Bai Velbai vs Commissioner Of Income-Tax, Bombay... on 23 January, 1963

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 23 January 1963

Coram: S. K. DAS

The case before the Supreme Court involved an appeal filed by special leave against a decision of the Income‑Tax Appellate Tribunal. The appellant was the widow of Kanji Jadhavji, who had conducted a large‑scale enterprise that included stevedoring, coal hauling, freight brokerage, clearing and forwarding of goods, loading and unloading of steamers, and the chartering of steamers. Upon her husband’s death she succeeded to these business interests. For the assessment year 1947‑48, which corresponded to the calendar year 1946, the tax authority initially assessed her total income at Rs 3,69,371. This assessment was later reduced by the Appellate Assistant Commissioner to Rs 2,99,471. During the assessment the Income‑Tax Officer added a sum of Rs 1,38,000 to her income, characterising the amount as derived from undisclosed sources because it represented the value of certain high‑denomination currency notes that the appellant had encashed. Dissatisfied with this addition, the appellant appealed to the Appellate Assistant Commissioner. The Commissioner directed the Income‑Tax Officer to compile, from departmental records, statements of the income that the appellant had returned and the income that had been assessed against her for the years 1931 to 1945. These statements were duly prepared. In addition, the Officer prepared statements of the capital accounts appearing in the appellant’s various books and recorded the amounts withdrawn by her for the assessment years 1936‑1937 through 1946‑1947. However, the books of account for the year 1944‑1945 and for the first four months of 1945‑1946 were not available; it was explained that those records had been destroyed in an explosion that occurred at the Bombay docks on 14 April 1944. By the time the appeal was heard the original Appellate Assistant Commissioner had been transferred, and his successor considered the addition of Rs 1,38,000 as justified. Consequently, the appeal was dismissed.

Subsequently the appellant filed an appeal before the Income‑Tax Appellate Tribunal in Bombay. By an order dated 6 May 1959, the Tribunal held that there was “no positive and tangible proof to correlate the encashment of high‑denomination notes worth Rs 2,38,000 with any previous saving or withdrawals of the appellant,” and therefore dismissed the appeal. It is relevant to note that the appellant had encashed 246 high‑denomination currency notes having a total face value of Rs 2,46,000 at the time the High‑Denomination Notes (Demonetisation) Ordinance was promulgated in January 1946. At that juncture she made a declaration stating that the sources of those notes were: (1) movable and immovable property, including cash left by her husband; (2) the profits earned from the business she had inherited; (3) rents and income derived from her landed property; and (4) the monies she had withdrawn from the

The appellant had, at the time the High‑denomination Notes (Demonetisation) Ordinance was issued in January 1946, encashed two hundred and forty‑six notes of high denomination whose total value was two lakh forty‑six thousand rupees. When she made this encashment, she declared that the money she possessed originated from five distinct sources. First, she claimed to have received movable and immovable property, including cash, that had been left by her husband. Second, she asserted that she derived profits from the business of her husband, which she had inherited. Third, she stated that she earned rents and other income from her landed property. Fourth, she explained that she had periodically withdrawn money from the aforementioned business. Fifth, she mentioned three fixed‑deposit accounts that she held in three different banks; these deposits had been withdrawn in 1942 because of a panic caused by the Second World War. The Income‑Tax Officer examined the two hundred and forty‑six notes and held that eight of them formed part of the day‑to‑day cash balance of the appellant’s business. Regarding the remaining two hundred and thirty‑eight notes, the Officer concluded that at most one lakh rupees could be regarded as savings accumulated from all of the appellant’s sources. Consequently, he treated the balance of one lakh thirty‑eight thousand rupees as income from undisclosed sources. Dissatisfied with this assessment, the appellant applied to the Income‑Tax Appellate Tribunal for a reference of certain questions of law under section 66(1) of the Income‑Tax Act, 1922. In substance, the appellant raised three questions: (1) whether any evidence or material existed to support the Tribunal’s finding that the sum of one lakh thirty‑eight thousand rupees represented income from undisclosed sources; (2) whether the Tribunal’s conclusion was perverse, meaning that no reasonable person could have arrived at it on the basis of the record; and (3) whether that conclusion was founded upon conjecture, surmise or suspicion and on a failure to consider relevant evidence that was part of the record.

The Tribunal rejected the appellant’s application, holding that no question of law arose from its own order dated 6 May 1959. The appellant then approached the High Court under section 66(2) of the same Act, seeking an order directing the Tribunal to state a case on the legal questions she asserted. On 27 March 1961 the High Court dismissed this application summarily. The appellant subsequently applied to this Court for special leave to appeal the High Court’s order of that date, and special leave was granted, leading to the present appeal. At the outset, the Court clarified that the concise issue to be determined was whether the High Court’s order of 27 March 1961 was correct. That determination hinged on the existence or non‑existence of any questions of law arising from the Tribunal’s order of 6 May 1959. If the Tribunal’s order raised no legal question, the High Court’s dismissal was proper. Conversely, if the Tribunal’s order did give rise to the legal questions advanced by the appellant, the High Court would have been wrong to reject the reference. The Court emphasized that, at this stage, it was not deciding any substantive question of law but merely assessing whether any legal questions were present in the Tribunal’s order and, if so, identifying their nature.

