under section sixty‑six sub‑section two of the Income‑tax Act. The Court therefore concluded that the appeals presented by the petitioners could not be entertained and that they must be rejected. In addition, the Court ordered that the petitioners should bear the costs of the proceedings, as is the usual practice when an appeal is dismissed. The final order recorded that the appeals were dismissed with costs, and no further relief was granted to the appellants. The judgment cited the earlier authority reported in volume thirty‑four of the Income‑Tax Reporter, page eight hundred and seven, paragraph one, to support the reasoning. Accordingly, the appeals were dismissed, and the matter was closed with the costs awarded against the petitioners in accordance with the established procedural rules. The decision reaffirmed that issues not falling within the statutory reference under section sixty‑six sub‑section two are beyond the scope of appellate review and must be left unexamined. Consequently, the court’s order settled the dispute and clarified the procedural position for similar future cases under the income tax statutes. (1) [1958] 34 I.T.R. 807, 810.