Commissioner of Income Tax (Central) vs Daulatram Rawatmull

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 26 March, 1964

Coram: J.C. Shah, K. Subba Rao, S.M. Sikri

In this case, the Court recorded that the respondent, Daulatram Rawatmal, was a firm that had been registered under the Indian Income‑tax Act of 1922. At the material times the firm comprised six partners, namely Nandlal Bhowalka, Giridharilal Bhowalka, Shyamlal Bhowalka, Bajranlal Bhowalka, Rawatmal Nopany and Rameshwarlal Nopany. The business of the firm was carried on as dealers and commission agents dealing in jute, rice and other commodities. For the account year 2001‑2002 Bikram Samvat, which corresponded to the period from 27 September 1944 to 15 October 1945, the firm was assessed in assessment year 1946‑47 by the Income‑tax Officer (Non‑Companies‑cum‑E.P.T.) Circle under section 23(3) of the Indian Income‑tax Act. On 19 February 1955 the case was transferred to the Income‑tax Officer of Central Circle VI by the Central Board of Revenue, and that officer issued a notice under section 34 of the Act requiring the firm to file a revised return of income for the relevant accounting year. In compliance with the notice the firm filed a return that showed an income of Rs 2,75,168, which reflected the amount that had been reduced in appeal. After receiving the return, the Income‑tax Officer inspected the books of the assessee and discovered that on 2 November 1944 an amount of Rs 5,00,000 had been tendered in cash at the Barabazar Branch of the Central Bank of India with instructions to transfer the funds to the bank’s Bombay head office. A demand draft for the same amount was subsequently issued through the Bombay head office and was drawn on the Jamnagar branch of the bank, which at that time lay in the territory of the State of Nawanagar. From the proceeds of that remittance a fixed‑deposit receipt was purchased in the name of Raghunath Prasad Agarwalla, son of Rawatmal Nopany, at the Jamnagar branch on 8 November 1944. Raghunath Prasad Agarwalla died on 16 August 1945, and the fixed deposit matured on 19 December 1945. Upon maturity the sum of Rs 5,00,000 was not paid to Agarwalla’s heirs; instead it was set off against the overdraft of the assessee. The assessee’s books recorded a credit of Rs 5,00,000 in the account of Raghunath Prasad Agarwalla. Moreover, the books showed a current‑account balance for Raghunath Prasad Agarwalla that involved large sums of money, with a balance of Rs 5,64,970 being carried forward to the following year, even though the account holder had died in August 1945. The continuation of the account in the same name during the next year was noted by the officer.

The Income‑tax Officer further found that on 15 November 1944 another amount of Rs 5,00,000 was tendered in cash at the Barabazar branch of the Central Bank of India, again with instructions to transfer the funds to the Bombay head office. A demand draft was issued from Bombay in the name of B. N. Gupta, son of Bajranglal Bhowalka, who was a partner of the firm, and the draft was drawn on the Jamnagar branch of the bank. Using that amount, a fixed‑deposit account was opened with the Central Bank of India at Jamnagar on 21 November 1944. On 2 December 1944 the firm lodged with the bank a letter of guarantee and a “letter of continuity” signed by Raghunath Prasad Agarwalla and B. N. Gupta, together with promissory notes executed by the firm, to keep the two deposits under lien. These documents were submitted to secure overdraft facilities for the assessee in the sum of Rs 10,00,000. The officer also discovered that on 5 October 1944 an amount of Rs 5,00,000 was tendered in cash at the Barabazar branch with instructions to remit the sum to the Jamnagar branch by a demand draft that was to be converted into a fixed deposit dated 11 October 1944 in the name of Sheo Prasad Agarwalla, son of Rameshwarlal Nopany, who was a partner of the firm. The findings relating to these transactions formed part of the assessment and the subsequent proceedings.

