Sovachand Baid vs Commissioner Of Income-Tax

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

Court: supreme-court

Case Number: Not extracted

Decision Date: 24 April, 1958

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

The case titled Sovachand Baid versus Commissioner of Income‑Tax was decided on 24 April 1958 by a Bench consisting of Justices A K Sarkar and P B Gajendragadkar. The matter before the Supreme Court was an appeal under article 136 of the Constitution from a judgment of the Income‑Tax Appellate Tribunal dated 7 August 1953. The Tribunal had held that, of the high‑denomination currency notes amounting to Rs 2,68,000 which the appellant had encashed during the relevant accounting year, a portion of Rs 1,28,000 represented concealed profits and was therefore liable to tax. The appellant contested the correctness of that finding. The appellant had been assessed to income‑tax for the year 1946‑47 in the character of a non‑resident British subject, and the present appeal arose out of the assessment proceedings. The accounting year in question extended from 6 November 1945 to 9 April 1946. At that time the appellant was a resident of Ratangarh in the Princely State of Bikaner, which lay outside British India. On 6 November 1945 he commenced a business in Calcutta, and the accounts for that first year were closed on 9 April 1946. On 19 January 1946 he arrived in Calcutta carrying eleven notes of ten thousand rupees each and one hundred fifty‑eight notes of one thousand rupees each; he subsequently encashed these notes a few days later through the Punjab National Bank pursuant to the High Denomination Notes Order that had been promulgated earlier in the same month. In his books of account for the Calcutta business, the appellant recorded the value of the notes as capital received from him, totalling Rs 2,68,000. When the Income‑Tax Officer sought an explanation of the source of these notes, the appellant asserted that the money had been bequeathed to him by his father, who had died in 1942. The Officer found that the appellant’s explanation was not supported by the books of account and other documents produced, and consequently held that the amount represented income from undisclosed business activities and was taxable.

The appellant then appealed to the Appellate Assistant Commissioner, who examined the books of account and the documents produced and concluded that the notes formed part of the assets that had devolved upon the appellant following his father’s death. On that basis the Assistant Commissioner allowed the appeal and removed the sum of Rs 2,68,000 from the assessment. Unsatisfied with this outcome, the Commissioner of Income‑Tax appealed the decision to the Appellate Tribunal. The Tribunal, after considering the material, permitted the appeal in part but held that, in the circumstances disclosed, a sum of Rs 1,28,000 must be treated as income while the remaining balance of Rs 1,40,000 could properly be regarded as capital. Accordingly, the Tribunal modified the assessment order by including Rs 1,28,000 as undisclosed income. The appellant subsequently challenged the correctness of the Tribunal’s decision before the Supreme Court.

The counsel for the appellant submitted that the present appeal did not permit the Court to re‑examine the evidence or to reach an independent factual conclusion. He argued that it was not the customary practice of this Court to substitute its own assessment for that of the fact‑finding authority. To support this position he referred to the decision in Mehta Parikh & Co. v. Commissioner of Income‑Tax, wherein it was observed that a Court may intervene only when the authority has acted without any evidence, or on a view of the facts that could not reasonably be entertained, or when the facts found are such that no properly instructed judicial officer would have arrived at the same determination. Applying the test articulated in that case, the counsel contended that the Tribunal’s finding could not be sustained. He emphasized that the matter before the Tribunal was purely one of fact: whether, on the basis of the evidence produced by the appellant, it could be said that the notes in question formed part of the assets inherited from his father.