In this part of the proceeding the Court stated that it was not addressing any substantive question of law. Instead, the focus was limited to determining whether any legal issues arose from the Tribunal’s order dated 6 May 1959, and if such issues existed, to identify precisely what those legal questions were. At first glance, the matter of whether the sum of Rs 1,38,000 represented savings or withdrawals that the appellant had drawn from her various businesses, or whether that sum constituted income derived from undisclosed sources, was characterised as a question of fact. Such a factual determination required a careful assessment of the evidence and the circumstances that had been proved or admitted during the trial. The Court recalled its observation in the earlier case of Sree Meenakshi Mills v. Commissioner of Income‑Tax, noting that a finding of fact retains its factual character even when it is arrived at by inference from other established facts. Nevertheless, a factual finding may be challenged under section 66 of the Act as an error of law if there is an absence of evidential support, if the finding is perverse, or if it has been made without giving adequate consideration to all the relevant material required for such a determination. Counsel for the appellant contended that the present case fell within this second category, arguing that the High Court erred in rejecting the application for a reference without further analysis. The Court, however, was not persuaded that the assessment order, taken as a whole, satisfied the condition of “no evidence in support of the finding.” Neither did the appellant’s counsel argue that the entire assessment was unsupported; rather, the appellant maintained that the specific finding that Rs 1,38,000 was income from undisclosed sources lacked any evidential foundation. The assessing authorities and the Tribunal, on the other hand, referred to a number of circumstances that had either been proved or admitted. These included the appellant’s cashing of 246 high‑denomination notes in January 1946, the explanations that she gave at that time for the encashment, a letter dated 19 November 1957 in which she described the sources of her income, her cash withdrawals made between 1932 and 1934 from her business enterprises, the withdrawals she made from three bank fixed‑deposit accounts in 1942, and the investments she carried out in September 1942 as well as during the period 1943‑1945. After reviewing these facts, the Income‑Tax Officer framed two specific inquiries: first, whether the appellant was the type of person who would keep a large proportion of her savings at home uninvested; and second, whether the high‑denomination notes that she had encashed represented part of the savings she allegedly accumulated since 1931. The Officer answered both questions unfavourably to the appellant and concluded that out of the total Rs 2,38,000 in high‑denomination notes, at most Rs 1,00,000 could be treated as savings from all sources. Consequently, the remaining balance of Rs 1,38,000 was designated as income from undisclosed sources. The Appellate Assistant Commissioner and the Tribunal adopted the same reasoning. The Tribunal further observed that the appellant’s husband had died in 1931 and, under his will, she was obliged to disburse legacies amounting to Rs 2,50,000. These statements formed part of the factual backdrop against which the Tribunal’s conclusion was drawn.

In this case, the Tribunal observed that the appellant’s disbursements of legacies would necessarily have been spread over quite a long period. The evidence, however, showed that in the late 1930s she maintained two bank accounts in her own name, namely the “Bai Velbai Kanji” account and the “Bai Velbai Kanji (personal)” account. From the first account, cash withdrawals recorded between 1934 and 1945 amounted to just under two lakh rupees, and, according to the appellant’s own statements, those withdrawals could have been largely applied to the payment of the legacies. In the second, or personal, account, only dividend income, interest on securities and debentures, and receipts of fixed‑deposit interest were credited, and there were no material withdrawals from that account. In addition to property investments exceeding five lakh rupees made in the late 1930s, the appellant also held three fixed‑deposit accounts with three different banks, whose combined balance was Rs 4,98,041. By the fiscal year 1940‑41 those deposits had increased to Rs 5,40,774. During the wartime panic of early 1942 she withdrew Rs 4,00,220, but those funds were subsequently reinvested in September 1942 and again in 1943. The reinvestments consisted of Rs 2,53,980 in municipal bonds in September 1942 and Rs 70,000 in shares in 1943, followed by a further purchase of municipal debentures in 1945. Accordingly, the Court noted that the 1942 panic withdrawals could not be viewed as a source of unexplained cash because the amounts were quickly placed back into productive investments. Consequently, there was no positive or tangible evidence linking the encashment of high‑denomination notes totalling Rs 2,38,000 with any prior savings or withdrawals. Shortly after the cash was encashed, the appellant reinvested Rs 2,14,000 in municipal debentures and Rs 24,000 in Scindia shares, demonstrating a pattern of shrewd and judicious investment from year to year. The Tribunal therefore found it implausible that the appellant could have retained about Rs 2,50,000 in idle cash or notes in a safe without earning any return. The Court further held that the appellant’s counsel had, on a preliminary basis, established good grounds for arguing that the Tribunal’s finding that Rs 1,38,000 of the encashed amount represented undisclosed income was unsupported by evidence and rested on conjecture. Moreover, the finding was said to be flawed because the Tribunal failed to consider several material aspects of the question. The Court pointed out that the Tribunal had offered its own reasons for separating Rs 1,00,000 from Rs 1,38,000 out of the total Rs 2,38,000 received from the encashment of 238 high‑denomination notes. Assuming the Tribunal had adopted the Income‑Tax Officer’s reasons set out in his assessment order, the Court observed that, with respect to the Rs 1,38,000 portion, the Officer had not cited any specific material on which he based the distinction between the two sums. While the Tribunal did refer to the appellant’s withdrawals from her fixed‑deposit accounts, amounting to about Rs 4,00,220, it did not provide the necessary evidentiary foundation for the adverse conclusion.