In this case, the Court described that on November 15, 1944 a cash amount of five lakh rupees was deposited at the Barabazar branch of the Central Bank of India together with instructions to transfer the funds to the bank’s Bombay head office, where a demand draft was issued in the name of B. N. Gupta, son of Bajranglal Bhowalka, who was a partner of the assessee. The demand draft was then presented at the Jamnagar branch of the same bank, and with the assistance of that amount a fixed‑deposit account was opened at the Central Bank of India, Jamnagar, on November 21, 1944. Subsequently, on December 2, 1944, a letter of guarantee and a letter of continuity, both signed by Raghunath Prasad Agarwalla and B. N. Gupta, together with promissory notes signed by the firm, were lodged with the bank. These documents were intended to keep the two deposits under lien as security for overdraft facilities granted to the assessee in the sum of ten lakh rupees. The Income‑Tax Officer also discovered that on October 5, 1944 an amount of five lakh rupees was tendered in cash at the Barabazar branch of the Central Bank of India with instructions to remit the same to the Jamnagar branch by a demand draft that was to be converted into a fixed deposit dated October 11, 1944 in the name of Sheo Prasad Agarwalla, son of Rameshwarlal Nopany, who was another partner of the assessee. That deposit was later offered as security for an overdraft facility granted to Sri Hanuman Sugar Mills Ltd., a company in which the partners of the assessee had a controlling interest. The Income‑Tax Officer concluded that the fixed‑deposit receipts credited in the Jamnagar branch in the names of the three sons of the partners of the assessee represented “secreted profits” belonging to the assessee, and therefore added fifteen lakh rupees to the total assessable income and completed the reassessment. On appeal, the Appellate Assistant Commissioner of Income‑Tax held that the assessee could explain the source of only fifty thousand rupees out of the five‑lakh‑rupee deposit in the account of B. N. Gupta, but could not explain the other deposits. Consequently the Appellate Assistant Commissioner modified the officer’s order by adding fourteen lakh fifty thousand rupees, representing the remaining portions of the three fixed‑deposit receipts, as secreted profits. That order was upheld on appeal with respect to the two deposit receipts dated November 8, 1944 and November 21, 1944. However, concerning the receipt dated October 11, 1944, the Tribunal observed that although a similar method was used to transfer alleged secreted profits from Calcutta to Jamnagar, there was no connecting link between the assessee and the amount deposited in the name of Sheo Prasad Agarwalla. The Accountant Member of the Tribunal noted that in the case of the fixed deposit in the name of S. P. Agarwalla, the amount was not utilized by the assessee for an overdraft, indicating a slight difference from the other transactions.

The Tribunal observed that the sum in question never entered the accounts of the assessee and that the deposit had been used by Sri Hanuman Sugar Mills Ltd. Consequently, the Tribunal could not state with certainty that the firm had earned any income that was then deposited to obtain an overdraft for Sri Hanuman Sugar Mills Ltd. In its view, there was minimal evidence to demonstrate that the firm had any interest in the money, and that any concealment was attributable to the firm. The Tribunal considered the possibility that the concealment might have been carried out by another individual. Because it found no connecting link between the assessee and the deposit, the Tribunal concluded that the amount could not be brought within the scope of tax. The Judicial Member of the Tribunal concurred, noting that although there were strong suspicions that the Rs 5,00,000 might represent the assessee’s income, a finding could not be based solely on suspicion. Accordingly, the order of the Appellate Assistant Commissioner was altered, and the Rs 5,00,000 relating to the fixed‑deposit receipt dated 11 October 1944 in the name of Sheo Prasad Agarwalla was excluded from the total assessable income.

The Commissioner of Income‑Tax then invoked section 66(1) of the Indian Income‑tax Act and applied to the Income‑Tax Appellate Tribunal for a reference of the matter to the Calcutta High Court, raising the question whether, given the facts and circumstances, the Tribunal’s inference that the fixed deposit of Rs 5 lakhs in the name of S. P. Agarwalla did not constitute concealed income of the assessee was legally justified. The Tribunal rejected this application, holding that the question presented by the Commissioner was a factual issue and therefore not referable under section 66(1). The Commissioner subsequently applied to the Calcutta High Court for an order directing the Tribunal to state a case and refer it to the High Court; the High Court refused the application. With special leave, the Commissioner appealed to this Court. Counsel for the Commissioner argued that the Tribunal’s decision involved a question of law, asserting that no properly instructed judicial officer could have reached such a conclusion. The Court noted that the principles governing references under section 66 are well settled, citing Sree Meenakshi Mills Ltd. v. Commissioner of Income‑tax, which held that the High Court should not disturb findings of pure fact made by the Tribunal.

In this case, the Court explained that a reference to a higher forum could be made only when the Tribunal’s findings were unsupported by any evidence that a reasonable person could rely upon, even if the High Court, after re‑examining the evidence, might have reached a different conclusion. The Court then set out the principles that governed the High Court’s approach. First, when the issue to be decided was a pure question of law, such as the interpretation of a statute or the construction of a document of title, the Tribunal’s decision could be referred to the Court under section 66(1). Second, when the issue involved a mixed question of law and fact, the Tribunal’s factual findings were considered final, but the legal effect of those findings remained a matter of law that could be reviewed by the Court. Third, a finding of fact could be attacked under section 66(1) as an error of law if the Tribunal had no supporting evidence or if the finding was perverse. Fourth, even where a factual finding was derived as an inference from other basic facts, it retained its character as a factual finding and was not transformed into a question of law.