The appellant’s version of events was that his adoptive father, Mohanlal, had been a partner in the Calcutta firm of Manekchand Tarachand. In 1906 he left that partnership and received a substantial sum representing his share. He then established a business in Calcutta under the name Kaluram Mohanlal, which he operated until its closure in the financial year 1925‑26. After closing the business he retired and took residence at his home in Ratangarh, Bikaner, where he died on 22 April 1942. Upon his death the appellant succeeded to his estate, which included the currency notes that are the subject of this dispute. To demonstrate that the notes had been bequeathed by his father, the appellant relied on account books that had been kept by the father at Ratangarh and subsequently continued by the appellant after the father’s death. These books recorded the serial numbers of the ten‑thousand‑rupee notes, while also indicating the existence of a large quantity of one‑thousand‑rupee notes, but without recording their numbers. The appellant argued that it was not customary to note the serial numbers of one‑thousand‑rupee notes in such accounts, and that the books therefore proved that the notes had been received from his father. The Income‑Tax Officer rejected the books as genuine and further held that the appellant had not established that the father had ever conducted a business in Calcutta capable of generating the large fortune claimed. The Appellate Assistant Commissioner set aside the Officer’s findings, concluding that there was no reason to doubt the authenticity of the books and that the appellant had indeed proved the existence of the notes as part of his inheritance.

The Tribunal concluded that the evidence established that the father, identified as Mohanlal, had indeed carried on a business in Calcutta as alleged by the appellant and had accumulated a substantial fortune. It recorded that Mohanlal retired from the firm of Manekchand Tarachand in the year 1906, possessing approximately six to seven lakh rupees, and subsequently launched his own commercial enterprise in Calcutta. Moreover, the Tribunal observed that during the period from 1926 to 1942, while residing in Ratangarh, he maintained significant deposits in the Bikaner State Savings Bank branch located there. Despite these findings, the Tribunal was unable to accept the account books kept at Ratangarh as genuine, and consequently it refused to rely on the entries contained in those books to prove the existence of any ten‑thousand‑rupee notes during the father’s lifetime. The Tribunal gave several reasons for this conclusion. First, it noted that the appellant had not produced the account books corresponding to the father’s Calcutta business, which operated from 1906 to 1926, and which would have shown the amount of money the father possessed at the time of his retirement and subsequent move to Ratangarh. Second, the Tribunal observed that the Ratangarh books contained no entries indicating any receipt of funds from the Calcutta business when it was closed, a feature that would have been expected if the books were authentic. Third, the Tribunal pointed out that the Ratangarh books recorded only cash sent to and withdrawn from the bank and the transactions of certain accommodation loans granted to the son‑in‑law and other close relatives, with the serial numbers of ten‑thousand‑rupee notes appearing solely in the loan‑related entries. In view of these circumstances, the Tribunal held that the books were of a nature that they could be fabricated at any time the appellant desired. Finally, the Tribunal remarked that the books did not provide a complete record of all of Mohanlal’s dealings over the lengthy period from 1926 to 1942.

The learned counsel for the appellant was unable to demonstrate that the Tribunal’s remarks concerning the Ratangarh account books were factually incorrect. Instead, his argument focused largely on establishing that the reasons offered by the appellant, the Assistant Commissioner, or those who accepted the Ratangarh books as genuine were correct and preferable. The Court noted that it could not revisit the evidence anew, and therefore it could not declare the Tribunal’s reasons for finding the books unauthentic to be unfounded or unsupported by evidence. In the Court’s view, it was entirely possible to accept the Tribunal’s conclusion that the Ratangarh books were not genuine for the reasons set out by the Tribunal. The Court declined to entertain a hypothetical assessment of what view might have been reached on the basis of the material presented, as such speculation would be irrelevant. It was sufficient to recognize that the Tribunal’s conclusion represented a reasonably possible view on the evidence adduced and that this view could not be said to lack support or to be unreasonable.

It was held that the Tribunal’s conclusion that the Ratangarh books could not be accepted was a view that was reasonably possible on the basis of the evidence that had been produced. Accordingly, the Court stated that nothing in the record showed that the Tribunal’s view was unsupported by the evidence or that it was unreasonable. While this finding alone could have been sufficient to dispose of the appeal, the Court indicated that two further questions required discussion.

