Kale Khan Mohammad Hanif vs Commissioner Of Income-Tax, Madhya

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 8 February, 1963

Coram: Sarkar J

In this matter the Supreme Court considered two separate appeals that originated from assessment orders issued under the Income‑tax Act of 1922 for the fiscal years 1945‑46 and 1947‑48. In each of those assessment proceedings certain questions were referred by the assessing authority to the High Court of Madhya Pradesh pursuant to section 66 of the Act. The present appeals were filed against the answers that the High Court gave to those referred questions. The taxpayer, who is described as a trader, was engaged in two lines of business, namely a general merchandise trade commonly called “manihari” and the manufacture and sale of bidis. He also possessed some income from immovable property, but the property income was not material to the issues raised in these appeals.

For each of the two assessment years the taxpayer had filed a return of income. Because the revenue officer found the taxpayer’s books to be incomplete and unreliable, the officer determined the gross profits of the two businesses by applying certain percentages to the total sales figures, with those percentages themselves being fixed through estimation. The present appeals did not challenge the correctness of those profit estimates; the disputes centered on later additions made by the revenue authority. While assessing the account for the year 1948‑49, the revenue officer discovered a series of credit entries in the taxpayer’s ledgers that had escaped his notice in the earlier assessments for 1945‑46 and 1947‑48. The entries identified for the year 1945‑46 were: Gold Khata amounting to Rs 41,300; Ghar Khata amounting to Rs 33,000; Mohammad Islam Khata amounting to Rs 10,000; and Muslim Bi Khata amounting to Rs 11,000, totaling Rs 95,300. For the year 1947‑48 the entries were: a Ghar Khata credit under the sale of ornaments amounting to Rs 19,575; and a loan recorded in the Yakub Manihar account amounting to Rs 20,000, totaling Rs 39,575.

Having obtained the sanction of the Commissioner of Income‑tax, the revenue officer reopened the assessments for the two years and, after granting the taxpayer a full opportunity to explain the nature of the aforementioned credit entries, made fresh assessments under section 34 of the Act. In those fresh assessments the officer added the full amounts of Rs 95,300 for 1945‑46 and Rs 39,575 for 1947‑48 to the previously estimated incomes because he was not persuaded by the taxpayer’s explanation that the credits did not represent assessable income. The taxpayer contested those additions before the Appellate Assistant Commissioner, but his appeals were dismissed. He subsequently appealed to the Income‑tax Tribunal. The Tribunal accepted the taxpayer’s explanation concerning the entries of Rs 33,000 and Rs 10,000, which were recorded under the headings “Ghar Khata” and “Muhammad Islam Khata” respectively, and ordered those amounts to be deleted from the assessment for 1945‑46. All other additions made by the revenue officer were upheld by the Tribunal.

Following that decision, the taxpayer sought a further order from the High Court under section 66(2) of the Act, which resulted in the Tribunal framing six questions in each assessment case for consideration by the High Court. Those questions, which were essentially the same in both cases except for a minor variation in question six that did not affect the overall dispute, were heard together. The High Court answered the questions against the taxpayer, prompting the present appeals to the Supreme Court.

The Tribunal framed six separate questions in each of the two assessment proceedings and forwarded those questions to the High Court for determination. The wording of the questions was the same in both proceedings, except for a minor distinction in question number six that did not affect the substance of the referral, and the two matters were heard together before the High Court. The High Court gave answers to all of the questions, and its answers were adverse to the assessee; consequently, the present appeals were filed by the assessee against those adverse answers. As noted earlier, there were six questions in each case and, for practical purposes, the questions were identical; therefore, it was unnecessary to discuss the two sets of questions separately. Of the six questions, the first three need not be considered further because two of them were abandoned by the High Court and the answer to the third question was not challenged before this Court.

The first question that warrants detailed discussion is question number four, which was posed as follows: “Whether the burden of proving the source of the cash credits is on the assessee?” The Court held that the answer to that question must be affirmative, and the High Court had indeed answered it in the affirmative. It is a well‑settled principle that the onus of establishing the source of any sum of money that appears to have been received by the assessee rests upon the assessee himself. If the assessee contests the liability to tax, he must demonstrate either that the receipt does not constitute income or, if it does constitute income, that it is exempt from tax under the provisions of the statute. In the absence of such proof, the income‑tax officer is authorized to treat the amount as taxable income, as affirmed in A. Govindarajulu Mudaliar v. Commissioner of Income‑Tax.

The next question for consideration is question number five, which was framed as: “If so, then whether in the absence of satisfactory proof as to the source of credits the inference of the Tribunal that these credits are the assessee’s income from some undisclosed sources is an inference of fact or an inference of law?” The Court expressed difficulty in discerning the purpose of this question. Under section 66 of the Act, questions may be referred to the High Court only when they involve points of law that arise from the facts determined by the Tribunal and that the Tribunal is alleged to have answered erroneously, thereby imposing an unlawful tax burden. Pure questions of fact, however, lie within the final jurisdiction of the Tribunal and cannot be referred to the High Court. The present question presupposes that the Tribunal has drawn an inference. That inference may be either factual or legal. If it is a factual inference, it cannot be the subject of a reference to the High Court; if it is a legal inference, the High Court may be asked whether such an inference could be drawn in law. The question, therefore, is whether the Tribunal’s inference is one of fact or of law, a determination that the Tribunal itself had not addressed and which does not arise directly from its decision. Consequently, the Court noted that this form of question does not fall within the scope of a section 66 reference.

