1960 (11) TMI 117 - HC - Income Tax

Court rejects tax liability claim, awards costs to assessee. Tribunal's estimation deemed arbitrary.

SRI RAM TANDON Versus COMMISSIONER OF INCOME-TAX, UP. & VP.

The High Court held that there was no material basis for the finding that Rs. 10,000 out of Rs. 45,000 encashed by the assessee represented income liable ... - Issues Involved:1. Legality and validity of proceedings under section 34 of the Indian Income-tax Act.2. Material basis for finding that Rs. 10,000 out of Rs. 45,000 encashed by the assessee represented income liable to tax.Issue-wise Detailed Analysis:1. Legality and Validity of Proceedings under Section 34 of the Indian Income-tax Act:The assessee, a Hindu undivided family engaged in money-lending, dividends, and interest on securities, was assessed for the year 1947-48 on an income of Rs. 12,588. The Income-tax Officer (ITO) later discovered that the assessee had encashed 45 high denomination notes of Rs. 1,000 each on January 18, 1946. Consequently, a notice under section 22(2) read with section 34 was issued to the assessee for escaped income. The assessee declared an income of Rs. 11,780 in response and provided explanations for the high denomination notes, stating they were part of the cash balance. However, the ITO included Rs. 45,000 as undisclosed income due to insufficient explanation.The Appellate Assistant Commissioner (AAC) and the Appellate Tribunal both upheld the initiation of proceedings under section 34, with the Tribunal reducing the addition to Rs. 10,000. The Tribunal found that the ITO had no prior knowledge of the encashment during the original assessment, justifying the proceedings under section 34.2. Material Basis for Finding Rs. 10,000 as Income Liable to Tax:The Tribunal accepted that the assessee handled various denominations of currency notes due to his business activities and maintained a large cash balance. However, it arbitrarily estimated that out of Rs. 58,000 cash balance, only Rs. 35,000 could be in high denomination notes, treating the remaining Rs. 10,000 as suppressed income. This estimation was not based on any concrete evidence or reasoning.The High Court found the Tribunal's estimate to be arbitrary and unsupported by material evidence. It was noted that the assessee's explanation of maintaining a large cash balance, which could include high denomination notes, was reasonable and not inherently improbable. The court cited several precedents, including the Supreme Court's decision in Mehta Parikh & Co. v. Commissioner of Income-tax, emphasizing that findings based on conjectures and without material evidence are not sustainable.The court concluded that the Tribunal's finding that Rs. 10,000 represented undisclosed income was arbitrary and lacked any reasonable basis. Therefore, the answer to the second question was in the negative, favoring the assessee.Conclusion:The High Court held that there was no material basis for the finding that Rs. 10,000 out of Rs. 45,000 encashed by the assessee represented income liable to tax. Consequently, the proceedings under section 34 were not pressed for answer. The assessee was entitled to costs assessed at Rs. 200, and the reference was answered accordingly.