Early in 1942 the Tribunal observed that the appellant had invested Rs 2,53,980 in municipal bonds in September 1942 and had subsequently invested Rs 70,000 in shares in 1943. A further investment was made in municipal debentures in 1945, which left the appellant with a balance of a little over Rs 76,000. The Tribunal also noted an additional investment of approximately Rs 20,000 in municipal debentures. However, the Tribunal did not examine the appellant’s claim that the entire balance of roughly Rs 76,000 remained in her possession, nor did it consider her explanation regarding the source from which the municipal debentures were acquired. The Tribunal’s analysis therefore omitted a discussion of the appellant’s total cash holdings and the provenance of the debentures that formed part of those holdings.

The Tribunal also failed to consider the cash withdrawals that the appellant made from the capital accounts of her various businesses during the period from 1936‑1937 to 1945‑1946. The Income‑Tax Officer had referred to those withdrawals but dismissed them on the short ground that the capital accounts were maintained primarily for inter‑departmental transfers of money rather than for the appellant’s personal needs. Counsel for the appellant pointed out that, although transfer entries appear in the capital accounts for the years 1936‑1937 and 1937‑1938, the books for the years 1939‑1940 through 1945‑1946 contain entries showing that the appellant withdrew various sums of cash from her businesses. Those withdrawals were apparently not taken into account by the Tribunal. Counsel argued that, if those withdrawals are added to the amounts the appellant withdrew from fixed deposits in three banks, the total would approximate Rs 6,00,000, which would adequately explain the large cash balance in her possession. The Tribunal had noted that the appellant needed to disburse legacies worth Rs 2,50,000 under her husband’s will and had opined that such payments would have been spread over a long period. Counsel contested this view, stating that no evidence was offered to show that the legacy payments were indeed spread over an extended period, and that the Tribunal’s conclusion rested on mere conjecture. Further, counsel maintained that even after accounting for withdrawals from the business and fixed deposits, a considerable sum would remain undisclosed. Counsel also complained that, in calculating the appellant’s business withdrawals, the Income‑Tax Officer initially excluded amounts attributable to household expenses, income‑tax, and other necessities, but later suggested that a portion of those excluded withdrawals, together with income from properties and cash left by the appellant’s husband, must have been applied to the legacies and household expenses. This, according to counsel, was again based on speculation rather than any documentary evidence. The Court considered that a detailed examination of these various contentions was neither necessary nor advisable at this stage.

The Court observed that the contentions raised on behalf of the appellant would require detailed consideration when the legal questions arising from the Tribunal’s order are finally decided. At this stage the Court found it sufficient to state that the three questions which the appellant raised, and which were referred to earlier in this judgment, are indeed questions of law that arise from the Tribunal’s order dated 6 May 1959. In reaching this conclusion the Court kept in mind the observations made by this Court in Omar Salary Mahomed Sait v. Commissioner of Income‑tax and in Homi Jehangir Gheesta v. Commissioner of Income‑tax. The Court read the Tribunal’s order as a whole and was mindful of the observation in Homi Jehangir Gheesta that, while considering probabilities properly derived from the alleged or proved facts, the Tribunal must not indulge in conjecture, surmise or suspicion. The Court added that its present remarks are intended only to demonstrate that certain questions of law arise from the Tribunal’s order and that the High Court erred in summarily rejecting the application for a reference. How those questions of law should be answered will be a matter for the High Court when it deals with the reference on the basis of the statement of the case filed by the Tribunal. Accordingly, for the reasons given above, the Court allowed the appeal and set aside the High Court order dated 27 March 1961, which had summarily rejected the application for a reference under section 66 of the Act. The Court directed the High Court to comply with the requirements of section 66(2) of the Act, namely to require the Appellate Tribunal to state a case on the three identified questions of law and to refer them to the High Court for decision. The costs of the appeal were ordered to follow the decision on the reference. Appeal allowed.