The Court observed that the issue of whether the Tribunal’s inference was one of law or one of fact did not arise from any decision actually rendered by the Tribunal, nor was it a matter that the Tribunal had addressed. Consequently, the Court held that such a question could not be referred to the High Court under section 66 of the Act. The High Court, however, had ruled that the inference was a factual one. If that view were correct, the matter would conclude there, because the Tribunal’s findings of fact were final and not subject to further review. Conversely, if the inference had been a legal conclusion, the High Court might have been properly approached to determine whether the inference was legally justified; that opportunity was not taken. The Court added that, even assuming the inference to be a question of law, the Tribunal had drawn it lawfully, a position that found support in the decisions of A. Govindarajulu Mudaliar’s case. The discussion then moved to the sixth question posed in the assessment year 1945‑46, which asked whether, considering that the Income‑Tax Officer had assessed the income on a percentage basis, he was justified in treating the sums of Rs 41,300 and Rs 11,000 as profits from an undisclosed source. An identical question arose for the assessment year 1947‑48, differing only in the amounts, which were Rs 19,575 and Rs 20,000. The High Court answered this question affirmatively, and the Court agreed that this was the only logical answer. The Court expressed difficulty in grasping the purpose of the question, noting that it seemed to suggest that because the income from a disclosed source had been computed by estimation rather than by the return actually filed, a credit entry in the books of that source could not be treated as income from another, undisclosed source. The Court did not see any reason why this could not be so held. It further explained that the High Court’s reasoning for the suggestion was that treating the amount as income from an undisclosed source would result in double taxation, which the Income‑Tax Act did not envisage. The High Court appeared to assume that the same income had previously been taxed on the basis of an estimate, leading to the alleged double taxation. The Court found this reasoning fallacious, because if the income were regarded as arising from an undisclosed source, it would no longer be considered income of the disclosed source that had earlier been assessed, and therefore no double taxation would occur. Consequently, the situation did not involve a case where the same income was taxed twice.

In this case the Court observed that the income which the tax authorities sought to tax had been characterized as undisclosed income belonging to a source that had already been disclosed, and that the income of that disclosed source had earlier been taxed on the basis of an estimate. If that characterization were correct, the possibility of double taxation could have been legitimately raised as an issue. However, the Court noted that the present situation does not fall within that scenario, as the very formulation of the question excludes such a conclusion. The Court acknowledged that determining the source of a particular piece of income requires examining the entire factual matrix of the case. Consequently, whether an entry recorded in the books of one business represents income of that business or of a separate business must be decided based on the facts that identify the business to which the entry pertains. The Court further observed that the answer to that factual inquiry does not depend on whether the income of the first‑mentioned business was assessed on the basis of a tax return filed by the assessee or on the basis of an estimate made by the tax authorities. Nevertheless, the wording of the question as framed appears to link the issue to the method of assessment, a link that the Court finds wholly without foundation. Accordingly, the Court concluded that the tax authorities were not barred from treating the credit‑entry amounts as income from undisclosed sources merely because those entries appear in the books of a business. The fact that the business’s total income had previously been computed on a percentage‑based estimate does not in itself prevent such a characterization. For that reason, the Court holds that the answer to the question as framed must be affirmative. Repeating its earlier observation, the Court stresses that the source of any specific income must be determined by considering all the facts of the case. In the present proceedings, the Income‑Tax Officer had held that the amounts reflected by the credit entries constituted income from undisclosed sources. In other words, the officer concluded that those amounts did not arise from either the manihari (general merchandise) business or the bidi business that the assessee had disclosed. That assessment was subsequently upheld by the Appellate Commissioner and by the Tribunal, except with respect to two of the amounts that had been earlier mentioned. The assessee was therefore entitled to challenge the finding on the ground that the determination of those amounts as income from undisclosed sources was unsupported by any evidence or was otherwise perverse. The record shows that the assessee did raise certain questions of this nature before the Tribunal in order to obtain a reference to the High Court. However, the Tribunal held that the questions did not arise in a manner that warranted a reference and consequently declined to refer the matter to the High Court. The assessee thereafter accepted the Tribunal’s decision and did not move the High Court seeking a reference under section 66(2) of the Act. Because the assessee did not invoke section 66(2), those particular questions cannot be re‑examined in the present Court. The Court notes that it has already considered the reference concerning the characterization of the credit‑entry amounts as income from undisclosed sources. That consideration was confined to the argument that the income of the business had been computed on the basis

In its reasoning, the Court noted that the quantum of income that formed the subject of the dispute had been arrived at by applying an estimate. The Court explained that, given the factual matrix of the case and the evidence that had been placed before it, the use of an estimate was the only practicable method of ascertaining the amount in question; no other basis for calculation could be applied under the circumstances. On that foundation, the Court held that the appeals filed by the petitioner did not establish any ground on which the assessment could be altered. Accordingly, the Court concluded that the appeals must fail and ordered that each appeal be dismissed. In addition, the Court directed that the costs of the proceedings be awarded against the appellant, reflecting the lack of merit in the contentions raised. The Court further directed that only a single set of hearing fees be payable, thereby avoiding the imposition of multiple fee demands for the separate appeals. In summary, the Court dismissed the appeals, imposed costs on the appellant, and limited the fee assessment to one set of hearing fees. The order was pronounced as final and took effect immediately.