Counsel for the Commissioner then set out the facts that the income‑tax authorities had recorded. They observed that three fixed deposits were made in rapid succession, and that the deposits made in the names of Raghunath Prasad Agarwalla and B. N. Gupta were held by the Tribunal to represent the “secreted profits” of the assessee. They further noted that all three deposits were placed in the same bank, within the same Indian state and branch, and were created under similar circumstances. The authorities also pointed out that the same method was employed to obtain overdraft facilities in British India for each of the three deposits, using the alleged secreted funds. Moreover, the names used for the deposits belonged to the sons of the three partners of the assessee firm. The source of the fixed deposits was described as clouded in obscurity, indicating that the deposits could not be considered bona‑fide transactions; alternatively, a direct loan could have been advanced to Sri Hanuman Sugar Mills Ltd. by Sheo Prasad Agarwalla instead of the circuitous route involving large interest and commission charges to the Central Bank of India. Finally, the authorities recorded that, although the assessee denied any connection with Sri Hanuman Sugar Mills Ltd., the record showed that more than Rs. 8,00,000 had been advanced to Hanuman Investment Ltd., the managing agents of the sugar mills, and that the entire amount ultimately entered the sugar mill’s account. Of the six partners of the assessee, three were directors of Sri Hanuman Sugar Mills Ltd., and that company was under the control of the assessee firm. Counsel for the Commissioner argued that these facts could support only one inference, namely that the deposit in the name of Sheo Prasad Agarwalla represented the assessee’s secreted profits and that any contrary conclusion would be perverse.

In this case, the Court observed that the deposit made in the name of Sheo Prasad Agarwalla could not be said to belong to the assessee or to represent its “secreted profits”, and that any conclusion to the contrary would be perverse. Accordingly, the Court stated that it could not accept the contention advanced on that basis. The Court then explained the scope of the advisory jurisdiction of the High Court under section 66 of the Indian Income‑tax Act. It clarified that only a question that arises out of an order passed by the Appellate Tribunal may be referred by the High Court under section 66(I). When the Tribunal declines to state a case, the High Court, if dissatisfied with the Tribunal’s decision, may require the Tribunal to state a case and may then refer the matter. However, the Court stressed that the High Court does not possess the power to compel the Tribunal to state a case merely because the High Court, upon a fresh appreciation of the evidence, believes a different conclusion might be reached, so long as there exists some evidential basis supporting the Tribunal’s finding. Turning to the Tribunal’s finding, the Court affirmed that it could not be characterised as perverse. The Tribunal had correctly noted that the similarity of the three deposit receipts and the close temporal proximity of the transactions could raise suspicion, and that such suspicion might be heightened because Sri Hanuman Sugar Mills Ltd. was the ultimate beneficiary of the amount deposited on October II, 1944, with the deposit apparently effected in the name of Sheo Prasad Agarwalla as a benami arrangement for the real owner. Nevertheless, the Court held that these circumstances did not justify an inference that the assessee was involved in the deposit of Rs 5,00,000 out of its “secreted profits”. The Court explained that the evidence failed to establish the required link showing that the assessee was concerned with the transaction of the deposit made on October II, 1944. It pointed out that the Rs 5,00,000 deposited on November 8, 1944, in the name of Raghunath Prasad Agarwalla, together with the interest thereon, was subsequently brought into the assessee’s amount. Moreover, the connection of the assessee with the deposit dated November 21, 1944, was demonstrated by a letter of guarantee and a “letter of continuity” signed by Raghunath Prasad Agarwalla and B N Gupta, as well as by the opening of an overdraft account on November 24, 1944 on the security of the two deposit receipts. In contrast, no such connection appeared for the deposit made on October 11, 1944. The Court noted that it was not called upon to consider whether any question of law arose from the Tribunal’s finding regarding the two deposit receipts in the names of Raghunath Prasad Agarwalla and B N Gupta, but it would be impossible to hold that the Tribunal’s finding concerning the two deposits made on October 11, 1944 was correct. However, in respect

In this matter, the Court observed that the finding of the Tribunal with respect to the deposit made on October II, 1944, in the name of Sheo Prasad Agarwalla was manifestly unreasonable and therefore perverse. The Court stated that no reasonable body of persons who are properly instructed in the law could have arrived at such a conclusion, and it emphasized that a perverse finding cannot be sustained merely because it appears in a lower authority’s record. The Court noted that the circumstances highlighted by counsel Mr. Sastri did raise some suspicion; however, it stressed that suspicion alone cannot replace the requirement of concrete and admissible evidence. The Court reiterated the well‑settled principle that the burden of proof lies on the party asserting the existence of a transaction, and that the appellant had failed to produce any admissible documents or other proof establishing a connection between the deposit and the assessee. Consequently, the Court held that the appeal was bound to fail. Accordingly, the Court ordered that the appeal be dismissed and that the costs of these proceedings be awarded against the appellant. The final order reiterated that the appeal was dismissed, thereby confirming that the appellant’s case was wholly untenable and that the dismissal was proper under the law.