First, having decided that the Ratangarh books were not genuine, the Tribunal observed that between the years 1926 and 1945 the appellant and his father had derived their only source of income from interest earned on money deposited in banks. This inference was drawn because the books of account that had been produced failed to disclose any other source of income. The Tribunal also noted that, by about 1945, the appellant held a balance in his bank account ranging from approximately eight lakh rupees to ten lakh rupees. In view of the earlier finding that interest was the sole source of income, the Tribunal concluded that it was implausible for the appellant to possess an additional sum of seven lakh rupees in a notice dated December 1945, as the appellant claimed. Consequently, the Tribunal estimated that the appellant’s uninvested cash was likely to lie between one lakh fifty thousand rupees and two lakh rupees, of which at most one lakh forty thousand rupees could have been held in high‑denomination notes. From this assessment, the Tribunal determined that out of the total high‑denomination notes amounting to two lakh sixty‑eight thousand rupees that the appellant encashed in January 1946, notes worth one lakh forty thousand rupees could not be treated as capital assets. The remaining balance of one lakh twenty‑eight thousand rupees was therefore characterised as undisclosed income, and the Tribunal directed that tax be levied on that amount. The appellant’s counsel described this part of the Tribunal’s finding as speculative. The Court acknowledged that the criticism had some merit but observed that it did not affect the Tribunal’s determination on whether the notes had descended to the appellant on his father’s death. The Court further noted that the Tribunal’s concession to the appellant amounted to a benefit that the appellant was not entitled to, given the Tribunal’s earlier findings on the evidence. Nevertheless, the Court could not set aside the Tribunal’s judgment on the ground that it had held the entire sum of two lakh sixty‑eight thousand rupees to be taxable. Finally, the appellant’s counsel argued that, even if the notes formed part of the appellant’s income, taxation could not be imposed unless a finding was made that the income had arisen or accrued in British India, since the appellant had been assessed as a person not residing in British India. The Court refused to accept this contention, holding that it could not be entertained.

The Court observed that the issue raised by the appellant had never been mentioned at any earlier stage of the proceedings. Counsel for the appellant attempted to draw the Court’s attention to a portion of the judgment rendered by the Appellate Assistant Commissioner, asserting that the same point had been raised previously. The Court examined the cited portion of the Appellate Assistant Commissioner’s judgment to determine whether it contained any reference to the matter presently before it. It found that the excerpt dealt exclusively with remittances to British India of interest earned in Bikanere and did not address the notes that formed the subject of the present dispute. No language in that judgment indicated that the appellant had earlier raised the question of the notes’ taxability or their character. Consequently, the Court concluded that the appellant’s claim that the point had been previously raised was unsupported by the record. The Court emphasized that procedural fairness requires a party to raise all material arguments at the earliest opportunity. Since the appellant had not introduced this argument at any prior stage, the Court held that it would be inappropriate to permit its introduction at this late juncture. Accordingly, the Court declined to entertain the appellant’s submission concerning the notes, finding that the issue could not be reopened.

Having determined that the appellant could not raise the issue of the notes at this stage, the Court turned to the ultimate question of the appeal’s merits. The Court observed that without the benefit of the disputed argument, there remained no viable ground on which the appellant could succeed. Accordingly, the Court concluded that the appeal must fail and that the order of the lower authority stands unaltered. In accordance with the established rules, the Court ordered that the appellant bear the costs of these proceedings. The assessment of costs reflects the principle that a party who unnecessarily prolongs litigation should be responsible for the resulting expenses. The Court therefore declared that the appeal was dismissed with costs awarded against the appellant. This dismissal affirmed the lower tribunal’s finding that the sum of Rs. 2,68,000 was not taxable under the applicable provisions. The decision also underscored the importance of raising all substantive matters at the earliest appropriate forum to avoid procedural prejudice. The Court entered its final order, confirming that the appeal was dismissed and that costs were imposed on the appellant.