Foreign remittances and reassessment objections: department must prove accumulated profits, and pure legal defences may be raised on appeal.

Remittances from Iran were not taxable in full without first proving a foreign source of income and the probable extent of accumulated profits from that source; the burden lay on the department to establish those facts before any rebuttable presumption could be applied, and the Tribunal erred by treating the assessee's failure to prove cash patrimony as enough. The Court also stated that a respondent in appeal may raise a pure question of law in support of the order under challenge, without fresh evidence, so the assessee could contest the validity of the section 34(1)(a) notice in the departmental appeal. Both points were answered in favour of the assessee.

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Issues: (i) Whether remittances received from Iran were liable to be treated as income assessable under section 4(1)(b)(iii) of the Income-tax Act, 1922, and whether the Tribunal correctly applied the burden of proof and the presumption arising from foreign remittances; (ii) Whether the assessee was entitled to raise, in the department's appeal before the Tribunal, the legal contention that the notice and assessment under section 34(1)(a) of the Income-tax Act, 1922 were invalid.

Issue (i): Whether remittances received from Iran were liable to be treated as income assessable under section 4(1)(b)(iii) of the Income-tax Act, 1922, and whether the Tribunal correctly applied the burden of proof and the presumption arising from foreign remittances.

Analysis: The legal position was that the department had first to establish the existence of a source of income in the non-taxable territory and the availability of accumulated profits; only then would a rebuttable presumption arise that remittances were made out of such profits. The presumption could not be extended mechanically to the whole of the remittances without correlating them to the probable amount of profits available from the proved source. The Tribunal erred by treating the failure to prove the alleged cash patrimony of Rs. 4,00,000 as sufficient, without properly correlating the source of income and the likely accumulated profits with the amount remitted. The better approach was to ascertain, as far as possible, the assessee's income in Iran and then limit the taxable remittances to the amount of accumulated profits actually attributable to that income.

Conclusion: The remittances could not be fully assessed as income under section 4(1)(b)(iii) on the Tribunal's reasoning, and the issue was answered in favour of the assessee.

Issue (ii): Whether the assessee was entitled to raise, in the department's appeal before the Tribunal, the legal contention that the notice and assessment under section 34(1)(a) of the Income-tax Act, 1922 were invalid.

Analysis: A respondent in an appeal may support the order under challenge on any available ground of law, including a new ground not urged earlier, so long as the ground does not require fresh evidence and operates as a defence to the appeal. The Tribunal proceeded on an incorrect view that allowing the contention would necessarily unsettle the entire assessment, whereas in law the point could be used only to resist the department's appeal for enhancement. The invalidity of the section 34(1)(a) notice, once the voluntary return had already been filed, was a pure legal contention open to the assessee in the appeal.

Conclusion: The Tribunal was not justified in refusing to entertain the contention, and the issue was answered in favour of the assessee.

Final Conclusion: The references were answered by rejecting the department's approach on taxability to the extent considered by the Court and by holding that the assessee could raise the legal objection to the validity of the reassessment notice in the departmental appeal.

Ratio Decidendi: Under section 4(1)(b)(iii) of the Income-tax Act, 1922, the department must establish the existence of foreign accumulated profits and their probable extent, and a respondent in appeal may raise a pure question of law in defence even if it was not raised earlier, provided it does not require fresh evidence.

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