Circumstantial evidence and inconsistent tax characterisation determined whether unexplained sums belonged to the assessee and attracted excess profits tax.

Circumstantial material was sufficient to support the Tribunal's finding that the proceeds of the high denomination notes encashed in the assessee's wife's name ily belonged to the assessee and were taxable as income from undisclosed sources. The surrounding facts, including the assessee's own unexplained holdings, the absence of any credible source for the wife's ownership, and the lack of supporting evidence, justified the inference. Amount treated as income from undisclosed sources could not also be characterised as business profits for excess profits tax purposes without evidence to support that characterisation. The first issue was answered against the assessee and the second in his favour.

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Issues: (i) Whether there was material before the Tribunal to hold that the sum of Rs. 40,000, being the proceeds of 40 high denomination notes encashed by the assessee's wife, really belonged to the assessee and was taxable as income from undisclosed sources; (ii) Whether the sum of Rs. 90,000 held to be income from undisclosed sources was liable to excess profits tax assessment.

Issue (i): Whether there was material before the Tribunal to hold that the sum of Rs. 40,000, being the proceeds of 40 high denomination notes encashed by the assessee's wife, really belonged to the assessee and was taxable as income from undisclosed sources.

Analysis: The Department had to show some material supporting the inference that the notes encashed in the wife's name were in truth the assessee's money. The surrounding circumstances included the assessee's own undisclosed income from other high denomination notes, the absence of any credible source for the wife's alleged ownership, the failure to produce supporting evidence, the improbability of keeping such funds in high denomination notes without any apparent advantage to the wife, and the general wartime context in which concealed profits were commonly kept in that form. The finding was based on circumstantial material and not on mere conjecture.

Conclusion: There was material before the Tribunal to support the finding, and the answer on this issue was in the affirmative, against the assessee.

Issue (ii): Whether the sum of Rs. 90,000 held to be income from undisclosed sources was liable to excess profits tax assessment.

Analysis: The sum had been treated as income from undisclosed sources and added over and above the estimated business profits. On that footing, it could not simultaneously be characterised as business profits for excess profits tax purposes. There was no evidence to support a contrary finding that the amount formed part of the assessee's business income, and the Department could not take inconsistent stands on the same sum for different tax consequences.

Conclusion: The amount was not liable to excess profits tax assessment, and the answer on this issue was in the negative, in favour of the assessee.

Final Conclusion: The reference was answered by upholding the Tribunal's finding on the first question and rejecting liability to excess profits tax on the second question, so the matter was disposed of with each party bearing its own costs.

Ratio Decidendi: In income-tax references, a finding that an item belongs to the assessee may rest on relevant circumstantial material, and an amount treated as income from undisclosed sources cannot be inconsistently treated as business profits for a different tax incidence absent evidence to support that characterisation.

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