C. Vasantlal And Co. vs Commissioner Of Income-Tax, Bombay

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 7 February 1962

Coram: J.C. Shah, M. Hidayatullah

C. Vasantlal And Co. versus Commissioner Of Income‑Tax, Bombay was listed as a matter decided on 7 February 1962 by the Supreme Court of India. The bench comprised Justice J. C. Shah and Justice M. Hidayatullah. In the judgment delivered by Justice Shah, the Court noted that the High Court of Judicature at Bombay had answered affirmatively the two questions that had been referred to it by the Income‑Tax Appellate Tribunal, Bombay, under section 66(2) of the Income‑Tax Act. The first question asked whether, on the facts and circumstances of the case, the Tribunal was legally justified in adding to the total income of the assessee the amount of Rs 1,45,706 and/or Rs 48,185, or any part thereof. The second question inquired whether there was any material on record to support the finding that those sums, or any part of them, represented the income of the assessee. With special leave, the assessee, Messrs C. Vasantlal & Co., appealed to this Court against the orders that had been passed.

The assessees conducted business as commission agents, brokers, and also engaged in forward transactions dealing with cotton, bullion and other commodities. During the assessment proceedings for the assessment year 1947‑48, the Income‑Tax Officer examined the books of account of the assessees for the financial year Samvat 2002, which corresponded to the year preceding the assessment year. The officer discovered two entries showing payments of Rs 48,185 and Rs 1,45,706 made respectively to Messrs Meghaji Kapurchand and Messrs Bhimaji Motiji. A partner of the assessees explained that these two parties were constituents of the assessees and that speculative transactions had been carried out through them as brokers with Mr Bhawanji Lakhmichand and Mr Joitram Kedarnath. The partner further stated that the latter two individuals had suffered losses amounting to Rs 12,303 and Rs 1,81,587 respectively, and that the payments received by the assessees from the two constituents were merely “passed on” to them. The Income‑Tax Officer was not persuaded by this explanation; he proceeded to examine Achaldas, a partner of Messrs Meghaji Kapurchand, and Poonamchand, a partner of Messrs Bhimaji Motiji. After considering the material placed before him, the officer concluded that the entries in the assessees’ account books were “fictitious” and accordingly disallowed the assessees’ claim to the amounts of Rs 1,45,706 and Rs 48,185 in computing their taxable income. The assessees appealed this assessment order to the Appellate Assistant Commissioner, Bombay, contending that Achaldas and Poonamchand had been examined by the Income‑Tax Officer in the absence of the assessees, depriving them of any opportunity to cross‑examine those witnesses. The Appellate Assistant Commissioner summoned the two partners to appear before him and allowed the assessees to cross‑examine them. Upon review, the Appellate Assistant Commissioner found that the cotton transactions recorded in the assessees’ books were not genuine; rather, the assessees had acted merely as brokers or “mediators,” while Mr Joitram Kedarnath and Mr Bhawanji Lakhmichand had directly “bought losses” from Messrs Meghaji Kapurchand and Messrs Bhimaji Motiji.

The Appellate Assistant Commissioner had ordered that Rs 1,94,890 be excluded from the total income of the assessees. The tax department challenged that order by filing an appeal before the Income‑tax Appellate Tribunal in Bombay. The Tribunal set aside the Commissioner’s order and reinstated the earlier assessment made by the Income‑tax Officer. Acting under the direction of the Bombay High Court, the Tribunal prepared a statement of the case and referred two specific questions to the High Court for opinion. After a thorough examination of the record, the High Court concluded that the material filed before it was sufficient to support the Tribunal’s finding that the sums of Rs 1,45,706 and Rs 48,185, which formed the subject of the reference, constituted income of the assessees. In its own review of the evidence the Tribunal recorded several detailed observations. First, it noted that in the years preceding Samvat 2002 the assessees had never dealt with Messrs Meghaji Kapurchand or Messrs Bhimaji Motiji, and it found implausible the idea that the assessees could have processed large financial transactions with new parties without obtaining any deposit or security. Second, the Tribunal observed that the entries appearing in the assessees’ books of account were suspicious and did not seem to arise from ordinary business activities. Third, it pointed out that every transaction recorded with Messrs Kapurchand and Messrs Motiji showed a profit to those firms; not a single entry indicated a loss, a pattern the Tribunal described as unrealistic. Fourth, the partners of the two firms, when examined by the Income‑tax Officer, described the transactions as “bogus” and claimed that the profits had been sold for ulterior motives. Fifth, even before the Appellate Assistant Commissioner, the witnesses Achaldas and Poonamchand did not assert that the transactions were genuine; instead, they merely said that the dealings had been carried out by persons who were “not available” at the time of inquiry. Sixth, the Tribunal recorded that Messrs Kapurchand and Messrs Motiji had cashed the cheques issued by the assessees and admitted that they had returned the corresponding amounts. Moreover, before the Income‑tax Officer those parties stated that the cheque amounts were returned directly to the assessees, whereas before the Appellate Assistant Commissioner they claimed the sums had been given back to “unknown and unidentifiable parties.” In view of these findings and the assessees’ refusal to call Joitram Kedarnath as a witness to support their claim that he had received payments from them, the Tribunal accepted the Income‑tax Officer’s view. The two questions referred to the High Court asked it to advise whether any material on record supported the conclusion that Rs 1,45,706 and Rs 48,185 represented the assessee’s income. Counsel for the assessees addressed the Court on this appeal.

