High Court directs fresh assessment, emphasizes proper exercise of jurisdiction, grants opportunity to substantiate source of capital

The High Court set aside the orders of the Commissioner and the ITO, directing the latter to give the petitioner an opportunity to substantiate the source of the Rs. 15,000 capital outlay and to pass a fresh assessment order accordingly. The court emphasized the need for a proper exercise of revisional jurisdiction and reserved liberty for the ITO to proceed in accordance with the law.

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Issues involved: Assessment of income, explanation of capital investment, rejection of explanation, exercise of revisional jurisdiction under s. 264 of the I.T. Act.

Assessment of Income: The petitioner filed an income-tax return for the assessment year 1975-76, disclosing income from business at Rs. 6,100, while the ITO estimated it at Rs. 7,000. Additionally, the petitioner showed a capital investment of Rs. 20,000 in a firm in the name of his minor sons. The ITO disbelieved the explanation regarding the source of capital, specifically questioning the withdrawal of Rs. 15,000 from a pigmy savings account in a bank and its subsequent investment in the business.

Rejection of Explanation: The ITO rejected the explanation provided by the petitioner regarding the Rs. 15,000 claimed to have been received from the pigmy savings account, bringing it to tax as income from an unexplained source for the assessment year 1975-76. The Commissioner, in the revision petition under s. 264 of the I.T. Act, upheld this rejection citing a gap of two years between the withdrawal and the investment, and the lack of corroborative evidence to support the claim.

Exercise of Revisional Jurisdiction: The petitioner contended that the Commissioner did not judicially exercise the discretion vested in him under s. 264 of the I.T. Act, as the reasoning for rejecting the explanation was deemed capricious. The court agreed, stating that once the source of the capital outlay was disclosed, it was not for the authorities to question how the money was utilized. The ITO should have either rejected the explanation based on evidence or called for further substantiation, rather than making assumptions about the petitioner's actions.

Conclusion: The High Court set aside the orders of the Commissioner and the ITO, directing the latter to give the petitioner an opportunity to substantiate the source of the Rs. 15,000 capital outlay and to pass a fresh assessment order accordingly. The court emphasized the need for a proper exercise of revisional jurisdiction and reserved liberty for the ITO to proceed in accordance with the law.

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