The Court observed that the assessees had argued that the statements of Achaldas and Poonamchand, which were recorded by the Income‑tax Officer in the absence of the assessees, could not be taken as evidence against them. According to the assessees, the only lawful evidence on the record was the testimony of these two witnesses before the Appellate Assistant Commissioner, where the witnesses cleared the assessees of any involvement in the questioned transactions. The Court, however, could not accept the contention that the earlier statements before the Income‑tax Officer were immaterial for the Tribunal’s consideration. The assessees maintained that the transactions reflected in their accounts were genuine, that they had received payments from the parties who incurred losses, and that they had passed those amounts on to the parties who earned profits. The tax authorities, on the other hand, asserted that the transactions were not genuine. The records showed that the evidence of Achaldas and Poonamchand unmistakably indicated that the amounts specified in the cheques had been repaid. In their statements made to the Income‑tax Officer, both witnesses affirmed that the repayment of the cheque amounts was made to the assessees. When examined before the Appellate Assistant Commissioner, the same witnesses said that they had handed the money over to other persons whose presence could not be secured. No material was found in the record to suggest that the Income‑tax Officer had failed to disclose to the assessees the material he obtained from questioning Achaldas and Poonamchand. Moreover, the Appellate Assistant Commissioner, pursuing the interests of justice and fairness, allowed the assessees to cross‑examine the two witnesses. The Court noted that the Income‑tax Officer was not bound by strict rules of evidence; he was permitted to gather information through private enquiry to aid assessment. Nevertheless, when such material was intended to be relied upon, the assessee had to be informed of it and given a reasonable opportunity to explain it. Consequently, the Court held that the statements of Achaldas and Poonamchand before the Income‑tax Officer were material and could be acted upon by the tax authorities, provided that the material was disclosed and the assessees were afforded a chance to respond. Hence, the Tribunal was free to consider those earlier statements and to reject the later statements made before the Appellate Assistant Commissioner.

The Court further explained that the High Court’s power under section 66 of the Income‑tax Act was purely advisory. The High Court did not sit in appeal of the tax authorities’ judgment and was not required to adjudicate whether the Tribunal’s factual findings based on its appreciation of evidence were correct. The Court noted that the Tribunal had before it a substantial body of evidence on which it could base its conclusion, and that the issue it needed to decide was strictly one of fact. The Court acknowledged that a factual finding that lacked evidential support or was unreasonable and perverse could be challenged on the ground of insufficient material, but reiterated that, as already observed, there was material upon which the Income‑tax Tribunal could reasonably have arrived at its conclusion. Accordingly, the Court affirmed that the High Court was correct in answering the two questions referred to it. The Court then stated that the appeal failed and was dismissed with costs, and that the appeal was dismissed.

In its reasoning the Court observed that a factual finding which is unreasonable and perverse could be questioned on the basis that it lacks any support in the material placed before the tribunal. Nevertheless the Court reiterated its earlier observation that the record did contain sufficient material on which the Income‑tax Tribunal could, in a reasonable manner, reach the conclusion that it had reached. Because the Tribunal’s conclusion was backed by material evidence, the Court held that the High Court had correctly answered the two questions that had been referred to it for determination. The Court also noted that the appellate procedure required the higher forum to examine whether the Tribunal had acted within the bounds of its evidentiary material, and it found no error in that examination. By confirming that the Tribunal’s conclusion was founded on the record, the Court reinforced the propriety of the High Court’s determination on the questions presented. Accordingly the Court concluded that the appeal filed against the High Court’s decision could not succeed. The Court ordered that the appeal be dismissed and that the costs of the proceedings be awarded against the appellant. Consequently, the appellate court affirmed that the lower tribunal’s decision remained valid and required no alteration. Finally, the Court formally recorded that the appeal was dismissed.